Weak US Containerboard Demand Puts Older Mills Under Pressure, Possibly Speeding Industry Shakeout

As summer began, whether the US containerboard industry had shaken off recession became a hot topic. One veteran industry analyst was optimistic at the time, expecting producers to offset inflation through price increases and pinning hopes on a demand recovery.

But the latest second-quarter figures dampened that optimism. Industry players had looked for a demand rebound, yet the improvement fell far short of what was needed to relieve the difficulties facing older mills. At the same time, a new generation of 100% recycled paper machines continued to raise output throughout the year.

Doug Larson, Bloomberg’s paper packaging pricing analyst, said in a mid-August presentation that paper from these new machines appears to be higher in quality than output from older 100% recycled paper machines, and the equipment runs more efficiently. He added that if demand fails to improve, these two factors could place even greater pressure on older assets.

Bloomberg recently hosted a webinar, “Containerboard Report — Market Dynamics: Reviewing Q2 2024 Sentiment and Data.” Speakers included Richard Burke, senior analyst for basic materials at Bloomberg; Ryan Fox, corrugated market analyst; and Doug Larson.

Fox said the market entered this year with high expectations and widespread hopes for a containerboard recovery. More than a year earlier, many institutions, Bloomberg included, had forecast that containerboard shipments would grow in 2024. Yet as 2023 drew to a close, demand-side headwinds were still evident, making it a difficult year.

Larson noted that the containerboard supply side was unusually active last year: five new machines came online, adding 2 million tonnes of capacity. That scale of expansion had not been seen since 1996.

Despite the 2 million tonnes of new capacity, total containerboard capacity at the beginning of 2024 was not materially different from a year earlier, Larson said, because nearly 2 million tonnes was also permanently closed last year. The net addition was therefore small.

What is emerging, he said, is a structural shift in capacity: the newly started machines all use 100% recycled material, while the closed capacity mainly relied on virgin pulp or mixed raw materials. The new capacity comes largely from independent or mid-sized suppliers, whereas most shuttered capacity belonged to industry giants such as International Paper and WestRock. Against total industry capacity of about 40 million tonnes, a 4-million-tonne capacity shift is a major transformation.

Larson further noted that beyond the 2 million tonnes permanently shut last year, some large industry players temporarily idled more than 2.5 million tonnes for economic reasons, making the 2024 production shortfall even more pronounced.

Even if the permanent shutdowns are annualised at 660,000 tonnes, International Paper and WestRock temporarily idled close to 165,000 tonnes in the first quarter alone, he said. That again points to a severe supply-demand imbalance.

On the recent closure of the McKinley Paper recycled paper mill in Port Angeles, Washington, Larson said his data analysis indicated it was a relatively low-cost mill. While he could not disclose the specific reasons behind McKinley’s internal decision, the event again shows that older mills face mounting pressure to survive.

He also pointed out that inefficient operation of older equipment places a considerable burden on companies.

Larson warned that if market demand does not improve significantly, older machines still in operation will face even greater challenges. If demand remains sluggish, more machine shutdowns are likely.

Turning to containerboard shipments, Fox said month-on-month data showed improvement, but volumes were still down about 1% year on year. He expects third-quarter shipments to be flat with the second quarter. Historically, the third quarter is usually the strongest quarter of the year.

Although everyone had expectations for the year’s market performance, first-quarter shipments fell 1.1% year on year, a new low since 2016, indicating a weak start, he said. Second-quarter volumes rose 1% month on month, but were still down about 1% year on year.

For the third quarter, he said, some improvement is expected, but it will not be substantial.

Larson noted a positive signal: containerboard exports increased in the first half. That effectively prevented a sharp build-up in domestic inventories and pushed the first-quarter mill operating rate above 90% for the first time, a nearly one-year high.

Export demand growth is clearly a positive, he said, but first-quarter data also indicate that industry shutdowns will continue. In his view, the peak of shutdowns in last year’s third and fourth quarters has passed, yet a return to the 93% or 94% operating rates seen during the pandemic is unlikely. Staying above 90% remains possible.

Source: China Packaging Network (pack.cn); original link: http://news.pack.cn/show-379638.html