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Published Q3 2008
Executive Observations
The paper and packaging industry continued to endure pricing pressure for commodities that not only have feedstocks tied to oil and natural gas, but also for metal-based products tied to aluminum and steel. RISI forecasts call for a gradual decline in industrial production of processed foods and other nondurable goods during the third quarter of 2008 as the U.S. economy remains sluggish, and production costs are projected to increase between nine and 15 percent throughout 2008 for paper packaging products.
- Logistics managers are starting to look towards the North American railroad industry in an effort to weather the impacts of high fuel prices and lower volumes in key commodities tied to the slowing U.S. economy. There is more interest in rail among paper and forest companies for shorter moves of corrugated, boxboard, and pallets. Rail companies are expected to maintain pricing power, padded by fuel surcharges, since the impact of higher diesel prices is more severe in trucking than it is in rail.
- U.S. domestic corrugated demand remains sluggish and pricing on sheets and finished boxes have continued to be highly competitive. The weak dollar has dramatically improved the competitiveness of U.S. containerboard producers in global markets, particularly southern kraft linerboard mills.
- Producers are counting on strong export demand to keep the U.S. containerboard market in balance this year. U.S. unbleached kraft linerboard exports hit more than a decade-long high in 2007 of 3.58 million tons, and this year’s shipments may approach 1997’s all-time high of 4.1 million tons.
- Due to the weak U.S. Dollar, U.S. containerboard mills have a significant advantage in delivered costs to Europe and can deliver into China at around the same cost as Asian mills. The historically high old corrugated container (OCC) costs and the weak dollar have also reduced the threat of imports into the U.S. market, particularly from China.
Second Quarter Trends
Due to continuing pressure on raw material prices, there is still no “optimal” time to source most packaging categories. Buyers continue to look for opportunities to leverage spend and present attractive sourcing bid packages to the supply base, with the hopes of realizing cost savings or, at a minimum, mitigating cost increases.
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