Weak Demand Weighs on the US Containerboard Industry: Older Mills May Be Phased Out Faster, an Industry Shakeout Is Imminent

At the start of this summer, discussion was rife about the US

industry and whether it has emerged from recession. One veteran industry analyst optimistically predicted that containerboard producers would raise prices to counter inflation and pinned his hopes on a demand recovery.

However, recent second-quarter data poured cold water on that. Although industry players expected some rebound in demand, the reality is that the recovery is nowhere near enough to ease the plight of older mills. Meanwhile, a new generation of 100% recycled paper machines kept increasing output throughout the year.

Bloomberg's paper packaging pricing analyst Doug Larson noted in a mid-August presentation: “The paper produced by these new machines appears to be of higher quality than that of older 100% recycled paper machines, and they run more efficiently.” He further analysed, “If demand cannot improve, then these two factors may put even greater pressure on older equipment.”

Bloomberg recently held a webinar entitled “Containerboard Report — Market Dynamics: Reviewing Q2 2024 Sentiment and Data”. Bloomberg senior analyst for basic materials Richard Burke, corrugated market analyst Ryan Fox and Doug Larson spoke at the event.

Fox said: “We entered this year full of expectations, and everyone hoped the containerboard market would see a recovery. More than a year ago, many institutions, including Bloomberg, forecast that containerboard shipments would grow in 2024. However, as the end of 2023 approached, we found that headwinds on the demand side remained, and this was destined to be a difficult year.”

Larson noted that the containerboard supply side saw a great deal of activity last year, with five new machines added and 2 million tonnes of capacity added. Such a scale of expansion had not been seen since 1996.

“Despite the 2 million tonnes of new capacity, total containerboard capacity at the start of 2024 was not significantly different from a year earlier,” Larson said. “Because nearly 2 million tonnes of capacity was also permanently shut down last year. So the net increase was actually not large.

“What we are seeing is a shift in the structure of capacity: the newly commissioned machines all use 100% recycled material, while those that were closed mainly used virgin pulp or mixed raw materials. In addition, this new capacity comes mainly from independent or mid-sized suppliers, while most of the shuttered capacity belonged to industry giants such as International Paper and WestRock. Against total containerboard industry capacity of about 40 million tonnes, a shift of 4 million tonnes of capacity is undoubtedly a huge transformation.”

Larson further noted that, in addition to the 2 million tonnes of capacity permanently closed last year, some large companies in the industry temporarily idled more than 2.5 million tonnes of capacity for economic reasons, making the production shortfall in 2024 even more pronounced.

“Even if the permanently shut capacity is averaged out to 660,000 tonnes a year, in the first quarter of this year alone International Paper and WestRock temporarily idled close to 165,000 tonnes. This once again shows that the supply-demand imbalance is quite severe.”

Regarding the recently closed McKinley Paper recycled paper mill in Port Angeles, Washington, Larson said that according to his data analysis it was a relatively low-cost mill. Although he could not disclose the specific reasons for the decision inside McKinley, the event once again shows that older mills are facing growing pressure to survive.

He also noted that the inefficient operation of old equipment places considerable pressure on companies.

“If market demand does not improve significantly, then the older machines still in use will face even greater challenges. If demand remains sluggish, we are likely to see more machines shut down.”

Turning to containerboard shipments, Fox said that although month-on-month data showed improvement, they were still down about 1% year on year. He predicted that third-quarter shipments would be flat with the second quarter. It is worth noting that, historically, the third quarter is usually the best-performing quarter of the year.

“Although everyone had expectations for this year's market performance, first-quarter shipments fell 1.1% from a year earlier, a new low since 2016. This shows that the year did not get off to a smooth start,” he said. “Although the second quarter grew 1% month on month, year-on-year data show shipments still fell about 1%.”

Speaking about the third quarter, he said: “We expect some improvement, but not by much.”

Larson noted that one positive signal was an increase in containerboard exports in the first half. This effectively prevented a sharp build-up in domestic inventories and pushed the mill operating rate above 90% for the first time in the first quarter, reaching a new high in nearly a year.

“Growth in export demand is undoubtedly a big positive, but the first-quarter data also show that shutdowns within the industry will continue,” he further analysed. “I think the peak of shutdowns in the third and fourth quarters of last year has passed, but we are unlikely to return to the high operating rates of 93% or 94% seen during the pandemic. Still, maintaining an operating rate above 90% is possible.”

— This article is reprinted from the China Packaging Network (pack.cn). Original link: http://news.pack.cn/show-379638.html