How did we get into this challenging spot, and when will converters feel relief? PPC recently hosted a webinar with Mark Wilde, Ph.D., managing director of BMO Capital Markets—also known to many in our industry as Doctor Paper—who shed light on recent challenges.
Where’s My Board? Supply-Side Shrinkage
Starting with supply-side difficulties, Wilde discussed how paperboard capacity has been reduced throughout North America. He noted that, even before the period in question, capacity had been shrinking. For example, SBS producers faced challenges from waning demand for tobacco and commercial printing. During the past year, COVID-19 led to declines in food service and liquid board needs, prompting producers to shift or decrease board capacity. In total, the past 3-4 years saw declines in capacity for SBS and CRB at 368,000 and 268,000 tons respectively. Wilde said, however, this is not entirely net-lost capacity. Some capacity has been shifted to CUK, which has increased by about 322,000 tons.
Compounding the challenges for carton converters, board prices have increased while supply has decreased. In fact, Wilde has been bewildered; never has he seen compound price increases like those over the past nine months. As of July 2021, CRB has increased by $176/ton compared to one year ago; CUK has increased by $150/ton in the same period; and SBS is up about $100.
Consumers Want More Cartons: Growing Demand
In contrast to the shrinking board supply, the demand for cartons has done nothing but expand over the past 6-9 months, putting even more pressure on converters. According to Wilde, part of the growth is cyclical: the post-pandemic economy is growing, and with it, the demand for consumer packaging.
On the other hand, structural changes in the North American market have also expanded demand. Wilde noted that the beverage can market has exploded. 70% of new beverages introduced into the market are packed in cans, with volume of cans increasing by almost 10 billion between 2018 and 2020. Most cans use CUK/CNK carriers, hence the increase in carton demand (and the shift of capacity to CUK as mentioned above). Broad sustainability concerns and CPG shifts away from plastic packaging have also contributed to growth. Again, this trend has benefited CUK/CNK in particular.
Other Stressors
Wilde pointed out additional issues that have affected our industry as of late. Back in February, Winter Storm Uri knocked out mills and petrochemical plants in Texas, affecting the entire supply chain and halting the production of glue and coatings. We’ve also seen freight and logistic bottlenecks (recall the ship that blocked the Suez Canal for six days in March), which have stretched supply chains and delivery time. Wilde noted that the result has been a premium on secure domestic supply.
What’s Next?
Wilde noted that he believes the industry is currently at the point of maximum tightness, and the first-quarter outage issues are resolving.
However, he warned against hasty celebration. While capacity for certain types of board has increased, there hasn’t been an overall net-increase in boxboard, nor is there one predicted for the near term. Other factors also call for concern: continued consolidation of suppliers across North American and Europe; a global supply chain that will remain tight; and probable further upward pressure on recycled fiber over the coming months. Wilde is cautiously optimistic that converters may see more relief in paperboard supply by the end of 2021.
In the meantime, don’t forget to rely on PPC for information and support. To see recordings of other virtual PPC webinars and events, click here.