Strength in Numbers Dealing With Customer Contracts in a Period of Declining Prices

BY MITCH KLINGHER

More and more customers are compelling converters to enter into contractual commitments. The contracts can contain clauses about inventory levels, delivery commitments, volume rebates, and various other terms. However, all contain some sort of mechanism to adjust prices when the published price of containerboard moves. The more sophisticated buyers want to have some certainty about what will happen to their packaging prices when the price of the basic raw material—paper—changes. Our larger integrated brothers, which tend to deal with larger companies, have had a large part of their output under contract for many years, and this trend has been accelerating rapidly in the realm of the independent converter for the past 10 years or so. Let’s spend a little time analyzing the fi nancial aspects of the pricing mechanisms of these contracts.

First, we need to understand that paper in general is purchased by the ton and packaging sold by the square foot. So, to understand how to convert paper price changes to packaging, we need to understand the concept of basis weight. Basis weight is simply how many pounds per thousand square feet the paper weighs. For example, containerboard with a basis weight of 42 means that 1,000 square feet of this paper weighs 42 pounds. Pretty simple, right? Where it gets a little more complicated is that corrugated board is a combination of two layers of fl at linerboard paper and one layer of fluted medium paper, and the size of the flute varies with each grade of board and each machine used to combine the board. Th is is called the take-up factor. So, B flute uses more medium than E flute, and older machines use slightly more paper in the process than more modern machines. Without trying to make this too complicated, in order to craft reasonable pricing mechanisms in a customer contract, we need to have a sense of how heavy the packaging we are selling is. The most common grade of combined board is ECT 32, which is often made using 33-pound liner board and 23-pound medium board. C-fluted board on a modern machine will generally have a take-up factor of 1.45/1, so the calculation for the weight of ECT 32 board made this way would be:

(33 lbs. + 33 lbs. + (23 lbs. x 1.45)) = 99 lbs./msf (thousand square feet)

In order to make the following calculations easier, we will round this off to 100 and make the assumption that ECT 32 board has a basis weight of 100 (lbs./msf). The next part of the puzzle involves converting dollars per ton to dollars per msf, and the formula for this conversion is as follows:

($/ton x lbs./msf)/2000 (lbs./ton) = $/msf

Therefore, if the price of paper drops $50/ton, and you are selling your