Container Board Market Softens

from Deutsche Bank - Equity Research

* Weak shipments, higher inventories
September containerboard & box numbers showed a sharp decline in shipment volumes and higher inventory levels. While we think that they exaggerate just how bad demand is, there is little question that conditions are weak. The $60/ton price initiative for Oct. appears to be dead. The real question is whether the industry can keep prices from falling. We think it will take aggressive action by the industry to reduce supply.

* Shipments - sharply lower
Box volumes fell 1.9% y/y in Sept., but adj. for two more shipping days this yr, they fell 11.3% y/y on an "avg. week" basis. Most observers tend to focus on the avg. week number, which would make the volumes look truly egregious. We think that the "real" number is a blend of the two, or a decline of about 6.6% y/y. Although this is by far the worst y/y blended comp this year, we think they may exaggerate the weakness in the mkt. Sept. '07 was a difficult comp,
and Aug. was a suspiciously strong month, suggesting that some business may have been pulled forward into August this year.

* Inventories - higher, again
Sept. saw inventories move higher again. Combined mill and box plant inventories rose 90K tons m/m. The last 10 yrs, inventories typically rose by an avg. of just 11K tons in Sept. meaning that inventory build relative to seasonal expectations was 89K tons. This follows a
negative variance of 72K tons in August. Total inventories now stand at 2.45MM tons. We would no longer characterize them as particularly lean on a historical basis, though they do remain below avgerage.

* Prices - $60/ton initiative a question mark
We think that it's now clear that the $60/ton price hike initiative for October is a dead issue. The big question is whether the industry will be able to retain the $55/ton price hike which was implemented in July. A number of factors are working against the industry, including soft demand, rising inventories, and a rising US$. We think that it will take aggressive action by the industry to maintain prices.