Industry Reports

Deutsche Bank Reports Summaries

070703 Deutsche Bank Report - August Containerboard Price Hike

Deutsche Bank - Equity Research

Smurfit-Stone, the world's largest containerboard producer, began notifying customers on Monday of a $40/ton hike on all containerboard grades (kraft linerboard, corrugating medium, and white-top linerboard).  The hike is effective on August 1.  The initiative essentially mirrors an earlier announcement by Weyerhaeuser (NA's #2 producer).  The only difference is that Weyerhaeuser is proposing an extra $10/ton on the West Coast, presumably to offset higher wood costs.  Weyerhaeuser and Smurfit control nearly 40% of North American containerboard supply.  We expect other producers to follow.

Producers in Europe are also announcing price hikes.  Over the past few business days, both Smurfit-Kappa (Europe's largest player) and PowerFlute have announced Euro50/mton (equivalent to about $61/ton) price hike on semi-chemical corrugating medium.  PowerFlute's hike is scheduled for July 1, Smurfit-Kappa's for August 1.

Price hikes earlier this year fell flat in the face of weak downstream demand for corrugated boxes.  The current initiative may get more traction if the recent rebound in the ISM's manufacturing index translates to stronger industrial production and a corresponding uptick in box volumes.  June's 56.0 reading is up sharply from January's 49.3 low.  Historically, an ISM reading in the mid-50's is indicative of healthy box markets.  Other critical variables include the state of global demand (currently, this appears healthy) and pressure from input costs.  On the latter count, after some Q2 easing, global wastepaper markets are again surging.  An increase in costs for old corrugated containers (OCC) and other wastepaper grades will boost variable production costs for recycled containerboard mills around the world.

Will this one work?    Much like St Louis-based Smurfit-Stone, we're from Missouri - - - at least on this one: “show me!”   While the

global containerboard backdrop remains just about as favorable as any we have seen in over 20yrs, the big North American integrated producers (including Weyerhaeuser, Smurfit-Stone, International Paper and others) must show more fortitude in putting business at risk if they intended to improve prices and raise financial returns.  This includes putting large corrugated box contracts at risk.  Stronger industry box volumes should make this easier.  The biggest uncertainty may come from leading integrated players like Weyerhaeuser and Temple-Inland, both of whom are in the midst of corporate restructurings.