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The buying environment for boxboard will be favorable in 2015. Both solid bleached sulfate kraft board (SBS) and clay coated recycled board prices softened by 1.5% in the first quarter of 2015 amid ample supply. Prices are expected to stabilize from the second quarter onward as demand slowly picks up. However, US exports will continue to suffer from an unfavorable exchange rate.
Since the spring of 2014, SBS prices have been $1,170/short ton, but recent softness in demand pushed them down by $5/ton at the beginning of 2015. With sluggish improvement in demand, prices could soften by further $5/ton before stabilizing through the second half of the year. Look for a very gradual price increase back to $1,170/ton by late 2016. Clay coated recycled board remained at $945/ton during 2014 and it is expected to stay largely flat during 2015. In 2016, with capacity in check and little pressure from production costs, recycled board price should increase only around 1%.
US capacity for SBS remained fairly stable since 2014 and no major changes are expected in 2015 or in 2016. Operating rates have remained in the low to mid-90% region. Margin improvement has come from declining production costs throughout 2014 despite stable prices. Demand, which softened marginally in early 2015, is expected to recover slowly through the year, and we do not anticipate announcements about major SBS mill closings in 2015 or 2016.
Although demand will continue to grow at around 1% per year and capacity will remain stable, increasing imports will be a steady source of material to keep the market sufficiently supplied. In fact, maintaining US capacity over the next 2 years will depend on how well domestic mills compete against the expansion of SBS production in Asia. Product from outside the region can not only supply the domestic US market, but could also displace some US SBS exports. However, foreign quality issues could support customers' preference for domestic product, and therefore, steady demand for local product is still expected. As such, expect US mill capacity to be relatively unchanged.
In terms of demand, the largest end industry processed food is anticipated to expand by 2.3% in 2015 and 2.7% in 2016. Pharmaceutical production is expected to increase 3.1% in 2015 and 3.7% in 2016. The soaps and toiletry industry should see an expansion near 9% in 2015. Production growth in beverages will come in at just over 2% in both 2015 and 2016. Tobacco manufacturing continues to contract and should decline by nearly 3% in 2015. Although most main industries exhibit healthy growth rates, boxboard packaging is facing competition from plastic packaging; therefore, our growth rates for boxboard demand are not as robust. Domestic demand for boxboard improved marginally in 2014 and should grow by around 1%–1.5% during 2015.
The US SBS industry is not only driven by domestic demand, but also relies heavily on exports. Approximately 30% of US output is exported. Most recently, US exporters are facing not only stiff foreign competition from Asia, but a stronger US dollar, almost at parity with the euro, is increasing competitiveness of European producers. Consequently, a 10% decline in US exports is expected in 2015. In US recycled board, exports play a minor part and the expectation is that these volumes will remain largely unchanged in 2015. Over the longer term, cheaper recycled board is likely to take some packaging market share away from SBS, especially in food and pharmaceuticals, but those decisions are usually controlled by marketing rather than procurement by users of paper-based packaging.