Presentation on theme: "NORTON ASSOCIATES L IGHTWEIGHT C ONTAINERBOARD I MPLICATIONS FOR C ONTAINERBOARD P RODUCERS Sarilee Norton July 2011."— Presentation transcript:
NORTON ASSOCIATES L IGHTWEIGHT C ONTAINERBOARD I MPLICATIONS FOR C ONTAINERBOARD P RODUCERS Sarilee Norton July 2011
NORTON ASSOCIATES NORTON ASSOCIATES C ONTAINERBOARD M ARKET S HARE BY C OMPANY 2 Interstate Resources Atlantic Packaging KapStone Kraft Simpson Paper Corrugated Services Sonoco Products US Corrugated Durango Group 1.0-1.5% each 0.5-1.0% each
NORTON ASSOCIATES NORTON ASSOCIATES I NDUSTRY B ASICS AND T ERMS Corrugated is the most commonly used type of paper packaging—over 90% of the goods produced in the U.S. get to market using corrugated packaging. Corrugated shipments in 2010 were 357 billion square feet, down 10% from just five years ago. Containerboard is made from two types of heavy paper, linerboard and medium. Linerboard is used for the two flat outer facings while medium is used to form the fluted inner, or middle layer of the corrugated sheet. Kraft linerboard and semi-chemical medium are made from virgin fiber. By industry definition, kraft linerboard must contain no less than 80% virgin fiber and semi-chemical medium not less than 60%. All other containerboard is referred to recycled. Today, material sold as kraft linerboard may be as high as 30-40% recycled. Fabricating the corrugated sheet and producing the container are both done at converting plants, which may be corrugator plants, sheet plants or sheet feeders. Corrugator plants perform both combining and converting. In the combining process, medium is fluted and laminated on each face to linerboard to produce corrugated sheets. In the box making operation, the combined sheets are printed, cut, folded and joined to create the finished boxes. Sheet plants purchase already combined sheets and make them into finished boxes. Sheet feeders only produce combined board, for sale to sheet plants or others who make finished product. 3
NORTON ASSOCIATES NORTON ASSOCIATES T HE L OGIC OF L IGHTWEIGHTS L ESS F IBER, M ORE S USTAINABLE, L ESS C OST ? 4
NORTON ASSOCIATES NORTON ASSOCIATES A BOUT RULE 41 – P ERFORMANCE VERSUS W EIGHT A BOUT RULE 41 – P ERFORMANCE VERSUS W EIGHT Beginning of the end for ‘standardized’ grades Variability in performance from mill to mill, machine to machine now a real consideration Proliferation of new, lighter weight grades and introduction of ring crush specifications Mid-weight and heavier grades have migrated to high- performance, lighter versions Not much has changed with the lightest grades 5
NORTON ASSOCIATES NORTON ASSOCIATES L INER B ASIS W EIGHTS – T HEN AND N OW 6 SOURCE: Future of Lightweight Containerboard in North America, 2010
NORTON ASSOCIATES NORTON ASSOCIATES S USTAINABILITY – I T ’ S N OT G OING A WAY Company policies and public statements – they’ve made sustainability too visible to fail Packaging a major plank in many platforms Common themes: Lighter weight materials Reducing amount of materials Leaner manufacturing, more efficient processes Rethinking packaging’s role in supply chain 7
NORTON ASSOCIATES NORTON ASSOCIATES I NFLUENCE OF M EGA -R ETAILERS Buying power and ability to shape the market are enormous The push to private label and direct control of their suppliers Globalization of their business model They set the bar very high – quality, consistency, reliability, flexibility, industry savvy – yes, they want it all 8 A relentless focus on reducing costs
NORTON ASSOCIATES NORTON ASSOCIATES An ‘holistic’ approach to packaging in the retail environment, integrating: marketing materials cost and efficiency sustainability operations data SOURCE: Institute of Grocery Distribution Report, 2007 R ETAIL -R EADY – L OTS OF B ENEFITS FOR R ETAILER … 9
NORTON ASSOCIATES NORTON ASSOCIATES …A ND I MPACT ON L IGHTWEIGHTS “One of the most interesting technological developments over the past few years has been the development and use of lighter weight liners and flutings. Improved papermaking technologies have ensured that the overall structural properties of the corrugated container can be maintained…to produce economic and environmental benefits.” 10 …PIRA International SOURCE: Wal-Mart Retail Ready Packaging Guidelines
NORTON ASSOCIATES NORTON ASSOCIATES A S CENARIO FOR C HANGE Time is right for lightweight investment Black liquor credits Restrained spending climate in recent years Generally good balance sheets Hard strategy for major integrated to embrace Who will step up Mid-sized integrateds, recycled positions Independent consortium European supplier—though not at current exchange rate
NORTON ASSOCIATES NORTON ASSOCIATES 12 A S CENARIO FOR C HANGE ( CONT.) North American companies with underutilized graphics paper assets Cost to convert Economics versus competitors Incremental upgrades What are the limiting factors for lightweights Market impact of more of the same grades
NORTON ASSOCIATES NORTON ASSOCIATES RISI C APACITY F ORECAST B ACK TO THE F UTURE ?
NORTON ASSOCIATES NORTON ASSOCIATES 14 M ILL O PERATING R ATES — C OMMENTARY Mill operating rates (production divided by stated capacity) are generally considered to have reached an upward price support tipping point at 95+%. This statistic is tracked closely and is used as a fundamental indicator of market strength. The downside tipping point is not as frequently referenced, but is in the range of 91-92+%. There can be a lot of noise in the monthly numbers; operating rates have actually exceeded 100% in a given month. We believe a quarterly comparison is a better indicator of strengthening or deteriorating market conditions. Many mills also achieve incremental productivity gains, called ‘creep’, that may not be reflected in their capacity numbers. Noted changes in capacity usually show major upgrades, product conversions or shutdowns. Creep is estimated to be between 1.0% and 2.0% a year for well operated, well-maintained assets, though today, that may be a little optimistic.
NORTON ASSOCIATES NORTON ASSOCIATES 15 C APACITY AND O PERATING R ATES This chart clearly shows capacity reductions and the impact on operating rates in the period since 1999. The forecasted numbers for 2010-2013 period have been adjusted to reflect more current information, e.g., Greenpac investment. SOURCE: RISI, Norton Associates
RISI C APACITY C HANGES D ETAIL (A CKNOWLEDGEMENT AND T HANKS TO K EN W AGHORNE, VP P ACKAGING, RISI) 16
NORTON ASSOCIATES NORTON ASSOCIATES 17 O PERATING R ATES — THE B ELLWETHER I NDICATOR ? Mill operating rates have traditionally been thought of as the leading indicator of market strength. After dipping below 95% in the third quarter of 2008, operating rates did not return to 95+% until the second quarter of 2010. First quarter 2011 rates have been struggling to reach the 95% tipping point. Some of the decline reflects temporary mill outages, but soft demand is also a real factor We believe efforts to keep operating rates looking favorable have run out of momentum in the face of sluggish box shipments and at best, uncertain economic conditions. We don’t see much to indicate that the remainder of 2011 will be a better environment for operating rates, unless there is another round of capacity rationalization.
NORTON ASSOCIATES NORTON ASSOCIATES B OX P LANT A CTIVITY S TILL S TRUGGLING TO R ECOVER V OLUME 18
NORTON ASSOCIATES NORTON ASSOCIATES 19 B OX P LANT A CTIVITY — C OMMENTARY Box plants shipments track well with overall economic activity, as measured by industrial production, especially for non-durables. About two-thirds of shipments are to non-durables segments, with food and beverage being the largest category. Recent softness in the economy hasn’t had as sharp an impact on box shipments compared with some other manufactured products since people continue to eat, drink and use disposable packaging. But the industry still hasn’t recovered from 2009. Discrete events, such as a hurricanes or crop failures, can have significant impact on quarterly numbers. Box plant capacity utilization isn’t a meaningful measure of market activity, since most plants operate well below their nameplate capacity. While the corrugator is, in a broad sense, the limiting factor, bottlenecks often are often caused by short-term mix shifts or machine center downtime. We think a better benchmark is shipments activity, tracked in aggregate for the period or on an average week basis to account for changes in the number of workdays in a month or quarter.
NORTON ASSOCIATES NORTON ASSOCIATES 20 B OX P LANT A CTIVITY — A VERAGE W EEK S HIPMENTS Since 2008 box plant shipments have yet to get close to the ‘magic’ 7.5 BSF average week benchmark. RISI notes that if the first quarter rate of growth is annualized, it would translate to 5+% for the balance of 2011. However, if key economic indicator forecasts become stagnant, we think 2011 will be no better than 1.5-2.5% growth.
NORTON ASSOCIATES NORTON ASSOCIATES N ORAMPAC ’ S N EW M ACHINE I T M AKES G OOD S ENSE FOR THEM 21
NORTON ASSOCIATES NORTON ASSOCIATES T HE B ASICS 7 machines, 1.1 million tons, 3% share of market Primarily recycled grades, no kraft linerboard Machines generally narrower trims and slower speeds; largest machine ranks ~70 of ~140 in capacity 328-inch multi-fourdrinier recycled linerboard machine; 540,000 tons capacity--among top 10 in North America Basis weight range 20-35#; will trim 3-out to meet modern corrugator requirements 22
NORTON ASSOCIATES NORTON ASSOCIATES T HE E CONOMICS Investment $430 million (US) Land purchase/site work* 7% Building construction*12% New equipment*55% Metso contract ~$91 million Other project costs*26% Benchmarks Greenpac, Niagara Falls ~$796/ton of capacity Pratt, Shreveport ~$417/ton of capacity IP Pensacola conversion $145? million for 500K tons (150K incremental) l/w kraft linerboard 23 Percentages based on 2010 data from Niagara County Industrial Development Agency, project total cost estimate of $407.5 million *
NORTON ASSOCIATES NORTON ASSOCIATES W HO E LSE T O C ONSIDER ? The tier-two players Pratt – a distinctive strategy, adding convertor capacity, two big corrugators in Indiana Boise – DeRidder newsprint machine conversion should look even better with the benefit of Tharco’s cut-up Longview – Who might eventually own the assets and what would they do with them? Other ‘buzz’ KapStone, Atlantic Packaging, Interstate Resources Multi-plant independents/sheet feeders, e.g., USCorrugated, Schwarz Group, Corrugated Synergies 24
NORTON ASSOCIATES NORTON ASSOCIATES W HAT D OES I T A LL M EAN A P OINT OF V IEW 25
NORTON ASSOCIATES NORTON ASSOCIATES C APACITY C REEPING B ACK TO 2003-2005 L EVELS … 26 …B UT N OT B OX S HIPMENTS
NORTON ASSOCIATES NORTON ASSOCIATES T HE R ELATIONSHIP B ETWEEN D EMAND AND P RICE … 27 …B UT W HAT ’ S H APPENED S INCE 2008?
NORTON ASSOCIATES NORTON ASSOCIATES H ISTORY W OULD S UGGEST … 28 …T HAT P RICES C AN ’ T B E S USTAINED