Brace for Impact: Covid-19 and North American Containerboard
As the situation of the Covid-19 pandemic unfolds globally, we attempt to assess the initial impact it may have on the North American containerboard sector.
China: Healthy Demand and a Recovering Supply Chain
With almost 20% of the global GDP, China is intertwined with the global economy. So when China was locked down at the beginning of the outbreak, we saw an abrupt disruption to the global supply chain. Beginning on January 23, ports in China became congested due to labor shortages and paralyzed truck and rail transportation. This congestion, as well as additional delays resulting from a 14-day quarantine of crews returning from China, caused a shortage of containers. Throughout February, we heard accounts of healthy demand from China but also accounts of goods stuck during transportation, including containerboard. With all Chinese ports outside of Hubei province back online as of Monday, March 9 and the workforce gradually back on-site, we expect productivity to steadily increase and congestion at ports to gradually clear throughout April.
As China began to bounce back, it also started to accept tariff exemption requests on over 700 US imports on February 17, including pulp and paper. If granted, US products would become more attractive in terms of pricing. We expect this to stimulate the US export of containerboard to China and to contribute to the success of the ‘phase-one’ deal while filling the significant fiber gap that China currently has.
Short-Term: Opportunities and Threats Come Hand
Within North America, the containerboard market recovered somewhat in the first two months of 2020, after a depressing year of low operating rates and continued price pressure. In this trying time, unique opportunities arise, and we expect containerboard demand to endure and the threats of Covid-19 to arrive much later.
As Covid-19 spreads in North America, with several cities in semi-lockdown and restaurants and bars shutting down, consumers have stormed online platforms and offline supermarket shelves to stock up on absolutely everything (see Figure 1). Retailers saw a sharp uptick in sales in the past one to two weeks. US packaged foods saw sales growth of 5.5% YOY for the week ending March 7, according to Nielsen. We expect this shopping pattern to continue for the moment but to calm down shortly. Meanwhile, there is an opportunity, though short-lived, for corrugated paper packaging to grow in this channel. As food companies work around the clock to shift their production from foodservice to meet retail demand, more primary and secondary packaging is consumed.
Online retailers have seen even more panic buying. Amazon is experiencing so much demand that it is hiring 100,000 warehouse and delivery workers while temporarily increasing their wages in North America. At a time when social distancing is the new norm, it will help e-commerce further penetrate many categories, including perishables. Widespread quarantine efforts will nudge consumers towards shopping online, even those who haven’t shopped online before or have done so infrequently. This behavior change may stay and help sustain demand for e-commerce corrugated boxes even after the crisis. The e-commerce channel and on-demand packaging solutions that can help reduce packaging costs and improve efficiency will become even brighter spots and attract investments.
However, cancellations of sporting events, such as the NBA, and postponements of conferences will take a heavy toll on the consumption of corrugated boxes. Food, such as hotdogs and hamburgers, is heavily consumed during sporting events. Thousands of boxes of food and other goods have now become canceled shipments. As the CDC expects Covid-19 to last at least through 2021, threats to containerboard demand may be slow to play out.
On the other hand, mills and converters are vulnerable if the virus continues to spread due to a large on-site workforce. The manufacturing sector could be at risk of shutting down or running at lower operating rates, possibly impacting regional supply in North America. Factories are coming up with emergency responses, ranging from implementing different workforce schedules to reducing the number of employees on-site at a time. While factories temporarily going offline has had limited impact on North American regional supply, operating rates are still at risk of dropping, and planned conversion projects could be delayed further.
With demand for food and consumables surging and consumption shifting from foodservice to retail channels, we expect positive growth in these corrugated segments to outpace the negative in the short term. Other segments, such as industrial packaging, pose a much less certain prospect.
Medium-Term: Recession as a Base Scenario
Different countries have taken different measures in their attempts to control the novel coronavirus outbreak. Some have locked down their cities and shut down most economic activities, while others were exploring herd immunity. Regardless of the containment measures taken, they have drastically tamed normal business activities and cast a shadow over global economic forecasts. As the virus spreads over time, we will see decreased business and manufacturing activity, a gradual drop in consumer demand, and thus slipping demand for containerboard, among others. According to Rabobank’s economic outlook from March 19, global economic growth will slow to 0.7% in 2020, down from 2.9% before the Covid-19 pandemic (see Figure 2, 3). A recession is closer than ever.
As life with Covid-19 becomes the new normal, the containerboard sector is faced with unique opportunities as well as unprecedented challenges. No one has yet come up with a bulletproof solution for a global recession, and it will certainly get worse before it gets better. If a recession hits as we expect, containerboard pricing and operating rates would come under immense pressure in the medium term. Regardless of whether or not there is a fast rebound in demand once recession subsides, containerboard producers should brace for impact and soften the blow. The present moment could prove valuable, if spent wisely. That is, optimize your assets for opportunities in growth channels.
Where to go from here
Xinnan LiAnalyst – F&A Supply Chains Read more