Kraft paper: Market contraction expected to continue in U.S. but exports rising

GRADE STRUCTURE. Consumer and industrial paper bags and sacks are the largest market for bleached and unbleached kraft packaging papers. Grocery and retail bags represent about 43% of total shipments, followed by multiwall shipping sacks at 38% and wrapping and converting papers at 19%. Basis weights for most bag and sack papers range from 30 lb to 80lb/3,000 ft2. Kraft paper can be machine finished (MF) by calendering or machine glazed (MG) on a Yankee dryer to improve printing quality. Special engineered multiwall shipping sack papers with higher tensile strength are also available. These are known as extensible kraft papers.

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. production capacity for unbleached packaging papers appears to have stabilized at about 2.0 million tons, which includes as much as 200,000 tons of "swing" capacity between kraft paper and linerboard. Bleached kraft paper capacity is about 400,000 tons. No new capacity additions are planned.

Industry shipments of bleached and unbleached kraft paper are forecast to decrease about 4%, or 90,000 tons, this year, after increasing by 3%, or 59,000 tons in 1999. Lower shipments of grocery bag and sack paper have accounted for most of the decline, mainly due to market share loss to plastic grocery bags. Shipments of multiwall shipping sack papers and specialty converting grades have remained fairly stable. The multiwall 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 88% this year, but linerboard production on "swing" machines and market related downtime has reduced the amount of actual production capacity available.

MARKET TRENDS. Kraft paper is expected to continue to lose market share to plastics, although at a slower pace than in past years. Unbleached kraft paper in particular will continue to battle with plastics in all of the major markets. Although many consumer polls indicate a preference for paper in grocery sacks, it has had virtually no impact because of paper's higher costs vs. plastics for supermarkets. Kraft paper producers have responded to these changing dynamics by adjusting their product mix and shifting production to lightweight linerboard and specialty grades and introducing handle bags.

Exports of unbleached kraft paper to Asia and Latin America have recovered from recent shortfalls due to reduced demand. A return to economic growth in these regions will raise demand for kraft paper, particulalrly shipping sack paper.

OUTLOOK. Heavyweight kraft paper prices closely tracked linerboard prices over the past two years, falling from a peak of $590/ton to approximately $410/ton and then recovering to about $520/ton in mid-year 2000. Multiwall shipping sack paper prices also declined, dropping to approximately $600/ton from $720/ton., but then recovering to about $740/ton this year Prices are forecast to remain stable over the next 12 months. Overall supply and demand should remain in balance, and industry operating rates should remain stable as kraft paper mills adjust to changing market dynamics.

Year-end price history for unbleached Grocery Sack paper (70-lb): 1996, $410; 1997-98, $450; 1999, $470. Multiwall Shipping Sack paper (50-lb): 1996, $600; 1997-98; $650; 1999, $690.

BY NOEL DeKING News Editor