Recently announced price increases for containerboard driven mainly by anticipation of expiration of black liquor tax credit at year's end, having no basis in actual market conditions, says AICC

Dec 10, 2009 — AICC

ALEXANDRIA, Virginia, December 10, 2009 (press release) — The expiration of the black liquor tax credit – and not a legitimate increase in market demand -- is providing the primary reason for the announced increases in containerboard prices reported in the press in recent weeks. The Association of Independent Corrugated Converters (AICC) believes this is an unfortunate message to be sending to the containerboard industry’s customer base: that it cannot earn a decent return on investment absent a government supplied tax credit, and so it has to raise containerboard prices without regard to what’s happening in the market.

AICC has reached this conclusion simply by reading our industry’s analysts whose commentaries have focused mainly on the expiration of the black liquor tax credits instead of industry fundamentals. Writes one analyst: “The timing of these announcements highlights the importance of the termination of the ‘black liquor’ credits at year-end.” The same analyst added in a separate communication that, “the end of black liquor credits is apt to prove a ‘game changer.’”*

AICC believes that the announced increases have no basis in actual market conditions, given stubborn box demand and a historical slow time of year. October box shipments were down 5.8% and members report continued sluggish demand. The industry’s commentators, ignoring the basics of demand for the end product, are basing the speculative success of this increase solely on the supply side of the equation: lower inventories and capacity closures.

As far as inventories are concerned, changes in supply chain management by independent corrugators – and indeed in the industry – have pushed the “weeks of supply” trend downward from five weeks in 2000 to four weeks today. In his presentation at AICC’s 2009 Annual Meeting, industry economist Dick Storat called this a “new age dynamic” at play in the supply-demand picture for containerboard since 2004. Hence we do not believe that the inventory numbers being cited are necessarily as important a factor as industry commentators would have us believe.

We also note that announcements for capacity closure – also known as “market discipline” in the pages of the press – focus on the numbers for announced mill closures, and speculate about further capacity shutdowns after the first of the year. These same reports don’t always take into account the annual numbers for “capacity creep,” which according to a recent RISI report, averages about 1-2% per, or 350,000-700,000 tons in 2009, nor do recent additions to capacity – Pratt’s 400,000 tpy mill in Shreveport or Sonoco’s entry into the medium market – which will have the effect of mitigating announced mill closures.

In short, we believe that the containerboard producers are looking to their independent customers – and the corrugated industry’s end-users – to provide the remedy for their impending black liquor hangover. We believe the CEO’s of the integrated companies should reconsider this strategy in favor of improving their own operating efficiencies and other cost saving measures. Independents have had to earn their profitability without the benefit from black liquor or any other renewable fuel subsidies. In the year ahead we hope containerboard suppliers could do the same, and manage their mill systems with more regard to true indicators of corrugated industry supply and demand.

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