In containerboard grades, relative cost position curves are becoming a metric of the past, not the future. Actually, what may happen is they bifurcate into two distinct sets, one recycled mills and the other virgin mills. We are on the cusp of an era where putting them up against one another is meaningless.
A bit of history to start with. For over 100 years, the railroads, then ground transportation (trucks) drove the performance specifications in the containerboard grades. The infamous Rule 41, which was promulgated in the late 1800's and was widely used until the mid-1990's dictated box design. It was a specification tied to basis weight. Railroads and trucks did not mind the linkage for most often their loads "cubed out" before they "weighed out." This was far truer for railroads than trucks, but we'll not quibble over minor differences here.
Three things happened in the 1990's. In our industry, strength specifications (instead of basis weight specifications) started making inroads into box design. The second thing was the founding of Amazon (which no one, not even Jeff Bezos, knew at the time was going to be such a behemoth in so many areas of commerce). The third material item to our discussion from the nineties was the maturing of the recycled paper mill design which started popping up in several places, often carrying the moniker, "mini-mill." Now recycled containerboard grades could compete on an equal footing with virgin grades. No longer designated as "jute" or "testliner" grades, these new recycled products met the market where it was, not at some inferior tier.
The recycled mills were built where the business is, not in the forest where the fiber supply is, as for the virgin mills. Their source of fiber came to be known as the "urban forest," a term I first heard in 1988 and found laughable. It is not laughable any longer. To illustrate the radical impact on the industry the recycled mills have had, one needs look no further than New York State. Since the mid-1990's, there have been five recycled container board machines built across this state, from Staten Island to Niagara Falls, with three machines thrown in for Solvay (Syracuse area).
Meanwhile, let's talk about venerable virgin grade mills in the deep South, deep in the woods.
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The virgin mills are in trouble and it is largely due to energy costs. First is the basic transportation issue. If you are going to purchase boxes in Chicago, for instance, probably the largest box market in the nation, you want your boxes made locally. The local box shops buy their containerboard feedstock from mills anywhere, after all the price is delivered to their dock. The mills pay the freight. Hence if you are a mill in Valparaiso, Indiana; Alsip, Illinois; or Green Bay, Wisconsin; it is likely you will have better mill "nets" (price mill receives after freight cost) than if you are in, say, southwest Georgia.
Of course, mills have cooperated and traded product forever to reduce freight costs, but when that gets out of balance (not as much consumption in southwest Georgia as there is in Chicago, for instance), problems exist. At the end of the day, the virgin mills in the woods cannot do trades to the extent to get themselves completely out of this freight (energy) cost problem.
Then there is the Amazon problem. In case you haven't noticed, freight has moved from rail and truck to airplanes. Suddenly, basis weight matters. Suddenly quick delivery matters. Suddenly, virgin mills in the woods are second tier players. And none of this had anything to do with energy costs inside the fence.
But there is something that does have to do with energy costs inside the fence and it will bite the virgin mills as soon as they attempt to make the lightweight grades demanded by the market today. Their pulp mills, their self-generated electricity, their steam loads are all balanced for making 42# liner. A drop to 35# liner means their pulping, steam and electrical generation capabilities are 20% too large. Add another machine? Not a good economic idea for a mill that is sixty years old and buried deep in the woods.
As an industry, we went through a gut-wrenching change when the internet took printing & writing and newsprint business. Next up for unfavorable winds: containerboard mills deep in the woods.
The urban recycled mills even have a safety advantage. For in the unfortunate situation where someone is injured, they are likely very close to first class hospital facilities. I once worked in a rural mill that was a solid one-hour ride to a hospital whre the most likely action was to transfer you to a life flight helicopter for a ride to the city.
Be safe and we will talk next week.
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