Dan’s Retirement
I would like to let everyone know that Friday, March 31, 2023, will be Dan Maheu’s last official day with RTi as he sails off into a much-deserved retirement. Dan will continue to support RTi when needed, as his plans for retirement include spending a lot of time traveling with his wife and entertaining his grandchildren here in the DFW Metroplex! I have only been with RTi for a short while, but during my time here, I have come to understand the value Dan has brought to our clients. Retirement is well deserved, and we want to thank Dan for all he has given to RTi over the years and wish him all the best in retirement!
Corrugated Box Market
The corrugated market has shown a dramatic shift from 2022. Pricing and demand have experienced a significant reduction. Demand for boxes turned to negative growth in Q3 and Q4 2022, resulting in negative growth for the year 2022. This trend has continued into Q1 2023.
Demand reductions result from destocking, and market demand drops due to reduced consumer spending. The destocking appears to be closing in on a bottom while demand drops for goods continues to present problems for the industry, and RTI believes this will continue well into 2023.
The issue of tight supply from oversold box plants is gone, and many box plants are operating back at three shifts per five days or less. Box plant capacity has experienced dramatic growth rates, with 32 new corrugator box plants starting up or soon to start up. RTI expects that there will be some consolidation of box production with the retirement of less efficient box plants due to market demand reductions.
Paper production has increased dramatically, with an additional 1.5 to 2.0 mm tons of new capacity coming online in Q1 2023. The market is over-supplied, and producers are taking significant market-related downtime, which began in Q3 2022. Pricing and demand in the export markets have also declined, and export is a less attractive opportunity to allow producers to manage the US market. RTI expects that some paper capacity rationalization will occur during 2023 with the shutdown of less competitive assets. These will, however be very difficult decisions as the remaining paper assets are generally competitive, and reduction targets are limited.
Paper pricing has declined since November 2022 by $70/ton for Kraft Liner, $80/ton for Recycled liner, and $110/ton for medium. Box pricing is down 5 to 8% as a result.
Market Outlook
RTI expects that, given capacity expansions and demand reductions, the paper market index will continue to decline another $40 to $80/ton by the end of Q2 2023. Integrated producers will defend domestic box demand as the primary profit outlet for their paper production, and customers can challenge pricing issues in exchange for contracts covering the next 24 months of demand.
Folding Boxboard Market
The folding boxboard market, which experienced significant and nearly monthly price increases in 2022, has now stabilized. However, the market is still definitely not oversupplied except for Uncoated Recycled Board (URB). URB producers are working to reduce supply with unplanned mill downtime and the recent announcement by Sonoco that they were closing their Hutchinson, KS mill (90,000 T) in March. There have not been any significant capacity increases except for the new Graphic Packaging Coated Recycled Board (CRB) machine in Kalamazoo, MI. Graphic Packaging shutdown capacity coordinated with the new machine resulting in an additional 170,000 tons into the market, which really did not influence the supply/demand relationship significantly.
Demand has tempered for folding board boxes, but demand for paper cups remains elevated. The lack of additional domestic paper capacity has resulted in a reduction in back orders and allowed the paper manufacturers to pull back on the mill operating rates more toward reasonable levels.
Customers will experience reduced issues with carton availability but have not gained any pricing leverage. The supply of Solid Bleached Board (SBS), CRB, and Coated Kraft (CUK) remains balanced with demand but is not in oversupply. Due to mill changes, the two suppliers of CUK can move manufacturing between SBS and CUK and can manage the supply-to-demand very effectively. CUK pricing has come into balance with SBS reversing the trend of the last two years where CUK was significantly higher in price than SBS (counter to historical trends). The return to price balance will limit opportunities for customers to board switch for packaging cost reductions. The packaging market will remain in balance Supply/Demand for 2023 and 2024 even with reduced demand due to the economy. This segment will be a beneficiary of switching from plastic in order to counter reduced consumer demand for goods.
The profitability of the US box board market is attracting increased imports of FBB from the EU and South America but will probably not move the market to oversupply. China has significantly expanded box board capacity to the point of substantial oversupply in Asia and unacceptably low operating rates; however, US tariffs limit the economics of imports to the US. Canada, Mexico, and Latin America are targets for imports from China.
Market Outlook
RTi believes that reduced demand and the threat of imports will keep box board pricing flat for 2023 and possibly into 2024. Beginning in 2025, there will be increases in SBS/CUK capacity from Billerud Escanaba and Sappi Skowhegan. Graphic Packaging will start up new CRB capacity in Waco in 2026, and Billerud Escanaba will start another SBS/CUK conversion in 2027. Those capacity increases have the potential for some pricing relief, but given market growth may well just continue the market balance.
Bag Market
Paper pricing for brown bag continues to decline tracking the oversupply issues in the corrugate market. White paper pricing continues to increase due to the tightness in the Printing and Writing market associated with mill shutdowns and conversions to packaging board. The issue in this market will primarily be concerning bag converting capacity. The replacement of plastic with paper bags will continue to challenge the capacity of converters. Customers will have limited leverage due to supply concerns and will have to seek relief in the import market, primarily Asia for supply and some price relief.
Pulp
Pulp pricing has declined in Q1 2023 with weak demand and large inventory builds having current inventory levels at all-time highs despite the additional down time taken by pulp producers. Destocking and higher-than-normal demand decline of graphic papers appears to be the main driver of weak pulp demand. This softening looks to continue in the near future, with additional declines in pricing expected over the next few months at a minimum.