According to a survey of North American corrugated container producers by Longbow Research packaging and container analyst Joshua Zaret, 78% felt that the July 1, containerboard price hike of $55/ton would be successful and subsequently passed onto box prices.
Mr. Zaret said the increase is notable in light of weakening demand for boxes. He said 52% of survey respondents characterized current demand as weak, in June compared to 27% who characterized demand as weak in May.
He added, The confidence in the successful implementation reflects the industrys imperative to restore margins in the face of rapidly escalating costs as well as the opportunity presented by temporary supply curtailments.
Joshua Zaret summary:
We recently completed our survey of corrugated container producers across the country to gauge market conditions for the month of June.
The prevailing issues during the month were:
1. The timing of the industrys next attempt to raise prices and its probability of success. All eight major North American containerboard producers, representing about 76% of North American containerboard industry capacity, have announced a containerboard price hike of $55/ton effective July 1. At this point, we are aware of five producers that have also announced box price increases of 11%-12% ranging in dates from July 14 to August 1 (with the majority scheduled for July 14). The key rationale for these announcements, and likely underlying factor for success, is the industrys need to recover its escalating costs for energy, transportation, and chemicals.
In our survey, 78% of the respondents felt that the containerboard price hike would go through within the next three months and subsequently be passed through to boxes; 55% believed it would go through in July and then be passed through to boxes. Prior to this round of announcements, there was a marked sentiment in our prior surveys that the next price hike would occur in the fall, based on the belief that the economy (and box demand) would be stronger at that time. That this initiative is sooner than end users expected, and is considered likely to be successful, reflects the industrys imperative to restore margins as well as the opportunity presented by unexpected supply curtailments stemming from a boiler explosion at an IP mill (roughly six months) and a flooding-related shutdown at a WY mill (roughly one month). The recent announcement that SSCC will permanently close a 135,000 tpy medium machine by October 15 came too late to be a factor in this survey.
2. Weaker June box demand. On the negative side, a higher proportion of respondents (52%) reported weaker box demand in June versus those reporting weaker demand in May (27%). While 50% saw June demand as typical, 47% saw it as weaker than usual. Weak box demand was the reason the March price initiative failed. What is different this time is the continuing surge in costs, which is negatively affecting margins. Consequently, the industrys top players appear more motivated to present a united and disciplined stance.
3. Tighter Supply. There was a marked increase in the number of respondents who reported tighter containerboard availability in June versus May. Over half of the respondents (55%) reported tighter supply conditions in June. The majority stated the constriction was across all grades. Many attributed the change to the temporary outage at IPs Vicksburg mill due to the explosion and to WYs Cedar Rapids mill due to flooding.
4. Further industry consolidation resulting from IPs pending purchase of WYs corrugated packaging assets. In our survey, 68% of the respondents thought the consolidation and rationalization of WYs assets would be a factor in the supply and price dynamics. Only 13% thought it would not (the remaining 20% had no opinion). We expect the transaction to close in August.
June Box Demand Preview - 52% characterized current demand as weak, compared to 27% last month - 38% of the respondents classified current demand as moderate. This compares to 56% in May - 10% stated that demand was strong in June, compared to 17% in May.