Paper Market Overview
Paper prices for liner and medium remain flat for September and October, and OCC pricing has stabilized for the time being. Mill operating rates were 95.6% for the quarter, up about 3% from June 2021. Paper production capacity increased 4.1% for the quarter and paper availability appears to be improving. Paper inventory at mills and corrugated facilities increased by 9.8%, with supply now up to 3.5 weeks from 3.1 weeks.
Two new liner/medium facilities in Pennsylvania and Arizona appear to be moving into the construction phase; however, financing has not been confirmed. Expectations for any paper pricing increases are now pushed into Q1 2022 or later.
US producers appear focused on supply to North America because it is more profitable than exporting via oceanic freight.
Corrugated Box Market
Box demand for Q3 was flat YOY (up 0.1%), with September demand being the weakest for the quarter. Demand projections for Q4 have tempered from the previous elevated levels. The availability of raw material (paper) no longer appears to be the cause of supply shortages. Based on operating schedules, the shortage of labor and increasing wages appear to be impacting box plant productivity by as much as 10%.
Q3 economic indicators reveal weaknesses in the Home Remodeling, Home Storage, and Auto Production sectors.
Food and Appliance demand still appears strong. However, concern is growing relative to the performance of the economy in Q4.
It has also been reported that demand for corrugated cartons could be experiencing artificial (or temporary) demand destruction. Although the demand is there, some manufacturers are experiencing a reduction in productivity due to raw material supply chain issues restricting a manufacturer’s ability to produce products that will be packed into corrugate boxes. Some of these issues are having a negative effect on box demand. The question is: when raw material supply allows manufacturers to resume normal production of finished goods, will the current level of consumer demand remain? It is difficult to quantify the exact impact this phenomenon is having on box demand, but it could be a contributing factor to any demand softening we see in Q4.
The issue of labor availability and increasing wages is the key factor impacting delivery lead times. Expect extended lead times until demand pulls back or the labor issue improves. However, demand lead times should improve due to increased paper availability.
Delivery lead times should improve, but pricing will remain elevated for now, and negotiation leverage still favors the box producer/supplier. Paper pricing should remain stable through the end of Q1 2022.
Two major corrugate/box production facilities are very close to startup (one in Ohio and another in Wisconsin). In addition, there have been several announcements of new box plant construction to increase production capacity over the next 12 months to better satisfy demand.
Folding Carton Market
Demand remains strong, especially in food-related categories, while supply continues to be constrained due to raw material availability, not converting capacity. In addition to increased raw material costs, virtually all other production costs are elevated. Some of the more obvious challenges are labor availability, labor rates, energy, freight, and
The primary price driver in the folding carton market is a shortage of raw material. US capacity has been reduced by mill shutdowns in SBS and CRB/URB categories. Moreover, Graphic Packaging and WestRock have converted significant domestic SBS capacity to produce the more profitable SUS/CUK.
All indices announced price increases in October. Recent announcements of $60/ton in URB are not yet reflected in the index, as they are effective in November. Given market tightness, we expect the announced November URB price increase to move to the index over the next 30 to 60 days.
CUK/SUS increased $70/ton – 2021 increase to date: $200/ton
CRB increased $60/ton – 2021 increase to date: $240/ton
URB increased $30/ton – 2021 increase to date: $210/ton
Imports of board from Asia have been priced out of the market primarily due to the escalating cost of ocean freight. Imports from South America and Europe continue to be strong. However, freight from SA and the EU, along with rising energy costs in the EU, will continue to drive board prices upward from these regions.
Converters will buy any competitive board available due to the short supply. The current gap of Asian board to the US market is at least $400/ton, and therefore not competitive. However, if the price gap closes enough to make Asian board economically viable, the current shortage of board could be eased, thereby leveling off and even forcing prices down.
The only domestic folding board capacity increase scheduled is the Graphic Packaging CRB machine slated to start in 4Q 2021 in Michigan. Interestingly, this machine capacity represents about 40% of the domestic CRB market. When the project was announced, Graphic Packaging also communicated the intention to idle equivalent capacity of older machines. Graphic Packaging may delay some closures until market demand declines given the tight folding board market. This action could help the availability of CRB for converters and may cause some carton customers to consider switching from SBS and CUK where practical.
Expect board prices to continue to move upward as much as $150/ton early into 2022. It will continue to be a seller’s market for the foreseeable future until we see improved board availability AND demand destruction.
Paper Bag Market
Brown Kraft bag paper moved up again in October by $20/ton for a total of $90/ton YTD. And brown bag paper producers have announced another $70/ton increase effective in November 2021. Other non-major producers have announced up to $150/ton increases. This product pricing is less influenced by the index and more by overall demand.
Raw material price increases in OCC have driven the pricing actions when coupled with higher demand for bags. Trucking, labor, and energy costs are also contributing to pricing pressure in this category.
Paper and Plastic bag converters are also experiencing significantly increased demand, which appears to be outstripping supply. Consequently, suppliers will continue to have the pricing power until demand subsides.
Natural kraft bags (virgin) are not experiencing the recycled fiber increases, but as with other bag types, demand is outstripping supply. This category is experiencing problems with tight supplies for raw material (paper) and converting capacity to meet the demand. Due to the continued shift from plastic to paper, we expect this category to remain tight beyond the resolution of Covid-related demand.
Bleached bag paper pricing has been recently influenced by the significant capacity reductions in the Printing and Writing sector, which has caused supply issues in the bleached categories.
The continued decline in Printing and Writing will cause bleached paper production capacity to better align with demand, and pricing pressures on bleached paper should abate. This adjustment will likely occur over the next 6 months.