North American and European Containerboard Capacity Declines - Has Growth in the Sector Finally Reached Its Peak?

Image Source: PA Files

Fisher International
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Containerboard demand took the Pulp and Paper industry by storm in 2020 and 2021. Various factors from increased sustainability initiatives to a booming e-commerce sector thanks to pandemic lockdowns fueled the need for mills to continuously up its containerboard capacity.

In fact, there was a roughly 10% (~20 MM tons) increase in global containerboard capacity from 2019 to 2021.

But the question producers and suppliers all around the world kept asking was: how long can we expect this sector to continue growing?

Looking back on 2022, we began to see a bit of a slowdown in containerboard demand, and consequently capacity, in the second half of the year in North America and Europe. As illustrated in the image below from FisherSolve, the decrease in capacity in 2022 compared to 2021 was minimal – down 2% year-over-year in North America and down 0.40% year-over-year in Europe.

Containerboard Capacity in North America and Europe

FI 7feb23 fig1Source: FisherSolve

While the dip in capacity in 2022 wasn’t anything extreme, it still comes as quite a surprise considering both regions reached record production in 2021 after experiencing a significant jump in demand over the prior two years. Compared to 2019, North America experienced a 6% increase in 2021 and Europe saw an 11% increase in 2021.

So, what happened?

A Decline in Consumer Spending in 2H2022

As consumers lived in a largely virtual world during the height of the global pandemic, ecommerce became a booming segment. It was essentially the only way consumers could shop or felt safe shopping, after all.

However, now that stimulus checks are a thing of previous years and factors such as inflation and rapidly rising interest rates have entered the picture, consumer spending has decreased. Fitch Ratings cut down its US growth forecasts for this year to 0.5% growth, a decrease from the 1.5% that was predicted in the June forecast.

Amazon experienced this reluctancy to spend during its Prime Day event in October 2022, which didn’t have as much success as the original Prime Day sale in July. According to Numerator, the average spend per order on October’s sale was $46.48, down from $60.29 from July’s sale. Klover also reported that transaction frequency was 30% lower during the October sale opposed to the original sale in the summer.

Transportation costs also played a factor in the dip of ecommerce and ultimately the demand for containerboard. To offset inflation and increase revenue quality in a slowing market, shipping costs were placed onto consumers as freight prices began to rise. Effective January 2, 2023, FedEx levied a general rate increase averaging 6.9% for its Express, Ground and Home Delivery services.

As the ecommerce sector began to experience some decrease, we saw impacts occurring in the Pulp and Paper industry. For example, in North America, we saw several removals/reductions in several locations. However, this was offset some by the anticipated restart of the Kingsport mill and Biron’s added capacity in Q4.

The falling demand together with new supply drove US containerboard operating rates to levels not seen since 2008 – and we expect them to stay low until 2024.

The Energy Crisis Played a Part in the Containerboard Slowdown

Decreasing demand in the e-commerce sector wasn’t the only factor to contribute to the 2022 decline. The energy crisis played a part as well.

In August, prices reached the worst spike Europe’s seen in years as it reached €340/MWH. This created costly consequences for both households and businesses.

And it just so happens that of the major grades in the P&P industry, containerboard is the biggest gas user in Europe by total consumption. The effect of increased energy costs creeping into production costs resulted in both permanent and temporary shutdowns.

Containerboard Prices in China

Overall, containerboard capacity has yet to decline in China or Asia Pacific as a whole. Containerboard prices in China, along with OCC prices, fell to the lowest level the country had seen in two years during the second half of 2022. A large contributor to this was China’s zero-Covid policy as it ultimately led to a decrease in containerboard demand.

FI 7feb23 fig2Source: OilChem

If we take a look back at the history of China’s containerboard industry, the segment started to boom in 2016 when the national supply-side reform began. This kickstarted a sharp rise in profitability which drove a new round of capacity expansion.

However, after the announcement of the nation’s recycled paper ban in 2017 – in combination with various challenges such as the China-US trade conflict, the global Covid-19 pandemic, “Dual-Control” energy consumption regulations, geopolitical tensions and softening demand – overproduction and surplus worries became a serious concern. Companies faced huge operating pressures as a result.

Since May 2022, the price of both OCC and finished paper have significantly decreased. Big players even announced a huge profit decrease in their 1H annual report. Lee & Man, for example, announced that its gross profit had decreased 50.4% and net profit 56.9%.

Looking Ahead

This all being said, when looking at global capacity in the Pulp and Paper industry, containerboard was still heads and tails above all other major grades at the end of 2022. Production capacity was 140% greater than market pulp, the second leading major grade. The demand and need for containerboard aren’t going anywhere, but the crazed boom we saw in the sector in 2020 and 2021 is something we are not likely to experience in the short-term.

With that said, some questions to consider include:

  • Will fiber availability create a near-term slowdown in Asia’s containerboard sector?
  • Will we see a decline in containerboard capacity in other regions?
  • Would investments in containerboard machines in North America and Europe be high-risk?

For further insight into the containerboard sector, contact us today.

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Source: Fisher International