But while analysts point to signs of an upturn in demand, partly due to expanded producer responsibility legislation and plastic substitution efforts, they warn that fibre packaging producers are not out of the woods yet, and that pricing disputes continue to simmer and prompt calls for a change in pricing models.
An independent survey of corrugated box processors released by Bank of America Global Research on April 11 shows that the "end of the destocking cycle" is the main driver of a "basically positive" outlook for box board over the next 12 months, and analysts expect sales momentum to continue. This is the organization's first comprehensive carton industry survey since September 2023, and the 48th overall carton industry survey since 2003. The survey was conducted from March 5 to April 4 with 20-25 respondents.
The results of the recently released survey show that 41% of respondents expect demand to be "better" or "much better" over the next two quarters, and 41% expect demand to remain the same. In a smaller "snap" survey conducted by Bank of America in February, 53 per cent of respondents expected demand to improve over the next two quarters, while 26 per cent expected it to remain the same. The new report said growth expectations had weakened since the February survey. Respondents still forecast growth over the next two quarters, but they see a slower pace of 0.6 per cent, down from 1.1 per cent in February.
Speakers at Fastmarkets RISI webinar on April 11 discussed the factors that will affect packaging costs in 2024, noting the recent growth in demand for fiber packaging. They highlight how supply and demand dynamics have remained out of whack since the surge in demand during the pandemic and its subsequent decline. According to the report, the global demand for paper packaging and cardboard in 2023 is 409.7 million tons, down 3.1% from 2022. "
Alejandro Mata, director of European packaging and printing paper at Fastmarkets RISI, said the 4.7% growth in demand in 2021 compared to the past 10 years was higher than normal, but the impact of the pandemic was not unusual. "Every time we've gone through a global crisis before, we've seen these demand growth shocks. For example, for many years after the 2008 financial crisis, demand performed better than its long-term average. Demand should return to its long-term average of 2%-2.5%, but it will take longer to get there."
While all types of paper performed better in 2021, box board paper (the largest wrapping paper segment overall) saw a big jump. Matta said this has led to an imbalance between supply and demand, noting that the current oversupply of fiber packaging is 40 million tons. This data assumes that the market utilization rate returns to 88%, a figure that indicates a balanced market. Operating rates have been below 80 per cent for about two years and are expected to remain at this level through 2025. Paper packaging groups over-invested in capacity. This trend began even before 2020, when the operating rate fell simultaneously.
"In general, consumers are behaving in a very different way now," Matta said, and that's affecting packaging demand. Inflation is the main factor influencing consumer behavior, followed by the expanding role of e-commerce and sustainability in purchasing choices. "Companies are also starting to react to excessive packaging, and sometimes packaging waste, that is being generated in response to the challenges of surging demand in 2021."
But the simultaneous movement to replace plastic packaging with fiber opens up possibilities for growth. Matta says this is thanks to emerging EPR legislation at home and abroad. "It is clear that plastic alternatives and all the legislation that is being implemented (at least in Europe) will provide opportunities for future growth."
But he warns that "not all packaging alternatives will come in fiber packaging." As the market moves further away from the volatility and shocks that have occurred since 2021, these fundamentals will increasingly drive growth."
Analysts said that fiber packaging pricing is still a hot topic in 2024. Fastmarkets RISI has published its monthly box board and corrugated paper price index for April in its Pulp and Paper weekly Weekly. All domestic box board and corrugated paper prices remained stable. However, after companies announced changes in March, export box cardboard prices rose for the first time in two years.
Criticism of the pricing index has been mounting after box board and corrugated paper processors widely announced price increases at the start of the year, with Fastmarkets RISI's monthly pricing released on January 19 not reflecting the increases, leading some observers to believe the market rejected the announced increases. Skepticism grew with the release of monthly data on Feb. 16 that reflected acceptance of only part of the increase - about $40 per ton of recycled cowhide box board, which is only about half of the $70-75 per ton increase announced by packaging companies.
On earnings calls earlier this year, numerous packaging executives addressed the price discrepancy and tried to put to rest rumors that the new prices didn't last. Both themselves and their clients have expressed disappointment with Fastmarkets RISI's model. Some have questioned the relevance of the index in modern markets, arguing that it represents only the public market, less than 10 percent of the overall market.
During Graphic Packaging International's investor day on Feb. 21, CEO Michael Doss said, "I can tell you that Fastmarkets RISI got it wrong. The listed pricing makes no sense to us and points out that we are making a concerted effort to move away from third-party indices that really lack what we believe to be accuracy and transparency."
Similarly, on U.S. Packaging's earnings call this week, executives reiterated their continued dissatisfaction with the index and described the work to incorporate alternative models when determining pricing for customer contracts. Respondents to Bank of America's carton industry survey believe more price increases are coming. About 70 percent of respondents expect the price of cardboard to increase over the next 12 months, and 71 percent expect the price of cardboard boxes to increase. There was a decrease in the percentage of respondents reporting discounts on box board paper and cartons: 31 percent reported discounts on box board paper and 63 percent reported discounts on cartons.
Survey respondents generally expect manufacturers to attempt the next box board and corrugated price increase in the second or third quarter. "Frankly, we are a little surprised by this view as it seems at odds with the response to the growth outlook, which has weakened," the Bank of America report said.
Matt Graves, senior vice president at Fastmarkets RISI, said processing costs change over time and many processors cite inflation-driven spikes in production costs as the reason for recent price increases. "From 2020 to July 2022, producers will not be able to raise prices quickly as costs rise. While costs fell through most of 2023, they are now coming back up... There are a lot of question marks in the market right now about what is being proposed for price changes."
The key question he mentions is why producers would raise prices during periods of tight demand, even taking into account higher production costs. Normally, prices rise during booms. "This curve doesn't usually look like this. This is a special moment, "Graves said." I've seen some of the complete opposite in history."
Michael Loxland, senior paper and packaging analyst at Truist Securities, said in a commentary to investors on April 21, referring to Fastmarkets RISI data for April released Friday, that packaging producers and processors "continue to highlight increases in manufacturing and input costs, particularly in the OCC, Prices have increased by 248 percent since January 2023."
Bank of America analysts said they expect the OCC shortage to return to normal in the second half of the year. As Michael Loxland noted in his April 8 commentary, Nine Dragons announced it would at least temporarily halt operations at one plant in Maine and another in Wisconsin, with potentially positive implications for supply, demand and pricing.
