Spend Matters welcomes this guest post from IHS.
Both linerboard and corrugated medium prices slipped marginally in the fourth quarter of 2015 amid plentiful supply. The benchmark price for 42-pound Linerboard East Coast Market is now $730/short ton, down from $735/short ton in the third quarter. Corrugating medium (26 pound) declined from $690/short ton to $680/short ton. Although these benchmark prices have not seen any significant drops, discounting has been widespread and some contract prices are reported to be around $100–120/short ton below benchmark. It appears that producers were overly optimistic, keeping their operating rates in mid-to-high-90 percentile range. Demand has ticked up in the third quarter, but not as significantly as they had hoped. In fact, offtake has been rather disappointing throughout the year, leaving suppliers with elevated stocks and readily available material. This was previously evident in softening corrugating medium prices only but has now transmitted to linerboard as well.
Looking ahead, 2016 is unlikely to bring any price recovery. At most, prices are expected to creep up by 0.5%, before they accelerate to 2–3% in 2017. Containerboard supply in North America remains ample and is the key factor keeping the prices from increasing. In fact, current production levels resulted in elevated stocks and so much readily available product that even the so-far-resilient linerboard prices started eroding. This finally pushed some producers to take downtime at their mills, in order to control output levels. According to the American Forest and Paper Association (AF&PA), October operating rates dropped to 94.4%, down from 96% in September, as a result of scheduled downtime at mills. Some more permanent supply changes are also ongoing, including both mill shutdowns and startups, but the net result is still an increase in capacity.
The key industries for corrugated packaging are mainly nondurable goods: processed food, beverages, tobacco, pharmaceuticals and soaps and toiletries. Processed food production is gradually expanding; after 1.3% growth in 2014, the 2015 output increase is expected to come in at 2.3%. Beverages manufacturing contracted in 2014 and 2015 by 0.7% and 0.8%, but looking ahead, annual growth rates will turn positive in 2016. Tobacco products showed a surprising spike in 2015. Manufacturing output has been in decline for four consecutive years due to health concerns, but 2015 output increased by almost 1.0% in comparison with 2014. On a more positive note, other nondurables like pharmaceuticals and soaps and toiletries posted solid growth in 2015 — by 2.94% and 8.8%. Although the outlook for 2016 is not as strong, these industries are still expected to post decent growth.
In durable goods categories that consume cartonboard packaging, large appliance manufacturing, such as furniture, computers, electrical equipment and household appliances, grew by 2.2% in 2015, but it is expected to show some slowdown in 2016, expanding by 1.5%. The overall growth rate for corrugated packaging consumption is unlikely to exceed 1% in 2015 and will remain at a similar pace in 2016. Given the ongoing, sluggish demand and challenging export conditions, ample supply will keep prices from moving up.
Bottom Line: 2015 saw substantial declines in raw material costs, driven by falling energy prices. Some gradual price increases in material costs are expected in 2016, but countered by still sluggish demand and ample supply, they will not be sufficient to support containerboard price increases.