Linerboard Pricing Soars

Tuesday, June 01, 2010

The kraft linerboard market has increased for the second time this year. How can linerboard producers justify the increases in such a difficult economy?

First and foremost is the simple supply and demand curve. The supply of linerboard has gotten increasingly tight with the closure of paper mills all around the country. At least 10 large paper mills have been permanently shut down over the past few years. Unlike the past, the mills were dismantled so that they could not be brought back online when paper prices increased. This has had the effect of making, what was temporary market tightness in the past, a permanent dynamic in the market.

Adding to the supply situation is the pressure paper companies are feeling to replace the profits generated last year by the Alternative Fuel Tax Credits. The major linerboard producers last year received nearly $3 billion dollars in direct tax credits. Those credits were eliminated when Congress closed a loophole opened 2-3 years ago. Without those profits, paper companies need to force through price increases to calm shareholders.

The market volume is not sufficient to support higher pricing by itself. The market has grown only about 2% over a very bad 2009. The consolidation in the linerboard market has put a very small group of companies in control of a majority of output. As long as 3-4 of the major producers of linerboard remain committed to raising paper prices, the independent companies can only press ahead and hope to recover as much as possible in finished box price increases.

While most of the ire of box users falls on the converters of finished products, the control of pricing rests largely with the integrated paper companies to affect the market. The independent producers fight the battle against increases in the market before end users even know it’s a possibility.