A box of tricks or a parcel of woe? A new study finds out what is in store for containerboard producers in the next millennium

By Timo Suhonen

Unwrapping the future of packaging

In 1998 though, world consumption of containerboard dropped by 0.3% to an estimated 86.7 million tons. Consumption in North America remained stable, showing only marginal growth on the previous year. The western European and Latin American markets grew by 3-4%, while consumption in the Middle East and Africa rose by 9-10%. The real problem was to be found in Asia where the financial crisis caused containerboard demand to plummet by 5%. As Asian economies slowly improve though, the industry can look forward to the next millennium, hopefully forgetting the 1998 hiccup and concentrating on the strong performance of the 1990s.

Building a brighter future for board grades

Making the grade

World demand for containerboard is expected to grow by 2.8%/yr in the long term, reaching 125 million tons by 2010. Rapid demand growth in white-top linerboard and waste-based grades will continue, while the market prospects for unbleached kraftliner and semi-chemical fluting appear somewhat weaker.

Global containerboard markets have witnessed fundamental changes in terms of overall grade structure and product specifications. The share of waste-based grades has grown steadily from about 34% in 1980 to 52% in 1998, while virgin fiber-based products have lost their dominant position in most markets. The definitions of kraftliner and semi-chemical fluting have changed too. Today, far higher recycled fiber contents are allowed in these grades than were accepted in the 1980s.

Global consumption of waste-based linerboard and corrugating medium grew by an average of 7%/yr during the 1990s. Waste-based containerboard such as testliner, wellenstoff and schrenz have been outstandingly successful, mainly on cost grounds. This has provided an inexpensive alternative for both fiber-rich and fiber-poor regions of the world. White-top linerboard is another high-growth product category, showing an average 6-7%/yr demand growth in the 1990s. Consumer and display packaging with good printability requirements have driven the growth of these markets.

In general, world economic growth, industrial production and merchandise trade are the main demand drivers for containerboard and corrugated board packaging. Other significant demand factors include the globalization and consolidation of end-use industries and retail trade, growth of self-service stores, the appearance of electronic shopping and product development.

New flute structures such as D, E, F, G and N will support the use of containerboard and corrugated boards in the competition against folding cartons. The demand for small flutes will be driven by the general tendency to reduce overall packaging costs and the rapid growth of new products such as software, convenience food and fast food, for example.

Corrugated board packaging has proved to be a less environmentally sensitive sector due to the recyclability of the packaging material and the extensive use of waste-based containerboard. However, increasing emphasis on the weight of transport packaging and the development of re-usable packaging systems will continue to have an impact on containerboard demand growth. Competing materials and systems such as plastic and returnable transit packs will continue to take market shares from corrugated board in applications where they provide cost savings or enhanced performance.

Figure 1 - World Consumption of Containerboard by Region 1980-1998

Regional outlook

North America accounts for about 39% of global containerboard production, with western Europe making some 21%. Asian countries constitute about 28% of the total production, while the balance is produced in Latin America (6%), eastern Europe (3%), Africa and Oceania. Typically, Nordic countries and Oceania have the most modern and large-scale containerboard machines, while the North American industry tends to operate large, but not very modern, machines. The containerboard industries in eastern Europe, Latin America and Africa are largely based on smaller and older production units.

North America and western Europe will continue to dominate the global containerboard industry well into the future despite rapidly growing demand and the new capacity coming on stream in the developing regions of the world. These two regions will still account for about 45% of the global production growth by 2010.

North American and western European producers enjoy a number of competitive advantages, including relatively good availability of raw materials, advanced technology, high quality products, a high degree of integration and a well-trained labor force. Changes in box rules in North America could induce major shifts in corrugated board weights, but historical evidence suggests that firm assumptions in this area should be avoided. If the opposite occurs, ie a rapid decline in basis weights, the demand growth forecast for North America should be interpreted from an area (m2 or ft2) rather than weight (ton) perspective.

North America and the Nordic countries have traditionally been, and will continue to be, the leading net exporters of containerboard to other world regions. The export surplus in North America will grow substantially from the present level, while the increasing net exports from the Nordic countries will be balanced by the marginally increasing import deficit in the rest of western Europe. In relative terms, the fastest growing markets in the 1990s have been found in the Asia-Pacific region led by China and the Asean countries, Latin America and the Middle East. In volume terms, though, North America and western Europe have been the main growth centers, providing over half of the global consumption growth during the decade.

Going forward, the fastest growing markets will be eastern Europe, the Middle East, China, the rest of Asia and Latin America. Despite ongoing economic problems in many of these regions, the fundamentals for long term growth and expansion still exist in these markets. Apart from uneven economic growth and industrialization, the main demand risks for the containerboard sector in Asia are the shortage of domestic recycled fiber, the poor quality of the material available and the resulting cost/price implications for containerboard demand. In contrast to the North American situation, a potential decline in containerboard grammages and changes in corrugated board composition in most parts of Asia would be of great importance.

Enormous forest resources along with a large dormant demand potential constitute the main elements for the future market and industry development in Russia and other eastern European countries. However, due to diverse political, financial, institutional and logistical constraints, the Russian containerboard industry has not been able to utilize this potential. Eastern Europe, especially Russia, could develop into a major export surplus region beyond the turn of the century, depending on the economic development of the region in general.

Comparatively poor availability combined with the high cost of recycled fiber and softwood pulp will be the main weaknesses of the Chinese, southeast Asian and Middle Eastern containerboard industries. Despite the remarkable relative growth of the Asian industry, the whole region will account for just 36% of the global production growth up to 2010. Based on the assumption that economic performance will improve and demand is set to rebound, the current export surplus in some of the financially stricken countries is likely to ease within the next few years. Net imports of containerboard in Asia are expected to grow substantially in the long term, reflecting the pickup in demand in the region, the market's desire for higher quality packaging materials and the local paper industry's raw material shortage.

Figure 2 - Forecast Long Term Consumption Growth for Containerboard by Region

Containerboard consolidation

As demand varies considerably across the regions, the level of concentration within each industry also shows significant differences. Over the past decade, merger and acquisition activity in the global containerboard industry has led to increased concentration in the sector. A decade ago, the top five companies accounted for 18% of the global capacity total, whereas the leading 10 firms controlled 29% of the industry. By the end of 1999, these shares had already grown to 24% and 33%, respectively.

The most concentrated containerboard industries can be found in Oceania, where the top three companies account for 100% of the region's capacity. This is followed by Africa, where the top five companies control 82%, and Japan, where the country's top five producers own 60% of the total capacity. North America comes next with 52% of the capacity controlled by the top five companies. In comparison, the western European, Latin American and Asian containerboard industries are still relatively fragmented, with the top five companies operating 25-40% of the total capacity, depending on the region.

Historically, concentration in the containerboard industry has taken place predominantly at the national and regional level via mergers and acquisitions of rival firms and integration with local or regional converting industries. The best-known companies that have significant production facilities in several continents include Smurfit-Stone (with containerboard manufacturing operations in North America, western Europe, Latin America and China), International Paper (with operations in North America, western and eastern Europe and Oceania), AssiDomän (western and eastern Europe), Pratt Industries (North America and Oceania) and Mondi (South Africa, eastern Europe).

On top of horizontal integration abroad, containerboard companies have often chosen to expand their international operations through investments in converting industries in fast-growing overseas markets.

The restructuring of the containerboard industry will continue into the new millennium. The trend is toward more concentrated company structures where the strongest companies continue to seek growth through acquisitions and investments in rapidly growing and/or strategically important overseas markets. Increasing concentration should produce a greater degree of market stability, but often it involves painful decisions over the closure of existing capacity.

As in any other business, increasing power on the sellers' side is countered by the growing strength among the buyers. This is especially true of the consumer goods manufacturing industries, which are the main end-users of corrugated board packaging. These sectors will continue to consolidate and globalize to leave fewer, but bigger, buyers with more centralized purchasing patterns. At the same time, converters have to be flexible enough to serve their small and medium-sized customers. Multi-national end-users expect a similar type of service on a global basis as they get in their home countries. This will be a major "pull" factor for the globalization of the containerboard and corrugated board industry.

Looking ahead, the retail industry will continue to have a significant influence on packaging design and packaging material usage. European and North American retail chains are increasingly focusing on the emerging markets in Asia, Latin America and eastern Europe. Retailers are also looking for more harmonization in the design and quality of transport packaging. These new challenges will be met through better interaction and cooperation between the different parties in the containerboard supply chain, especially in the areas of research and development, package design, development of distribution systems and in handling packaging waste.

The next decade will throw many new challenges in the way of containerboard producers. But if the experience of the 1990s is anything to go by, the industry can head into the new millennium with confidence.

Timo Suhonen is vice president at Jaakko Pöyry Consulting. This article is based on the company's report "World Containerboard Market Outlook up to 2010"

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