Multi-Client Study - Norton Associates

Report
IMPLICATIONS FOR CONTAINERBOARD PRODUCERS
LIGHTWEIGHT CONTAINERBOARD
Sarilee Norton
NORTON ASSOCIATES
July 2011
CONTAINERBOARD MARKET SHARE BY COMPANY
Interstate Resources
Atlantic Packaging
1.0-1.5% each
KapStone Kraft
Simpson Paper
Corrugated Services
Sonoco Products
0.5-1.0% each
US Corrugated
Durango Group
NORTON ASSOCIATES
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INDUSTRY BASICS AND TERMS
 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.
NORTON ASSOCIATES
3
LESS FIBER, MORE SUSTAINABLE, LESS COST?
THE LOGIC OF LIGHTWEIGHTS
NORTON ASSOCIATES
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ABOUT RULE 41 – PERFORMANCE VERSUS WEIGHT
 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
NORTON ASSOCIATES
5
LINER BASIS WEIGHTS – THEN AND NOW
1978
33#, 11%
26#, 5%
38#, 7%
90#, 4%
69#, 21%
42#, 50%
2008
All Other, 7%
90#, 1%
Under 26#, 1%
26#, 4%
27-32#, 7%
70-89# , 1%
33#, 5%
69#, 10%
34-37#, 25%
55-61#, 20%
42#, 19%
SOURCE: Future of Lightweight Containerboard in North America, 2010
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SUSTAINABILITY – IT’S NOT GOING AWAY
 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
NORTON ASSOCIATES
7
INFLUENCE OF MEGA-RETAILERS
 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
 A relentless focus on reducing costs
NORTON ASSOCIATES
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RETAIL-READY – LOTS OF BENEFITS FOR RETAILER…
An ‘holistic’ approach to packaging in the retail
environment, integrating:
marketing
 sustainability

 materials cost and efficiency
 operations data
SOURCE: Institute of Grocery Distribution Report, 2007
NORTON ASSOCIATES
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…AND IMPACT ON LIGHTWEIGHTS
“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.”
…PIRA International
SOURCE: Wal-Mart Retail
Ready Packaging Guidelines
NORTON ASSOCIATES
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A SCENARIO FOR CHANGE
 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
A SCENARIO FOR CHANGE (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
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BACK TO THE FUTURE?
RISI CAPACITY FORECAST
NORTON ASSOCIATES
MILL OPERATING RATES — COMMENTARY

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
1
CAPACITY AND OPERATING RATES
SOURCE: RISI, Norton Associates
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.
NORTON ASSOCIATES
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RISI CAPACITY CHANGES DETAIL (ACKNOWLEDGEMENT AND THANKS
TO
KEN WAGHORNE, VP PACKAGING, RISI)
Major Containerboard Capacity Changes
(short tons ,000)
in North America, 2010–2015
Company
Location
Country
Eurocan
Kitimat, BC
Canada
(369)
2010 Q1
Kraftliner
Missoula, MT
US
US
US
220
(440)
(340)
184
94
116
50
72
(413)
2010
2010 Q1
2010
2010
2010 Q2
2010
2010
2010 Q4
160
125
20
250
200
(94)
80
40
781
200
300
(300)
100
40
200
150
150
40
880
360
300
200
150
150
100
40
40
1340
420
40
300
140
900
560
(150)
200
(80)
2011
2011
2011
2011
2011
2011 Q1
2011
2011
Kraftliner
Kraftliner
Kraftliner
Recycled Liner
Recycled Liner
Semichemical Medium
Recycled Medium
Recycled Medium
Doesn't include IP shuts in 20082009 totaling 1.4 million tons
Kraftliner
Recycled Liner
Recycled Medium
Kraftliner
Kraftliner
Recycled Liner
Semichemical Medium
Recycled Medium
Unidentified Projects or Creep
Smurfit-Stone
Unidentified Grade Shift
Unidentified Projects, Shift or Creep
AbitibiBowater
Unidentified Projects, Shift or Creep
* Unidentified Projects, Shift or Creep
Specialty Paper Mills
Unidentified Projects, Shift or Creep
Unidentified Projects, Shift or Creep
Unidentified Projects, Shift or Creep
* Unidentified Projects, Shift or Creep
* Assumed Swing
AbitibiBowater
* Unidentified Projects, Shift or Creep
* Unidentified Projects, Shift or Creep
Coosa Pines, AL
Santa Fe Springs, CA
Coosa Pines, AL
US
US
US
US
US
US
US
US
US
US
US
US
* Unidentified Projects or Creep
* Assumed Grade Shift
* Assumed Grade Shift
* Unidentified Projects, Shift or Creep
* Unidentified Projects, Shift or Creep
* Assumed Conversions from Graphic Paper
* Assumed Conversions from Graphic Paper
* Assumed Conversions from Graphic Paper
* Unidentified Projects, Shift or Creep
US
US
US
US
US
US
US
US
US
* Unidentified Projects, Shift or Creep
* Assumed New Machine
* Assumed New Machine
* Assumed Conversions from Graphic Paper
* Assumed Conversions from Graphic Paper
* Unidentified Projects, Shift or Creep
* Unidentified Projects, Shift or Creep
* Unidentified Projects, Shift or Creep
US
US
US
US
US
US
US
US
* Unidentified Projects, Shift or Creep
* Unidentified Projects, Shift or Creep
* Assumed New Machine
* Unidentified Projects, Shift or Creep
US
US
US
US
* Unidentified Projects, Shift or Creep
* Assumed closures
* Unidentified Projects, Shift or Creep
* Assumed closures
US
US
US
US
Capacity
Date
Grade
2012
2012
2012
2012
2012
2012
2012
2012
2012
Kraftliner
Kraftliner
Recycled Liner
Semichemical Medium
Recycled Liner
Kraftliner
Recycled Liner
Recycled Medium
Recycled Medium
2013
2013
2013
2013
2013
2013
2013
2013
Kraftliner
Recycled Liner
Recycled Medium
Recycled Liner
Recycled Medium
Semichemical Medium
Recycled Liner
Recycled Medium
2014
2014
2014
2014
Kraftliner
Recycled Liner
Recycled Liner
Semichemical Medium
2015
2015
2015
2015
Kraftliner
Recycled Liner
Semichemical Medium
Recycled Medium
530
*Note: Projects marked with an asterisk were not included in the 51st AF&PA Capacity Survey or reflect assumed capacity changes.
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OPERATING RATES — THE BELLWETHER INDICATOR?

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
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STILL STRUGGLING TO RECOVER VOLUME
BOX PLANT ACTIVITY
NORTON ASSOCIATES
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BOX PLANT ACTIVITY — COMMENTARY

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
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BOX PLANT ACTIVITY — AVERAGE WEEK SHIPMENTS

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
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IT MAKES GOOD SENSE FOR THEM
NORAMPAC’S NEW MACHINE
NORTON ASSOCIATES
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THE BASICS
 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
NORTON ASSOCIATES
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THE ECONOMICS
 Investment
$430 million (US)
• Land purchase/site work*
7%
12%
55%
• Building construction*
• New equipment*
- Metso contract ~$91 million
• Other project costs*
26%
 Benchmarks
• Greenpac, Niagara Falls
• Pratt, Shreveport
• IP Pensacola conversion
(150K incremental)
~$796/ton of capacity
~$417/ton of capacity
$145? million for 500K tons
l/w kraft linerboard
based on 2010 data from Niagara County Industrial
* Percentages
Development Agency, project total cost estimate of $407.5 million
NORTON ASSOCIATES
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WHO ELSE TO CONSIDER?
 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
NORTON ASSOCIATES
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A POINT OF VIEW
WHAT DOES IT ALL MEAN
NORTON ASSOCIATES
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CAPACITY CREEPING BACK TO 2003-2005 LEVELS…
…BUT NOT BOX SHIPMENTS
NORTON ASSOCIATES
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THE RELATIONSHIP BETWEEN DEMAND AND PRICE…
…BUT WHAT’S HAPPENED SINCE 2008?
NORTON ASSOCIATES
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HISTORY WOULD SUGGEST…
…THAT PRICES CAN’ T BE SUSTAINED
NORTON ASSOCIATES
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