Packaging Corporation of America (PCA), the undisputed king of containerboard production, just delivered another earnings beat. But behind the impressive volume growth and ongoing operational efficiency improvements lies a deeper, almost counterintuitive trend: PCA might be quietly shifting the power dynamics of the containerboard pricing game.

Traditionally, containerboard pricing has been anchored to benchmark indices like the RISI Pulp & Paper Week publication. These indices, based on a survey of market participants, are supposed to reflect prevailing market prices. However, as PCA subtly points out in its latest earnings call, this system is showing signs of strain.

The crux of the issue lies in the shrinking open market for containerboard. As integrated producers like PCA increasingly prioritize their own box plant systems, the volume of containerboard traded openly has dwindled. This raises a crucial question: how representative are these indices if they are based on a shrinking and potentially skewed sample of transactions?

PCA's management, particularly Tom Hassfurther, Executive Vice President of Corrugated Products, expressed a growing frustration with this disconnect. They highlighted a sense of dissonance between what the indices report and the actual price trends experienced by both PCA and its customers. In fact, PCA boldly announced and implemented price increases in January that were not reflected in the RISI index.

While this might seem like a mere discrepancy, it hints at a potential paradigm shift. Could PCA, with its immense production capacity and vertically integrated business model, be signaling a move away from traditional index-based pricing?

The company is tight-lipped about its exact strategies, emphasizing that these discussions are confidential and occur directly with their customers. However, they clearly state they are exploring all alternatives, including moving away from index-based pricing altogether.

This shift could have profound implications for the industry. If PCA, the largest US containerboard producer, successfully negotiates pricing mechanisms that decouple from traditional indices, it could trigger a broader industry-wide movement.

Imagine a world where containerboard pricing is less susceptible to the volatility of a shrinking open market and instead is determined through more nuanced, value-based negotiations with individual customers. This could lead to greater price stability, fostering long-term partnerships between producers and customers, even in the face of inflationary pressures.

The hypothesis is bold, and the evidence remains circumstantial. But the numbers do lend some weight to this intriguing possibility.

In Q4 2023, PCA implemented a $70/ton increase for linerboard and a $100/ton increase for medium. However, the RISI index did not reflect these increases. -

Despite this, PCA reported slightly higher prices and mix in Q4 compared to the previous quarter, indicating successful implementation of at least some portion of the announced increases. -

PCA's order backlog remains robust, and they are confident about strong demand continuing into the first half of 2024. -

The puzzle pieces are starting to fall into place. PCA, wielding its market dominance and backed by satisfied customers eager for price stability, might be poised to rewrite the rules of the containerboard pricing game. If successful, this move could mark a significant turning point in the industry, ushering in a new era of value-driven pricing and long-term customer partnerships. The containerboard landscape, it seems, is far from static, and PCA is leading the charge towards a potentially more stable and mutually beneficial future.

Corrugated Products Shipment Trend

The following graph shows the trend of PCA's corrugated products shipment over the past few quarters.

PCA Financial Highlights

"Fun Fact: PCA operates a nationwide transportation logistics network with a large fleet of tractors and trailers, enhancing flexibility and cost management in delivering containerboard and packaging products to customers."