Grade Profile

Corrugating Medium: Mills Look For Strong Market Recovery By The End Of This Year

GRADE STRUCTURE. Corrugating medium, the middle fluting material in corrugated containers, is made from semichemical pulp and recycled fiber. By definition, semi-chemical medium may contain up to 25% recycled fiber, but average recycled content is 37%, and some contains up to 50%.

Of total medium capacity, semichemical board has declined from 79% in 1980 to 56% in 1998; recycled medium’s share has grown to 44%. Basis weights for medium are 22, 26, 33, 36, and 40 lb/1,000 ft. Standard basis weight is 26 lb (62% of all production).

PRODUCTION/CAPACITY. The U.S. corrugating medium market began to deteriorate in mid-1995 and continued declining steadily through 1996 and 1997. The rapid buildup of recycled medium capacity from a number of new mini-mills has been blamed for the market turmoil. Medium mills continued to operate at high rates even as the market softened, running at 99% in 1996 and 1997, although recycled mills ran in the low 80s. Medium mills are expected to run at 95% of capacity in 1998 as all the new machines will be online. While capacity remains high, the market is expected to be balanced by 1999. Excess inventories of corrugating medium began to decline slowly in the second half of 1997. Medium mills began taking serious downtime in late 1997 and early 1998, prompting notable inventory reductions by the second quarter. Exports have grown steadily in recent years, but are expected to slow as market demand in Asia slows.

OUTLOOK. The growth of box plant demand for corrugating medium has increased by 2 million tons or 25% since 1990. Box demand continues to trend upwards as economic expansion continues. Box shipments should post good gains this year and into 1999. Shipments are projected to rise 2.5% in 1998, after rising 3.3% in 1997. Total industry shipments reached 390 billion ft² in 1997 and are forecast to increase to 400 billion ft² this year. The two-year increase reflects the best growth since the 1993-94 boom.

Production of semichemical and recycled medium in 1997 hit 9.8 million tons, a 5% increase over 1996. Medium production is expected to increase by 1.6% in 1998 and 4.0% in 1999. After declining in 1995, medium exports increased by 11% in 1996 and 18% in 1997. Exports are expected to continue growing this year, although recent events in Asia could slow market demand in that region of the world.

Capacity for semichemical and recycled medium continues to rise. Total medium capacity in 1997 reached 10.6 million tons, a 5.2% increase over 1997. Capacity is slated to increase 2.0% in 1998 and 1.6% in 1999.

Operating rates for 1998 are expected to be in the 95% range for semichemical medium and in the 88% range for recycled medium. Combined with extensive downtime, these rates should support a slow upturn in the second half of 1998, although the price recovery will not match the 1995 upcycle, when medium topped $530/ton. Producers likely will shoot for a price increase to $380/ton by the end of 1998, with the upturn beginning by the end of summer. Current downtime, declining inventories, and adequate demand growth seem sufficient to fuel a moderate upcycle. But the upturn is building on a very deteriorated market, as medium has been selling near the cost of production.

PRICES. Medium prices hit bottom in early 1997, but a moderate upturn has been building since then. After a long slide that brought prices to a low of $200/ton and below, medium prices have improved to about $330/ton, in the wake of three price increases in 1997. Producers tried again to raise prices of both corrugating medium and linerboard with announcements in April and May this year, but a widespread price increase has not yet taken hold. Average annual transaction prices for semichemical medium (26 lb) in the eastern U.S. follow: 1991, $310; 1992, $310; 1993, $295; 1994, $425; 1995, $470; 1996, $300; 1997, $270.

BY NOEL DeKING

News Editor

SUPPLY/DEMAND (million tons)