Pricing is the one subject-perhaps the only subject-that affects every single member of the box and carton industries. A recent Boxboard Containers International survey disclosed that countless end-users-packaging buyers!-feel that price increases are not market driven, that prices are too volatile and that a great number of converters are unwilling to reduce prices as aggressively as they raise them. Anyone in these industries, when asked, would most undoubtedly voice an opinion on the issue, probably one of frustration. But it is understandably an issue of great sensitivity.

The well-known and respected industry consultant who shares his insights on the marketplace for the following article hoped to unravel some of the mysteries of pricing so that our readership might better understand the big picture, nothing more. As discussed in BCI's Special Report on End-Users, which was distributed last November, the aggravation your customers experience with pricing is directly related to its volatility. As box and cartonmakers continue to face the threat of other packaging alternatives the importance of the issue of pricing will grow.

The following article does not, obviously, address what individual plants need to do in terms of pricing. That remains-as it always should be-an individual decision. The article only hopes to illuminate the trends that are currently underway in these industries and how these trends could affect the health and vitality of box and cartonmaking operations in the future.

It's Elementary, Watson It is a common belief that the North American box and carton industries are on pace with the U.S. economy and that they trend with the Gross Domestic Product (GDP). One would think then that prices in these industries would naturally reflect the steady, albeit slow, growth in the overall GDP by being stable. What, then, is the mystery behind prices, and why is their derivation so baffling to consumers of raw materials? The answer to that question couldn't be so simple as the principle of supply and demand, could it?

Actually, yes it can, and it is. The paper pricing system is based on little more than the fundamental principle of supply and demand-if you have a surplus of product, you lower your prices. Conversely, if you can't churn your product out fast enough to satisfy your consumers, your price shoots right back up.

The rather idealistically elementary concept of supply and demand, however, does not keep the box and carton industries in check unless it is in a state of balance. And at this point, it is in anything but a balanced state. In fact, according to the industry consultant, in spite of recent price increases, health has not yet returned to the North American containerboard industry-capacity still exceeds demand.

The answer to the ever-popular question, "Why are prices in our industry so volatile?" is manyfold. And currently, there is no proven answer or remedy, but rather a combination of many contributing and related issues that are frequently blamed for aggressive price fluctuation.

Paper machines are currently being built to be faster, larger and more efficient than prior technology, capable of churning out more linerboard and corrugating medium than ever before. This improved technology though, might not be a good thing. Maybe, as our source expressed, the thing to do is to slow the pace down. "Our industry doesn't really need more linerboard. We already know that our capacity still exceeds demand."

This concept, of course, is not intended to advocate a no-growth scenario, but an overall slowdown so that the industry can catch up to itself. The consultant also stated, "Once the industry balances itself and growth continues at GDP rates, it will be able to support two big new machines a year. It will not support four new machines per year."

Playing Catch-Up Some theories for improving this unbalanced state advocate industry leaders looking at their neighbors and curbing mill overproduction. This would mean stepping back to look at the impact that new machines and mills brought on by other companies will have on the industry. These theorists feel planning ahead could potentially prevent the slow-down or shut-down of a new mill that cannot combat the overcapacity problem that exists in the containerboard industry today, saving companies from making bad decisions.

The consultant noted that a lot rides on the extent to which a company can sustain a mill slow-down. For example, a company like Stone Container, a definitive leader in the market, has the advantage of having deeper pockets, and thusly, a greater ability to take risks when it comes to starting up new facilities. That is not to say that larger companies do not suffer consequences from an investment gone bad. No matter what the product is, people can't stay in business very long if they sell their products for less than it cost to make them. And when prices hit rock-bottom, that is precisely what is happening.

The same containerboard overcapacity that causes integrateds to lose money end-over-end actually benefits the independent converter, who then partakes in lower materials prices. A balance, though, in supply and demand-assuming that one lies somewhere ahead-would up-end the situation and cause the integrateds to relax once again, as their inflated output gradually gives way to higher and more satisfactory income.

Some say that prices also suffer as a result of our industry products' commodity status. When products are relatively undifferentiated such as liner and medium, converters seek out new markets and explore the export marketplace. One disadvantage that medium has when that approach is taken is its propensity for damage when shipped overseas.

Medium does not travel well. It's made to suck up water in a hurry, so that it readily accepts corrugator glue. When it goes over water or it's exposed to rain-it literally swells up and explodes. So, export sales are not a logical option, leaving its creators one other choice, and that's to try to take business away from its competitors by cutting price.

According to the consultant, the folding carton industry seems to be improving, as far as the balance of capacity versus consumption is concerned, but it, too, falls victim to buoying prices. "I wish I could tell you that there's some great science to pricing, but there isn't," he said. "I do know that people work this very hard, trying to understand economic trends, supply-demand balances, competitive activities and customer needs. So much of it is just management judgment."

A Judgment Call Pricing experts essentially need to know it all, especially their own costs. Another more difficult talent to qualify that they need to possess is the ability to make a darn good guess, because prices rely so much upon what is going to happen down the line. And so often the things that happen at a greater or slower rate than expected are the spoils in the pricing formula that ruin the mix. Like any other business decision, pricing is largely a matter of trained foresight and a little bit of luck.

But business people are business first and people second. Their job is to protect the enormous capital investments they've made. The consultant explained that their primary directive behind pricing is to get a return on their investments, and though price increases have come rapidly and have been aggressive at times, the companies are trying to recoup past losses.

As much as pricing experts need to understand their customers' needs, the consultant also pointed out that buyers need to take into account more than just their own perspective on the industry to better understand prices. "The seller knows what his backlog is and what his customer is telling him. The buyer knows this and how many vendors are showing up at his door, as well," he said. "So, they're not dealing with perfect information at any given point in time."

Perfect pricing information, at this point in our industry's lifetime, is impossible to come by. Printed prices, popular in various trade publications, are derived in a variety of ways. While some converters rely heavily on these prices, others feel that there is currently no foolproof method of tracking prices. The consultant said that the concept is often misunderstood, suggesting that simply because prices are printed in a magazine, doesn't mean that converters are, or should be, getting that price. "A converter that's buying 25 tons a month isn't going to get the same price as one that's buying 1,000 tons per month," he explained. "And yet he'll look at one of those lists and wonder why that wasn't his price." Though the prices don't reflect every transaction, some consultants feel that printed prices serve valuable purpose of reflecting price trends as a whole over a period of time.

Finally, there are some who feel paper should be traded publicly. This would eliminate contracts and management judgment and would make paper a pure commodity. "You don't get mad at your stockbroker when they tell you that your stock dropped, do you?" quipped the consultant.

However, there are those in the industry who would rather maintain control, and the movement is not generally accepted. But if paper is traded in the same fashion as pork bellies, it does remove acrimony from the equation, and some feel that that's what this industry needs.

For now, price fluctuation will undoubtedly continue to bust the banks of many companies, cause investors to look toward other, less volatile materials and our industry will be playing catch-up to make up for lost time. But hopefully, seeing the big picture will offer the consolation that prices, both high and low, affect the whole industry-not just you.