Folding Carton Grade Shifts in North America
The three major folding carton grades for food applications all have a different outlook on supply, demand, and pricing trends, due to changing consumer preferences, supplier dynamics, and Covid impacts. Here we discuss each grade in detail and the supplier strategies applied for grade shifts.
Similar Boards, Different Prospects
Three types of folding carton boards are relevant for food packaging. They include coated recycled board (CRB), mainly used as non-direct food contact retail packaging, coated unbleached kraft board (CUK), often used as beverage carriers and frozen food packaging due to its wet strength, and solid bleached sulfate board (SBS), often used to make foodservice containers and confectionary and luxury food and drink packaging (see Figure 1).
While total (food and non-food) North American folding carton capacity slowly declined over the last decade, at a -0.62% CAGR from 2010 to 2020, some grades experienced mild growth, while others continued a downward trend (see Figure 2). Among them, CUK experienced the highest and most constant growth of 0.8% CAGR, while CRB and SBS experienced a flat to gradual decline (see Figure 2). Shifting between grades is slowly but surely happening, especially in the food segment, and, along with other drivers such as sustainability and consumer preferences, the pandemic has reinforced this trend.
Due to the growing consumer preference for kraft and natural packaging, unbleached CUK is growing in popularity – its brown appearance is often associated with sustainable qualities. Virgin-fiber-based CUK can be in direct contact with food and is slowly cannibalizing market share of SBS – the other virgin fiber board. CUK’s historically lower production cost accelerated this trend. In addition, due to the rise of off-premise consumption during the pandemic, the demand for beverage carriers has surged and is likely to stay due to the expected continued strength in off-premise consumption, even after restaurants recover in the next few years. Lastly, while all folding carton could benefit from the sustainability initiatives to replace plastic, beverage carriers are one of the leading segments substituting single-use plastic with easier-to-recycle, fiber-based options. Numerous companies have developed products substituting six-pack rings or shrink-wrap, e.g. Graphic Packaging’s KeelClip and Cap-It product lines or WestRock’s CanCollar. We expect this trend to accelerate as consumer awareness grows and governments implement stricter policies in single-use plastic packaging.
Slowly Declining SBS
North American demand for SBS has slowly declined over the past decade. With its superior printability, SBS is also used in the structurally declining non-food segments, such as tobacco and Bristol board. At the same time, as discussed above, it faces strong competition from domestic CUK. The decline in foodservice applications was exacerbated by restaurant closures during the Covid-19 pandemic, while the booming take-out segment benefited the adoption of plastic containers more than SBS. Going forward, we expect foodservice-related SBS consumption to bounce back gradually, but CUK may still be ahead. Imports of folding boxboard (FBB) are another potential threat (see Figure 3). FBB is somewhat similar to SBS but is a high-yield and thus low-cost alternative and still suitable for many similar applications. We also expect growing risks of substitution from micro-fluted packaging solutions, especially in the luxury food and non-food and personal care segments.
CRB is often the first choice for packaging without direct food contact, due to its low cost and good recyclability, when there is no need for high strength and printability. Covid-19 has stimulated CRB demand, as food retail sales soared, but we expect it to be temporary. Domestic CRB is also facing competition from imports, sometimes even from virgin grades, as less fiber is needed for similar board strength. The higher costs of the virgin grades can be effectively offset by higher strength, and thus lighter and less material is used. However, as consumers and brands put more emphasis on sustainability, CRB will continue to emerge as a better choice compared to virgin grades due to its high recycled content.
Pricing Ties Everything Together
Supply-demand dynamics impacted the pricing trends of folding carton grades1. SBS prices largely stayed flat, while CUK pricing climbed at a 3.5% CAGR between 2015 and 2020 (see Figure 4). CUK pricing surpassed SBS for the first time at the end of 2018, as SBS operating rates declined to below 90% in the face of abundant SBS supply and CUK’s strong demand. The average 5% premium pricing of SBS over CUK prior to 2018 declined to a discount of 11% at present in a matter of two years. The strong consumer demand, coupled with an extremely concentrated market, allows suppliers greater pricing power. However, we expect SBS to substitute certain CUK applications, especially in frozen foods and foodservice, should the pricing differential continue to increase. This would limit CUK’s pricing upside and further growth potential. In addition, upcoming capacity switches from SBS to CUK (WestRock’s Evadale mill for example) should help bring supply and demand in balance and stabilize the SBS pricing downside trend.
CRB, on the other hand, is benefiting from the extremely low fiber cost of mixed paper, with an average price of USD 39 per metric ton in the last twelve months. While already the cheapest folding carton product in general, CRB producers are constantly optimizing their production costs while improving the quality of the board. For example, Graphic Packaging’s new machine at the Kalamazoo facility is expected to replace high-cost production of CRB at other facilities. We expect asset optimization to be an ongoing trend across all folding carton grades as machines age and new technologies are developed.
Strategic Entrances and Exits
While each grade displays different trends and market dynamics, total folding carton demand is stagnant, thus resulting in responses from the players. Around 1.3% of capacity has exited in the past decade, due to reasons ranging from asset optimization to plant closures. The majority of the exits were in CRB and SBS grades, due to the flat consumer demand and fierce competition from both domestic and international players.
Capacity additions have been few and far between. Sappi’s rebuild of Somerset Mill in Maine has been the most notable, adding 350,000 metric tons of SBS. This mill is an important strategic step to expand Sappi’s presence in the North American market. However, this may have contributed to other SBS exits and overall flat SBS pricing in the following years.
To navigate this mature and saturated market, folding carton producers could focus on the following points:
- Be flexible with grade shifting, especially between the virgin grades SBS and CUK.
- Lower cost through asset optimization and replacing older, higher-cost machines with more efficient ones; reduce input costs through new technology, and incorporate a higher percentage of low-cost recycled fiber.
- Vertical integration by building conversion plants and developing relationships with food manufacturers. New entrants could also utilize distributors.
- Innovate and improve board performance, such as higher strength, lighter weight, lined with innovative coatings, or customized designs to address specific applications. For example, AR Packaging’s snack boxes with a beverage compartment aimed to replace single-use plastic in take-out meals; CRB from Graphic Packaging’s Kalamazoo facility will be equipped with the wet-strength needed for beverage carriers, traditionally only seen in CUK; or Evergreen Packaging’s ice cream packaging with a sugarcane-derived coating.
1 Recent price movements across the board are expected to be transitory as they are based on inflationary factors and temporary demand surges. They are thus not discussed further in this report.
Where to go from here
Xinnan LiAnalyst – F&A Supply Chains Read more