There's a critical skill in both business and in life that involves seeing into the future...accurately. It involves the ability to "read the tea leaves" as some people say. The idiom originates from the ancient practice of tasseography, a form of early fortune-telling that involved interpretation of loose tea leaf formation at the bottom of your empty cup. Sounds ridiculous to me, but hey, some people put their belief behind such parlor games. However, in the ensuing centuries, better leading indicators were developed to shine some light on what both the short-term and long-term future look like. In other words, how you should play the game to win.
The reason I decided to explore this topic for my column this month is because of what is happening in the precious metals market globally - particularly the silver market. Two major trends have been setting themselves up for this price action that is occurring right now. First, it should be noted that silver mine output has not really grown in the past few years because low silver pricing did not warrant capacity investments, yielding an annual deficit versus industrial consumption that has grown with solar, EV, chip, battery, and weapons demand. This has consistently drained above-ground stock in all the exchange and bank vaults to meet industrial and investment needs. Second, we have been bombarded non-stop for several years about all the advanced electronics/compute and green technologies that are projected to take over our lives, whether we like it or not. All of it consumes silver, nature's best conductor.
If one were smart enough to see this dynamic happening and began to "stack" physical silver while the price was "cheap", or even invested in ETFs or mine production companies, over the years this imbalance was taking place...congratulations, you won. You had to first see the data, and then most importantly, act on your gut instincts about what to do to prepare for this imbalance to be noticed more broadly and reflected in the price of silver. There's much more to this silver story than I have space to explore. I would highly recommend readers of this column to research this topic to find out the whole story involving governments, banks, exchanges, and even future warfare (e.g. what is China doing with their domestic supply?)
Other examples of leading indicators for the economy that have been used for several decades are the Baltic Dry Index (global shipping rates), Dr. Copper (copper pricing indicates electrification growth), lumber prices (construction), and containerboard pricing (manufacturing output.) Let's look a little closer at that last one. After all - that's where many of us earn our paychecks.
When I first began working in this industry, linerboard, the major component of corrugated containers, was priced between $350 and $500 per ton. Even at that rate, mills were being built left and right because investors could see the demand trends, mostly coming from the growth of e-commerce. Twenty years on, and even with the manufacturing capacity growth during that period, linerboard pricing climbed to $600-800 per ton range. The Covid period of 2020-2022 saw peak pricing of between $1000-1200 per ton due to broken supply chains and massive demand for parcel shipping. Since then, we have seen a severe pull back that has actually killed several industrial papermaking assets to take supply off the market to control the price decline.
Yes, more efficient assets come online and less efficient assets are displaced due to cost competitiveness. However, market pricing is still a driver because production output expansion is not kept as additive but swapped for efficiency - making the same amount of tons at a lower cost. What we can't ignore with this dynamic happening right before our eyes is that the economy is softening. Demand for containerboard, and thus its pricing, is lower year to year as consumers buying products cut back on their spending. The consumer appears to be tapped out. That is not what we want to hear, but there it is in the numbers. It feels like it is getting worse with every market-related downtime that gets announced.
We've been through this before. It's not pretty for those involved in restructuring. Weak hands must be shaken out, or pruned if you like, to make room for growth. If the US makes do on their goal of domesticating more manufacturing, we should see a clear and certain reversal in trajectories. That's where the real fun starts. Machines are built. Projects are funded for capacity expansion, wherever the bottleneck resides. Young operators, managers, technicians, and engineers are trained for their future roles when the rebound happens. We're not down and out in this industry - we are simply re-tooling for growth in a few years. Timing is always tricky. Keep a close eye on those leading indicators to see what the trends are telling us in the containerboard market. Not so much printing and writing grades...which have collapsed due to digitization (or some call it "product substitution") or the consumer products market (tissue and towel grades), which more-closely track population trends.
If you're selling solutions to containerboard/boxboard papermakers in this market, better focus on quality, costs, safety, and yield rather than tons. Capacity projects may not get funded unless they are several years away from production. Rest assured; we're not looking in the bottom of our cup of tea to make decisions. In capital-intensive industries, great care must be taken to not waste precious resources. After all, the paper industry needs to attract and deploy capital responsibly if they want any chance of competing for investment dollars with anything AI-related. Since we're quite sustainable, recyclable, and bio-degradable, we can attract investment with the best of them. We also have a track record of delivering returns too.
Good thing we don't use silver in our products - physical availability of the metal could bring the global economy to a screeching halt.
Steve Sena (stevesena@me.com) is a Cincinnati native. He obtained degrees in Paper Science & Engineering from Miami University in Oxford, OH and an MBA concentrating in Economics from Xavier University. He's worked for a broad array of leading producers, suppliers, and converters of pulp and paper grades.
