The new containerboard playing field

by Bill Studstill

A considerable amount of publicity has recently been directed at North American containerboard producers concerning mergers and acquisitions, significant downtime, and new value-added grades. Despite the recent announcements of "slow back" and "shut down" strategies, current linerboard capacity in North America has decreased less than 1% since 1998, according to a new study by Jacobs-Sirrine Consultants (JSC). Consequently, perhaps the most serious challenge facing the producers is managing the delicate balance of supply and demand. In addition, this balance is compounded by rising energy costs that show no signs of weakening.

CONSOLIDATION AND CONTAINERBOARD. Industry consolidation has not only served to increase the linerboard capacity share of the top five producing companies from 51% to 63% between 1998 to 2000, but has also resulted in a decrease of linerboard mills from 69 to 66, and companies from 34 to 29. These numbers will become even more dramatic if Weyerhaeuser is successful in acquiring Willamette; Weyerhaeuser's share will increase to 16.1% and the top five will now control more than two third's (69%) of the capacity share. This is a far cry from 1989 when the top five controlled only 41% of the market.

A similar scenario exists for North American corrugating medium producers. On the bright side, total medium capacity did decrease about 270,000 tons, or about 2.4%. Also, capacity share of the top five producers increased from 46% to 56%, along with a reduction in total mills from 66 to 64 and companies from 31 to 28.

On the dark side, however, two things will make market leadership more difficult in the corrugating medium sector. First, the 56% capacity share owned by the top five producers is not really enough to leverage the market (especially in comparison to the linerboard situation). Second, the danger of swing tonnage can thwart shaky market discipline.

The joint venture of Caraustar and Inland (called Premier Boxboard) is a prime example of swing tonnage potential. The mill rebuild, completed in August 2000, "converted" the majority of the mill's tonnage to gypsum face paper. However, the mill can, does, and will produce corrugating medium. Although the optimal plan for Premier is to produce the gypsum paper, given the impending recession with housing starts falling, will it switch over to primarily corrugating medium? And will others follow, given the relative ease for some in swinging into medium?

INTERNATIONAL FACTORS. On the international front, attention is now directed towards China. Beginning with Nine Dragons' recent machine startup, almost 1.5 million tons of new capacity is slated between 2000 and 2002. The Chinese market has until recently been an attractive outlet for containerboard export. If the new projects are built, this market may be choked off for "excess" North American production.

Indeed, according to Kenneth M. Jastrow, II, chairman and CEO of Temple-Inland, "domestic pricing for linerboard and boxes continues to be stable, although export markets for linerboard have declined." In response to this situation, Inland shut its Ontario, Calif., mill from mid-December through the end of the year. The JSC study provides an analysis of the manufacturing cost competitiveness of the Nine Dragons mill vis-à-vis western North American producers.

THE ENERGY DILEMMA. The JSC study shows that producers remain focused on containing costs. The results show that the average linerboard cash manufacturing cost for mid-year 2000 is $242 per ton, an increase of less than 4% over 1998. The fiber cost component actually decreased a small amount, while labor costs were stable. However, of greatest concern currently are the exploding energy costs facing producers.

Average energy costs on a per ton basis are up an incredible 37% over 1998, and are still rising. According to John Faraci, International Paper's CFO, "energy costs, particularly natural gas, are up $40 million compared with the previous quarter." The Department of Energy's Energy Information Administration (EIA) in its Short Term Energy Outlook reports spot wellhead natural gas prices for September through November more than doubled prices of the same period in 1999. Further, the December price averaged an "unheard of $8.36 per thousand cubic feet (mcf)." The EIA projects average prices at $5.20 per mcf in 2001, versus $3.70 in 2000.

The situation is not much better for oil. Though the average price for West Texas Inter-mediate fell from $34.30 per barrel in November to $28.40 in December, additional weakening in 2001 is unlikely, given the likelihood of an OPEC production cut. The EIA projects average annual oil prices declining by only about $1.50 per barrel in 2001. Some mills, especially western U.S. locations, are shutting down or cutting production in the face of this energy crisis.

Bill Studstill is group manager at Jacobs-Sirrine Consultants, Atlanta, Ga.