The Niche Payoff

It's tough to get a good feel for how any industry is doing right now as the economy recovers from the worst recession in ages. Recent housing reports indicate that recovery is still sluggish. However, products must be packaged and while not recession-proof, each segment of the packaging market has come through some very difficult times. The folding carton segment, an area taking constant punches from film manufacturers, continues to rebound from, as Ben Markens, president of the Paperboard Packaging Council (PPC) puts it, falling off a cliff in 2009. "The economists say we are going to have decent growth, but it will take a while to make up for the big losses everybody took in 2008-2009," he says.

Right on the money

According to Markens, there are pockets of PPC members doing very well, and other members still struggling through these uncertain economic times. Taking that as a microcosm of the overall folding carton market, it's understandable that growth has been slow and is expected to continue that way.

A Freedonia Group study titled "Corrugated & Paperboard Boxes to 2014" reports that demand for corrugated and paperboard boxes is projected to increase 2.4 percent annually through 2014 to $36.4 billion. According to the study, "An acceleration of shipments of nondurable goods such as food and beverages will support demand for related boxes. Additionally, box demand will benefit from the increasing importance of higher-value boxes that can support improved printing and graphics as producers continue to look for ways to heighten the visual appeal of boxes in order to offset competition from alternative packaging formats."

Second quarter reports from some of the leading paperboard packaging manufacturers substantiate Freedonia's data. For example, second quarter earnings for International Paper were $93 million, compared with a net loss of $162 million in the first quarter of 2010. Industrial packaging operating profits for the company increased to $193 million, compared with $46 million in the first quarter of 2010. Its consumer packaging had an operating profit of $49 million compared with $31 million in the first quarter.

On the industrial packaging side, earnings improved mainly from increases in linerboard and North America box demand, according to its earnings report. For consumer packaging, results were positively impacted by higher volumes, further realization of announced coated paperboard price increases, and stronger operations.

For MeadWestvaco Corporation, its packaging resources segment profit increased 47 percent to $72 million in the second quarter of 2010, compared to $49 million in the second quarter of 2009. It achieved this by increasing sales volume of targeted products, improving product mix, and achieving solid gains in productivity, according to its second quarter earnings report.

Markens also cites niche markets as some of those that are performing well. "The companies I've spoken with seem to have organized themselves in a niche intentionally, and they've done a really good job of selling to companies that are not affected as much," he says. "The people I talk to who are having good years—their customers are having good years."

At Graphic Packaging, second quarter 2010 net sales decreased 0.7 percent compared with 2009. But on a segment basis, tons sold for paperboard packaging increased 1.0 percent, although net sales declined 1.3 percent compared with the second quarter of 2009, mainly due to lower pricing primarily related to contractual deflationary pass-throughs.

Each year, the PPC partners with RISI to publish Trends, a portfolio of data analysis, forecasting, and benchmarking reports affecting the paperboard packaging industry. At mid year, it releases an abbreviated report. This year's report further corroborates the assertion that pockets of the industry are performing well, while others not as well. According to the mid-year report, in which RISI reports on statistics and forecasts for 17 end-use paperboard packaging markets, five of these markets are expected to grow at a pace of 1.0 percent or more per year through 2013, including one with forecast growth more than twice that rate. Six others will shrink more than 1.0 percent per year, and three of these are expected to shrink at a rate around 5.0 percent per year. So, while there is growth, it's a mixed bag.

The brass tacks

The folding carton market, and the cartons themselves, have a lot going for them. Currently, the American Forest and Paper Association (AFP&A) reports that linerboard production was at its highest since August 2008, so says its July 2010 U.S. Containerboard Report. Total production saw an increase of 152,200 tons or 5.5 percent over July 2009 and grew 4.5 percent compared with June 2010. The containerboard operating rate for July 2010 rose 9.7 points over July 2009 to 98.0 percent. Why? Demand.

The Freedonia report states that demand for folding paperboard boxes will rise 1.8 percent per year through 2014 to $9.4 billion, slower than the corrugated box pace, but competition is stiff between folding cartons and alternative packaging in many markets. Source reduction efforts, many of which involve eliminating or downsizing cartons, also restrain demand, states the report. However, advances in printing and graphics capabilities, as well as a more favorable environmental profile than plastic packaging, will support some gains for folding cartons.

Corrugated boxes will enjoy better growth, according to the report. Corrugated and solid fiber boxes accounted for more than 70 percent of demand in 2009, and sales are expected to increase 2.7 percent annually through 2014 to $26.6 billion. These containers are well entrenched as the shipping container of choice in nearly all manufacturing sectors, says Freedonia.

Finally, the Freedonia report cites mass retailers, warehouse club stores, and Internet-based shopping as supporting box demand, as well as boxmakers working to develop corrugated boxes that can serve as appealing product billboards.

Paper is good

One of the most important things concerning paperboard folding cartons is their sustainability properties, and Markens asserts that communicating the sustainable benefits of using paperboard is something the folding carton industry, as a whole, must do better. "When you talk to retailers or consumer product companies, they all know paper is a good thing," he remarks. "But, they need us to provide them with more things to hang their hats on so they also know some of the science and statistics. I think humans generally understand that paper is good—we grow trees as a crop. I think most people get it, especially people who are packaging professionals."

Still, communicating these benefits is a challenge, but the PPC is working hard to change that. "We work hard every day on sustainability. That's one of the pillars of our strategy," contends Markens. "We're out there every day trying to understand what customers and retailers want and trying to provide our members with real tools to respond to things without getting in the mud with the other guys, because we just don't think it's productive to be mudslingers."

Innovation not lacking

Alternative material suppliers are spending a good deal, according to Markens, to get their message out. Markens contends that folding carton manufacturers are doing a better job of communicating why paper is a viable option as a substrate. "We are doing a better job. But the other guys spend a lot more money than us, so we have lots of work to do," he points out. But in general, Markens remains enthusiastic about the folding carton market. "We're working very hard on innovation in carton design and cost effectiveness," he says. "If you look at our carton competition, our guys are really putting out some great stuff and a lot of cool developments are happening for us. I'm happy we're in the position we're in."n

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