Executive Observations
The latest ISM Purchasing Manager’s Index (PMI) was 43.5 percent in September, its lowest level since October 2001. The PMI manufacturing index dropped from 49.9 percent in August, the biggest decline since 1984, according to MarketWatch. The U.S. economic outlook has darkened considerably in recent months, as the economy is now in a recession, and the current financial crisis threatens to plunge it into a severe recession.

Many companies are struggling against a challenging economic environment due to the housing market and weaker consumer spending on discretionary items. In turn, these factors affect demand for wood products, printing/writing papers (coated papers in particular), and paperboard. A positive trade balance is expected to remain a plus for industrial production, but RISI reports a substantial softening in packaging demand in several overseas markets, which is likely to continue as the economic malaise spreads across the globe.

RISI’s third quarter analysis suggests a modest increase in corrugated box consumer inventories, but the shift in business confidence will likely lead to renewed inventory reductions during the next few months, especially if corrugated box plants attempt to raise prices further. Given the shift in the forecast for domestic demand, it will be nearly impossible for the containerboard industry to implement the announced October linerboard increase of $60 per ton.

Folding boxboard demand eased substantially during July and August, and cumulative demand for the first eight months of 2008 was almost five percent lower than the 2007 level. The most recent erosion in demand partially reflects the decline in industrial production of processed foods during the last few months, since production levels in August were 1.6 percent below the March peak for these goods. Cartonboard markets are facing accelerated losses in market share to competing materials this year, which came about in response to the sharp increase in prices for all boxboard grades during the last year.

Heavy rain, flooding, and loss of power from Hurricane Gustav caused the loss of more than 40,000 tons of Gulf Coast containerboard production. The production loss was small compared to the estimated 150,000 tons of containerboard production lost in September 2005 due to curtailments and inventory damage after Hurricanes Rita and Katrina, which kicked off the current upturn in containerboard market pricing.

Third Quarter Trends
Ariba’s customers in the U.S. and Europe continued to actively leverage their corrugated spend, one of the primary sourcing categories kicked off during the last quarter. Data collection for these projects has generated significant hurdles, especially since the average project involves consolidating five or more locations. As a result, many of these projects have carried over into the fourth quarter for completion. Other projects delivered during the quarter included ones for folding cartons and labels, with a savings range of eight to 15 percent.

North American containerboard producers pushed through the announced $55 per ton price increase on linerboard and corrugating medium with a surprising lack of resistance, despite sluggish box demand and continuing economic uncertainty in the U.S. The driver behind the increase was mounting cost pressure from soaring energy and freight costs that have severely squeezed operating margins.

Independent converters did not resist the increase because of their own need to pass through escalating costs for energy, starch, and freight that have built up over the past year. A few suppliers also proposed three to four percent “fuel surcharges” in some cases on box customers with high freight costs.

Since the current upward cycle began in late 2005, prices increased five times by a cumulative total of $215 per ton. This amounts to a 53 percent price increase over the 2005-2008 timeframe. The market is expected to remain balanced or slightly tight as the industry enters the seasonally strong September-October period.

U.S. Focus

by Nicoleta Diaconu