Industry Reports

Deutsche Bank Reports Summaries

070221 Deutsche Bank Report - January Containerboard Numbers

Deutsche Bank - Equity Research

January box numbers suggest some weakness, but a closer look suggests the overall box market remains reasonably healthy.  Box volumes fell 1.1% on an actual basis and 5.6% y/y on an average week basis.  However, we believe that the normal month-to-month volatility in these figures as well as unexplicably strong December numbers and January's freeze in California all suggest that these numbers may exaggerate the weakness.

Inventories

Combined mill and box plant inventories rose 168K tons m/m in January.  Over the past decade, inventories in January have increased by an average of 152K tons, implying a negative variance of about 16K tons.  This is a modest move compared to the positive variance of 157K tons in December.  Overall, inventories are up just 139K tons y/y.  Moreover, with big producers like Smurfit, IP and Packaging Corporation all taking extensive downtime during Q1, we think the inventory situation could tighten further in the months ahead. 

Prices

The $40/ton Jan. price hike remains dormant, we think rising input costs, export demand, and potential inventory reductions during Feb. and March could revive this it in the spring.  Make no mistake, this hike is no “slam dunk.”  The ISM numbers are soft; Jan. was reported at 49.3 vs. expectations of 51.7, suggesting that volumes could remain in slow-growth mode through the spring.  The key is keeping supply & demand in balance. 

Stocks

We recently upgraded Smurfit-Stone, Packaging Corp, and International Paper all from Hold to Buy.  We think seasonal & cyclical recovery, along with cost push from rising fiber costs, supports another price hike.  We also continue to rate WY & TIN as Buys, based on our conviction about their long-term asset values.

Valuation/Risk

Paper companies are trading around 1.7x book value and 6.8x estimated “peak” earnings - - - a bit more than half of the of the historically high “peak” multiple. The primary risks involve momentum in the economy, the health of demand within key grades like containerboard and white paper, and additional energy, chemical, and freight cost inflation.