Executive Observations

Many companies are changing their supplier landscape due to the recession and uncertainty of supplier viability. In recent months, Ariba has worked with customers who are looking to move to dual or even tri-level sourcing to protect against the risk of key suppliers going under. In addition, some customers are looking for larger strategic partner relationships, as they feel better about the staying power and financial security of larger suppliers. However, companies really do need to be careful about pushing too hard on strategic suppliers, especially those that have had less benefit from falling commodity prices. In today’s market, companies have to conduct more formal and informal “what if” analyses around the potential loss of suppliers due to financial turmoil. With weak demand and ample supply, there is no incentive for a buyer to carry inventory in excess of immediate requirements.

Many suppliers are currently finding themselves on precarious financial ground, and beating them up on price could push them to fold or force them to cut costs in critical areas like quality or delivery in order to make up the difference. However, with the steep drop in commodity costs over the past year, many suppliers of products closely tied to commodity price swings may be good candidates for pressure to reduce costs--especially those suppliers that drove prices upward when commodity costs rose earlier last year.

The paper, film and foil industry has seen many converters expanding their service offerings to acquire new business or expand their footprint within their current customer base, as capacity utilization averaged only 70 percent during 2008. Despite tough conditions, expect to see continued “deal” activity including acquisitions of distressed businesses, or more strategic deals at relatively low premiums where consolidation is needed.

North American paperboard producers have faced a threat from growing overseas imports in both the cartonboard and containerboard markets. However, entry barriers like freight, distribution, just-in-time delivery, and basis weights had prevented Asian cartonboard from infiltrating North American markets over the past few years. The cost for shipping board from Asia to the North American market was estimated by RISI to be $125-150 per ton in 2006, and the differential between Asian and North American prices was large enough to absorb this discrepancy. However, this was the cost to ship to the West Coast ports, and the cost to ship all the way to the converters in the North Central U.S. was roughly double, making sales into the U.S. market less attractive to Asian sellers. Distribution has been a critical challenge for importers, as JIT delivery for most North American converters makes it very difficult for overseas producers to supply the market, unless they have a well-established distribution network in the region.

Despite a huge drop in domestic and export demand, North American paper packaging producers have done an amazing job of matching production to demand during the last six months, illustrating that increased industry consolidation has paid off. This capacity constraint has prevented prices from deteriorating as rapidly as forecasted. However, RISI estimates there are simply too many negative demand factors at work for producers to have much success in maintaining pricing levels. International Paper (IP), the largest containerboard producer, has been taking the heaviest amount of downtime, accounting for approximately half of all industry downtime for the past two quarters, and almost 43 percent of curtailments in the second quarter. The five largest producers, also including Temple-Inland and Packaging Corp. of America, have been taking 85 to 90 percent of total reported containerboard downtime. Looking for new outlets for their tonnage, some North America mills are significantly increasing their shipping distance--in some cases across the country. Original import threats from China are now being thwarted by recent threats of kraft linerboard coming from Australia.

U.S. Focus

by Nicoleta Diaconu