An alternative view of North American containerboard supply expansion

Nearly 3.0 million tons of new containerboard capacity entered the North American market in 2020-21, and an additional 3.0 million tons worth of projects are currently announced to begin production in 2022-23. While recent shifts in consumer spending and the economic environment have increasingly raised concerns about the ability of future demand growth to fully absorb this new capacity, this Viewpoint approaches the topic of supply expansion by revisiting the topic of industry concentration.

Previous Viewpoints have discussed the Herfindahl-Hirschman Index (HHI), which measures the degree of concentration in a given industry by summing the squared market share of all producers in an industry. This index differs from other popular views of industry concentration, such as the total market share of the top four producers, in that the HHI places more emphasis on producers with larger shares of supply.

For example, an industry in which the market shares for the top four companies were 60%, 5%, 5% and 5% would have a much higher HHI than an industry in which the top four producers had equal shares of 20%, but simply summing the top four producers’ market shares would incorrectly describe the latter industry as more concentrated.

The North American containerboard industry was long classified as an unconcentrated industry before two major waves of consolidation and acquisition in 2008-09 and 2012 pushed the HHI up to what the US Department of Justice would consider a moderately concentrated level in 2012.

As improving market conditions, including the emergence of e-commerce as an important driver of demand growth, drew more supply to the industry, containerboard market concentration gradually decreased until 2019, when WestRock’s acquisition of Kapstone returned the HHI to more than 1,700. Capacity changes in 2020-21 included a broad mix of additions from the top two producers and projects from smaller companies, as well as a few closures amid the demand weakness of 2019 and early 2020. Overall, the HHI showed industry concentration falling slightly but probably not enough to have any noticeable impact on the market balance, especially given the surging demand growth in 2020-21.

The strong containerboard and corrugated market conditions of 2020-21 have attracted a slew of new capacity additions, and this wave is dominated by machines from smaller players and new entrants. Based on current announcements, we estimate that the North American containerboard HHI will sink further in the next several years, reaching unconcentrated territory by 2024 after a decade of moderate concentration.

For buyers craving a more favorable demand/supply balance, this projected shift may bring some hope for a return of negotiating power as new machines ramp up. However, just as developments in consumer spending and the broader economy have emphasized demand risks in recent months, so too have supply risks become more prominent.

The projected HHI in Figure 1 is based on current announcements, and several projects have already had their start-ups delayed by supply-chain issues; if unresolved logistics issues continue to create inflation and present obstacles for the broader economy, they will also likely remain a threat to start-up schedules.

Rising interest rates present another risk for projects that have not yet finalized their financing, as higher interest rates may make it more difficult to justify major capital commitments, especially if investors become more concerned about the prospects for demand growth.

Finally, while we are tracking list 3.0 million tons of announced expansions for 2022-23, the net capacity change will be closer to 2.4 million tons due to Sonoco’s conversion to uncoated recycled boxboard at the Hartsville mill, WestRock’s closure of the Panama City kraftliner mill and any shifts back to boxboard at WestRock’s flexible Evadale mill.

One final implication for a declining HHI is that it may open the door for the next round of industry consolidation. While several producers have recently communicated a focus on improving their own mill systems, some new entrants from previous expansion rounds, such as SP Fiber Technologies, were eventually acquired by existing containerboard producers, and a lower HHI may result in lower divestment hurdles from the Department of Justice for any mergers.

Regardless of the outcome, we expect the North American containerboard market to remain, if nothing else, extremely interesting.

About the author

Derek Mahlburg, Director, North American Paper & Packaging, is co-author of the Paper Trader, the Paper Packaging Monitor, the North American Graphic Paper Forecast and the North American Paper Packaging Forecast. He works out of Durham, North Carolina, and can be reached at 434-218-1183 or dmahlburg@fastmarkets.com.