June was another healthy demand month, and lower-priced exports declined for the first time in 2017, which we view positively. The N.A. containerboard market remains firm, in our view, thanks mostly, if not entirely, to e-commerce growth; the economy remains sluggish and CPG demand remains profoundly weak. Of course, the same e-commerce growth is limiting OCC availability and consequently pushing up costs.

The AF&PA (American Forest and Paper Association) and FBA (Fibre Box Association) released June containerboard and box data this morning. Box shipments were up 2.7% on an actual basis and average-week basis (we were expecting 2-3% growth, so we were in the ballpark), and are up a comparable amount (3.0%) YTD.

Inventories were down 11,000 tons compared to a 5-yr. average decline of 29,000 tons and 10-yr. average decline of 17,000 tons; inventories remain in line with historical averages (1% below the 5-yr. average but 2% above the 10-yr. average). The industry's operating rate of 96.3% was in line with historical averages (the 5-yr. average is 96.7%), while the YTD average operating rate of 96.9% remains much higher than last year's 94.4%. Lower-priced exports declined for the first time in 2017, down 11.3% from a year ago, though are still up 6.6% YTD. The market remains firm, in our view, likely thanks mostly, if not entirely, to e-commerce.

The overwhelmingly likely reason for the surge in box demand over the past 11 months - e-commerce growth - is the same factor driving down collection rates and thus OCC supply, partly as a result of which OCC prices have been historically inflationary over the same period. Please see our note from last evening (Containerboard - ALERT: E-Commerce Growth Leading to Falling OCC Supply; OCC Generation Down 2.3% YTD) for more details. Good demand is obviously a positive for the integrated containerboard producers, while input cost inflation is obviously not. We expect plenty of discussion of both issues (the unusually strong demand and the unusually high OCC prices and related price increases) on containerboard producers' 2Q17 earnings calls. For the time being, investors have chosen to focus on the positives (strong demand, leading to high operating rates and price increases) and not on the negatives (OCC inflation, which severely crimped producers' profits in 1Q17 and to a lesser extent in 4Q16, and which is likely to continue having an impact). 

Courtesy of Adam J. Josephson, KeyBanc Capital Markets