Containerboard Mills: Thousands of Tons of Output Cut
Containerboard is a form of paperboard manufactured from natural, unbleached wood fibers. The composition of containerboard varies depending on wood types, pulping processes and quantity of recycled materials. More than 100 million tons of containerboard is produced each year. In an effort to keep industry inventories from rising to the point where the large quantity will negatively affect pricing, North American containerboard mills are cutting tens of thousands of tons of production. However, this may not be enough as announced Chapter 11 bankruptcy filings have increased, including recently announced Smurfit-Stone Container Corp. and its U.S. and Canadian subsidiaries.
SUPPLY
Drastic cuts in production expected
Integrated corrugated producers took almost 450,000 tons of downtime in November 2008 with production of 2.56 million tons against nominal capacity of just over 3.0 million tons. No. 2 producer Smurfit-Stone is expected to reduce containerboard and kraft paper production by up to 255,000 tons. No. 3 Temple-Inland idled 100,000 tons at three mills and No. 5 Packaging Corporation of America removed 90,000 tons – all primarily in the last quarter of 2008. Continuing the downward trend, U.S. containerboard mills took more than 875,000 tons of downtime in December alone; a 26.1% decrease in production from one year earlier. These trends can be expected to continue through the first quarter of 2009.
Increased inventory levels
In the past few months, corrugated inventories have risen 11.6% or 268,000 tons; equal to a change from a demand-calculated 3.8 weeks of supply to 4.5 weeks. Even with fourth quarter downtime for the industry – at the highest amount seen in nearly two years – inventories rose for more than five months. December’s exceptionally weak 71.6% operating rate reflects this industry’s commitment to keeping inventories under control.
Other influencing factors continue to have an affect
Even with production cuts as a result of the floods in Iowa, hurricanes in the deep South and the five-month loss of International Paper’s huge Vicksburg, Mississippi kraftline machine, the negative month-over-month containerboard consumption numbers kept climbing.
DEMAND
U.S. manufacturing turned sharply negative
The October decline for paperboard included a 5.0% decline in containerboard for domestic use and a 4.3% decline for boxboard used in domestic packaging; clear evidence of the U.S. manufacturing slowdown for both durable and nondurable goods. Corrugated box shipments through November were down 3.8% after a 14.4% plunge – the lowest volume level witnessed since December 1992. According to the American Forest & Paper Association, containerboard production for exports also fell 15.1% in October and 12.0% year-over-year. November represented the third consecutive month of sharply lower business matching a severe contraction in manufacturing, which, according to the Institute for Supply Management, put new orders at the lowest level in almost 30 years.
Consumer spending has slowed
As of November 2008, the consumption of containerboard was at a low 2.080 million tons – a decline of 15.3%. In market updates, various containerboard companies represented that business conditions for the industry have continued to weaken in the fourth quarter. Demand for containerboard and corrugated product was significantly lower than these industry players expected.
Recession slams U.S. paper and paperboard output
U.S. paper and paperboard production has been crushed by a weak economy resulting in a decrease in paper orders and production. Results for the fourth quarter of 2008 reflect the continued impact of severe input cost inflation and lower demand due to declining global economic conditions. Some containerboard companies are responding to these factors by pursuing price increases, adjusting production to a more demand-specific level and tightly managing working capital and capital expenditures. Even with these changes, the industry expects the weak economy to continue to have a negative impact into the first quarter of 2009.
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