Morningstar | We Anticipate Increasing Supply Will Weigh on Product Pricing and PCA's Returns in the Coming Years
A decade of consolidation in the corrugated packaging industry has seen Packaging Corp. of America and its peers push more aggressively on prices, resulting in a period of sustained high margins. Packaging Corporation of America played its part in the trend with the 2013 acquisition of Boise, boosting its market share to 10% in the process. We expect increased competitive intensity to diminish profitability for Packaging Corporation of America and its peers in the long run. Thinning margins in corrugated packaging, which accounts for nearly 80% of Packaging Corporation of America's sales, are likely to weigh on consolidated profit growth.Despite the proliferation of Amazon boxes, corrugated packaging isn't a growth business. Although e-commerce is likely to remain a demand tailwind, that growth comes on a modest base. Meanwhile, falling paper consumption (12% of U.S. corrugated box usage) and a flat volume outlook for food and beverage (40%) diminish the upside. In total, we expect subdued corrugated packaging demand growth, averaging just below 1% per year, in line with the past five years. The demand outlook for Packaging Corporation of America's paper segment, less than 20% of sales, is worse. We expect demand for uncoated free sheet, used in office paper and envelopes, to decline 3%-4% annually on average, accompanied by falling prices as higher-cost production bears the brunt of falling demand. Problematically, falling paper demand threatens the profitability of Packaging Corporation of America's corrugated packaging business. We expect a portion of the industry's idled paper capacity to be converted to linerboard production, attracted by the corrugated packaging industry's healthier economics. We've already seen signs of this from International Paper and PCA, itself. Rising supply amid tepid demand growth is likely to pressure prices and diminish margins for Packaging Corporation of America.Packaging Corporation of America is a producer of containerboard products and a producer of uncoated freesheet paper. The company's segments include: Packaging, which produces a variety of corrugated packaging products, including shipping containers, multi-color boxes and displays, and honeycomb protective packaging, as well as produces packaging for meat, fresh fruit and vegetables, processed food, beverages, and other industrial and consumer products; Paper, which manufactures and sells papers, including both commodity and specialty papers; and Corporate and Other, which includes transportation assets, such as rail cars and trucks, to transport the company's products to and from its manufacturing sites.
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