U.S. Containerboard Sees Weak Volumes, But Inventories Shrinking

Nov. 19, 2009 - October containerboard and box numbers in the U.S. again showed weak industry volumes, said industry analysts at Deutsche Bank.

Box shipment volumes fell 7.9% y/y in October. Adjusted for one fewer shipping day this year, volumes fell 3.7% y/y on an “average week” basis.

"We think the “real” number is a blend of the two, a decline of 5.8% y/y," said Mark Wilde, senior analyst at Deutsche Bank covering the paper and forest products sector. "This looks disappointing given that September’s decline was just 4.8% y/y, and it looks even worse given the very easy comp of October ’08 (itself down 8.6% y/y)."

Meanwhile, the ISM manufacturing index continues to improve, rising to 55.7 in October, the highest reading in over 3 years, Wilde noted. "At some point, this should lead to improving box volumes. If it does, the y/y comp could see a sharp turn, because the coming months will bring even easier comps," he said.

Inventories Getting Leaner
Inventories continued to tighten. Combined mill and box plant inventories fell 73,000 tons m/m. However, measured in terms of weeks of supply, the number rose from 3.2 to 3.3. Looking over the last 10 years, inventories typically fall by an average of 52,000 tons m/m in October, implying a positive variance of 21,000 tons, Wilde said.

Since the start of the year, total inventories have declined by about 330,000 tons, compared to a 10-year average decline of just 49,000 tons in the first 10 months of the year. "This is a highly impressive accomplishment given the weak demand environment," Wilde added.

Total inventories now stand at 2.16 million tons, near the low end of a normal historical range.

Operating Rates & Trade Flows
Operating rates also remained approximately flat in October month/month, Wilde said. The total containerboard rate was 88.3%, flat with the 88.0% of September, but noticeably higher than the YTD operating rate of 84.4%.

The linerboard rate was 88.7% (88.6% in Sept), and the medium rate was 87.3% (86.3% in Sept).

With the recent closure announcements by International Paper and West Fraser, as well as potential further announcements by Smurfit-Stone, operating rates may rise substantially even without a significant improvement in demand, Wilde said.

If the year-end expiration of black liquor credits further reduces supply, the market could tighten even further, he added.

Longview Fiber is out with a $50/ton price hike initiative for January 1. After a series of hikes for various export markets, this is the first domestic announcement.

"We find this somewhat surprising, both because it is earlier than expected, and it comes from a small player," Wilde said.

At about 600,000 tons/year, Longview is the #12 producer in North America.

"Longview was likely both pressured by high fiber costs and emboldened by a stronger competitive position due to recent closures in the Pacific Northwest (IP at Albany, OR and West Fraser at Kitimat, BC)," Wilde explained.

But, "Longview won’t move the market by itself," he said.

So the question remains: Will the larger producers like International Paper and Smurfit-Stone follow?

"We think they will attempt an increase for some point during 1Q, but perhaps not quite so early. January 1 is unusual timing because it is a seasonally weak time of year. Typically, increase attempts are slated for March 1 or April 1 when seasonal volume is rebounding," Wilde concluded.

SOURCE: Deutsche Bank (Mark Wilde)

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