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John Anton: Hello, this is John Anton once again with the S&P Global pricing and purchasing team. Today we're talking about something that affects pretty much everybody who does commerce either as a consumer or business, we're going to be talking about packaging with Patrick Warren, he's a senior economist with our group who follows the area and there are a lot of some things that went on last year and are continuing into this year. And some of them don't necessarily match with the other things that were going on in the COVID economy. Patrick what is going on with packaging?
Patrick Warren: Hi John, well 2020 was kind of a wild year for a lot of commodity prices, but packaging did not follow that trend container board which is like a coordinated box. Prices for that were completely unchanged for most of 2020 until we got a price hike announced for November and that was the first increase in over two years. Box makers immediately passed that on which is pretty unusual, usually there's some lag between the board prices and the box prices going up. And now container board suppliers are pushing for a second increase in March and this is going to be met with more resistances.
John Anton: Is this a bigger than normal increase or is it going to put pressure on shippers, is it going to put pressure on retailers.
Patrick Warren: Each individual increase wasn't necessarily bigger than usual but it's pretty rare for them to follow one after the other so quickly, especially after a flat year in 2020 and a downward trend in 2019. This box market is really reflecting consumption patterns and in 2020 these changed dramatically. Everybody was staying at home, e-commerce made huge inroads and it grew about three times faster than the year before. And all those packages delivered to people's doors, pushed box shipments up to record levels, and starting in the fall holiday demand really stretch those inventories even thinner pushing prices higher.
John Anton: It sounds like you're saying this is really driven by demand, was there any supply side problems.
Patrick Warren: So demand is really the majority of this story, but there were also some supply issues that cropped up, so to keep up with demand mills were pretty much running around the clock for months on end and that meant extra shifts and overtime pay and this is really what suppliers pointed to justify their November price hikes. We've also had transportation issues working and that is the most consequential for packaging, but other modes have seen difficulties as well.
John Anton: Are the increase is mostly in the paper and box side or are they also coming in from plastic packaging.
Patrick Warren: So the box increases combined are almost 15%. We have seen pressure on the plastic packaging side as well but plastic resins just serve a much larger market than packaging as opposed to boxes and pulp which is much more tailored.
John Anton: I'm someone who shopped online since the pandemic started, I'm pretty sure many people have as well is this delaying shipment. Is it increasing the prices we pay to online shippers. Has this been passed onto the consumer either as higher prices or has it been passed on through delayed delivery.
Patrick Warren: It hasn't been passed on to consumers yet. These are still relatively new, they're kind of working their way through the supply chain, but it is something that's going to eat into margins at some point and push up final prices down the line. Logistics those issues aren't really coming from the packaging side yet and those backlogs are really improving as we head into the second quarter.
John Anton: Now you mentioned some of the things, we're driving up the initial round of price increases in November and specifically you referenced labor and some transportation cost. Is that the same thing behind the increase they have requested from March or are there other factors coming in as well.
Patrick Warren: Those are still there, labor and transportation costs are still problems but we've had additional supply issues and that's really coming at the worst possible time. Mills postponed maintenance throughout 2020 to keep up with demand and now in the first quarter of 2021 we've had a glut of maintenance that just kind of accumulated. On top of that several boarding box makers were hit with cyber-attacks and one of the largest US suppliers got hit in January and they're still running in manual mode because their systems are down. This has led to slower production because of the manual mode and complications for billion delivery which is slowing down their shipments and loading and unloading deliveries.
John Anton: Starting with the March increases where are we going to go in 2021.
Patrick Warren: So we do expect prices to come down in the second quarter and the second half of 2021. Suppliers were catching up with backlogged orders in February and we're going to see that continue into March and the second quarter as box demand drops back to normal. There is also a significant new production capacity coming online for the first half of 2021 and these are going to make the March increases a tough sell with buyers who are looking at increased capacity and pushing back. We can see partial increases probably half of what suppliers are asking for.
John Anton: So Patrick you've put out a pretty good story of why prices went up, whether they are not they will stick in March and it's not exactly sure and it sounds like you're looking at a basically retreating pricing profile for the rest of the year, not a collapse but kind of dropping back to undo some of the increases. Is there anything else we should keep an eye on for the packaging sector?
Patrick Warren: I'm keeping an eye on pulp prices which have been on a tear since December led by trading on the Shanghai Futures Exchange. There are fundamental reasons for pulp prices to rise. They were at historic lows for most of 2020, but this is way more dramatic and increase than we could justify with fundamentals. And I don't think anyone expects pulp prices to remain this high for a sustained period, but if the speculation has staying power it is going to result in higher box prices over the course of 2021.
John Anton: That sounds like pretty much every commodity, we're certainly we believe copper is expensive at 8000, but it's at 9000 and that's a lot of commodities just what you said for Paul, a lot of things deserve to be expensive but not this expensive.
Patrick Warren: Exactly right.
John Anton: So you've done a really good job at explaining what's going on with the paper and packaging side, any final thoughts to the topic.
Patrick Warren: So we did focus on the paper side but demand for packaging has really hit a much broader base of the packaging market and that includes plastic with things like shrink wrap packing peanuts, plastic pallets even, and all of this is kind of facing the same demand story.
John Anton: Well thank you Patrick and I hope everyone has gotten a lot of information out of this session. We will be updating in a few weeks with our next topic, so please be sure to tune in and we appreciate your time today in listening to our podcast. Thank you.
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