Grade Profile

Kraft paper: Market losses to plastics reduce shipments and operating rates

GRADE STRUCTURE. Grocery bags and sacks are the largest market for unbleached kraft packaging papers, accounting for about 40% of total shipments, followed by multiwall shipping sacks, 38%; other bag and sack, 5%; and wrapping and converting papers, 17%. Basis weights for most bag and sack papers range from 30 lb to 80 lb/3,000 ft2.

PRODUCTION/CAPACITY. A long-term decline in demand for unbleached kraft packaging papers, particularly for grocery bags, caused producers to reduce production capacity for these grades by 1.4 million tons, or 40%, over the 10-year period from 1985 to 1995. U.S. capacity for unbleached packaging papers appears to have stabilized at about 2.5 million tons, which includes as much as 300,000 to 400,000 tons of "swing" capacity between kraft paper and linerboard. No new capacity additions are planned in 1998.

Industry shipments of unbleached kraft paper are forecast to decline about 2%, or 45,000 tons, this year, after declining by 70,000 tons in 1996 and 300,000 tons in 1995. Lower shipments of grocery bag and sack paper account for most of the decline due to market share loss to plastic bags. Shipments of multiwall shipping sack papers are up about 5%. The shipping sack grades remain competitive with alternative materials and provide cost-effective packaging solutions for a wide range of industrial and consumer markets.

Operating rates for kraft paper mills are estimated to be only 74% this year, but linerboard production raises the actual industry operating rate closer to 90%.

Exports of unbleached kraft paper have been rising the past several years, reflecting stronger demand for shipping sack paper in the fast growing markets of Latin America and Southeast Asia.

OUTLOOK. Kraft paper is the only segment of the packaging market that is expected to weaken over the next year due to continued market losses to plastic grocery bags. Unbleached kraft paper will continue to battle with plastics in all of the major markets. Although many consumer polls indicate a preference for paper, it has had virtually no impact on the market because of paper's higher costs vs plastics for supermarkets. Kraft paper mills have responded to these changing dynamics by adjusting the product mix on "swing" machines, shifting production to lightweight linerboard and specialty grades. Also, shipping sack paper remains a stable market for kraft paper producers. Overall supply and demand should remain in balance, and industry operating rates should remain stable if kraft paper producers continue with this product mix.

PRICING. Heavyweight kraft grocery paper prices followed closely the decline in linerboard prices over the past year, falling to approximately $410/ton from a peak of $590/ton. Multiwall shipping sack paper prices also declined, dropping to approximately $600/ton from $720/ton. Several producers have attempted to restore prices during the fourth quarter of 1997 following successful increases in linerboard prices. Prices could recover gradually over the next year.

Year-end price history for 70-lb grocery sack paper: 1988, $455; 1989, $495; 1990, $465; 1991, $425; 1992, $390; 1993, $320; 1994, $490; 1995, $530; 1996, $410. Multiwall shipping sack paper (50-lb): 1988, $520; 1989, $560; 1990, $580; 1991, $560; 1992, $580; 1993, $550; 1994, $620; 1995, $700; 1996, $600.

BY NOEL DeKING

News Editor

FORECAST (000 tons)

Total U.S. capacity (1997): 2,573
Capacity Share of top five companies: 74%
Capacity Share of top 10 companies: 98%
1. Totals include unbleached kraft paper/linerboard swing capacity.
2. IP also has 200,000 of bleached kraft capacity.
3. Purchased Chesapeake West Point, VA., kraft mill in 1997.