Used cardboard demand seen boon for US packagers
Date: 13-Feb-04
Country: USA
Author: Michael Erman
Cheap and readily available domestic softwood allows U.S. packaging companies to make most of their cardboard from wood. But overseas packagers rely heavily on recycling old boxes, known in the packaging industry as old corrugated containers (OCC).
Analysts say the strong Chinese demand is already driving up the prices paid for the baled, used boxes, and expect them to surge further in coming months.
While U.S. packaging makers could feel some short-term margin pressure due to rising OCC prices, the surge would eventually help the American companies as competitors in Europe and Asia push packaging prices higher to cover their own costs.
Domestic producers would be able to reap the benefits of higher packaging revenue and maintain a relatively stable cost structure - a scenario industry experts could see playing out within 18 months.
"We pray every night that you see a massive spike in OCC prices," said Georgia-Pacific Corp. (GP.N: Quote, Profile, Research) Chief Executive A.D. "Pete" Correll, during the company's quarterly conference call. "You'd have to assume (OCC would) be under pressure and prices are going to go up, and that's what we have in our business plan."
Georgia-Pacific said it would benefit from the spike because it uses relatively little OCC. Other companies that could gain the most from OCC price increases include Packaging Corp. (PKG.N: Quote, Profile, Research) , International Paper Co. (IP.N: Quote, Profile, Research) , and Temple-Inland Inc. (TIN.N: Quote, Profile, Research) , according to Deutsche Bank analyst Mark Wilde.
He said the U.S. companies that use more OCC in their operations, including Caraustar Industries Inc. (CSAR.O: Quote, Profile, Research) , Rock-Tenn Co. (RKT.N: Quote, Profile, Research) , Sonoco Products Co. (SON.N: Quote, Profile, Research) , and Weyerhaeuser Co. (WY.N: Quote, Profile, Research) , would likely see margin pressure at first and would benefit less from a surge in OCC values.
Chinese producers, including Nine Dragons Paper Industries Co. and Lee & Man Paper Manufacturing, and European packaging makers, like Jefferson Smurfit Group and Sweden's SCA (SCAb.ST: Quote, Profile, Research) , would see surging raw material costs.
CHINESE DEMAND UP ON EXPANDED MANUFACTURING
OCC prices have already started to respond to the strengthening demand, primarily from China, according to Resource Information Systems Inc. Senior Economist David Clapp. He said the export price of the material has risen between $10 and $20 a ton in the last few weeks to about $120 a ton.
"I've talked to suppliers that are fairly confident it could go above $150 in fairly short order given the strength of the export orders they've received in the past few weeks," said Clapp.
Wilde said he could envision OCC prices challenging 1995 highs of about $225 a ton.
Chinese demand for old boxes is surging due to its rapidly expanding manufacturing base.
The Chinese "have been building a lot of new recycled containerboard machines ... and that's probably the highest growth market in the world for containerboard and corrugated containers," said Wilde. "They don't have a lot of pine forests like we have, so they have to import the old corrugated containers."
When demand for OCC picks up a little bit, the price can move up very dramatically, because it is difficult and expensive to expand the supply.
Wilde said demand for OCC from abroad has been rising for several years. But weak domestic industry conditions have kept the lid on pricing for the material, with U.S. producers taking much of their downtime in the mills which use OCC as a raw material.
"Now domestic demand is starting to pick up," he said. "If you've got strong export demand and the domestic demand picks up, then the price of this stuff could really move."
