How paper and packaging work: mills, converters and five materials
From forest and recycling bin to the box on your doorstep, the five main packaging materials, who buys packaging, and the measures that matter.
Industry brief, with a one-minute summary: Paper and packagingKey takeaways
- Packaging is two businesses joined together. Making the material (paper, board, plastic resin, aluminium) happens in a few huge, capital heavy mills and plants.
- Mill operating rate: production divided by capacity. A paper machine has high fixed costs and runs around the clock, so downtime is expensive.
- Price per tonne of board or paper, often taken from published price indices that contracts refer to.
- Fibre cost: the price of wood or of recovered paper such as OCC. For recycled mills it is the biggest single input.
Key idea
Packaging is two businesses joined together. Making the material (paper, board, plastic resin, aluminium) happens in a few huge, capital heavy mills and plants. Turning it into boxes, cartons, cans and bottles happens in many smaller converting plants close to the customer, because empty packaging is mostly air and costly to move. Profit depends on running the big mills full and on passing input costs on to customers quickly.
- From fibre to box and back
- FibreWood from managed forests and plantations, or recovered paper such as old corrugated boxes (called OCC, old corrugated containers)
- PulpWood chips are cooked or ground into fibres; recovered paper is pulped in water and cleaned
- Key: Paper and board millOne paper machine can be hundreds of metres long and make hundreds of thousands of tonnes a year
- Containerboard, carton board, graphic paper (printing and writing), tissue
- Converting plantBox plants glue liner and fluting into corrugated sheets, print and cut them; carton plants print and fold
- CustomersFood and drink makers, consumer goods firms, online shops, factories
- Collection and recyclingUsed boxes go back to recycled mills as fibre
Containerboard is the strong paper used to make corrugated boxes: flat outer layers called liner, and a wavy middle layer called fluting or medium. Kraftliner is made mostly from fresh wood fibre; testliner and recycled medium are made from recovered paper.
| Material | Typical uses | Main input cost | Where plants sit | How players win |
|---|---|---|---|---|
| Paper and board | Corrugated boxes, cartons, paper bags | Wood or recovered paper, energy, chemicals | Mills near forests or big cities (for recovered paper); box plants near customers | Low-cost fibre, mills owned together with box plants, full machines |
| Flexible plastic | Pouches, wrappers, films for snacks and detergents | Plastic resin such as polyethylene | Near brand owners' factories | Printing quality, fast changeovers, new recyclable designs |
| Rigid plastic | PET bottles, tubs, caps | PET and other resins | Often next to or inside the drinks or food factory | Light designs, high-speed lines, recycled content |
| Metal | Aluminium drink cans, steel food cans, aerosol cans | Aluminium or steel sheet | Next to drink and food fillers, since empty cans are bulky | Long contracts with big drinks companies, very fast lines, metal cost passed through |
| Glass | Bottles for beer, wine, spirits, jars | Sand, soda ash and natural gas for the furnace | Regional; heavy, and furnaces run non-stop for years | Full furnaces, premium bottles, recycled glass (cullet) that cuts energy use |
So-what
In every material, the raw input is most of the cost, so the contract terms that pass input costs on to the customer matter as much as the factory.
The customers are other businesses. A drinks company signs a multi-year contract for cans. A biscuit maker buys printed film and cartons. An online shop buys boxes by the million. Many contracts include a pass-through clause: when the price of resin, aluminium or board moves, the packaging price moves too, usually after a delay of one to a few months. Packaging is a small part of the price of the final product but essential to it, so customers care a great deal about reliable supply and quality. Changing a supplier means testing new packs on filling lines, which creates some switching costs, though large buyers still negotiate hard on price.
Key measures, in plain words
- Mill operating rate: production divided by capacity. A paper machine has high fixed costs and runs around the clock, so downtime is expensive.
- Price per tonne of board or paper, often taken from published price indices that contracts refer to.
- Fibre cost: the price of wood or of recovered paper such as OCC. For recycled mills it is the biggest single input.
- Energy cost per tonne: drying paper takes a lot of heat, so gas and power prices matter, especially in Europe.
- Box shipments or square metres sold: the demand signal for corrugated packaging, which tracks how much goods people buy.
- Price minus cost spread: how far selling prices are ahead of fibre, energy, resin or metal costs at any moment.
- EBITDA margin: profit before interest, tax, depreciation and amortization as a share of sales.
- Integration rate: how much of a company's own board its box plants use. Higher integration evens out the cycle.
A containerboard mill in Germany has capacity of 700,000 tonnes a year. It took downtime to cut output and produced 595,000 tonnes. What was its operating rate, as a decimal?
Why are there a few very large paper mills but many smaller box plants close to customers?
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and terms
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