By Jim Thompson
We discussed containerboard a bit last month and wanted to return to it again.
While the ISM index is soft, and this usually is a leading indicator for the container business, I would like to suggest that new paradigms are afoot.
Perhaps containerboard is not as tightly connected to the ISM as it once was?
Amazon created the retail standard that we could expect goods delivered free to our homes in 24 hours or less. Fulfilling this expectation is costing them $50 billion per year. They are doing this from about 110 fulfillment centers.
Wal-mart is creeping up on Amazon in the near instant free fulfillment sector that Amazon has created. Except they are doing it from about 1,600 stores. 90% of the US population is within 10 miles of a Wal-mart store.
The Amazon model means goods are not sitting around long after they are procured--they are moving out quickly from those 110 distribution centers. If Wal-mart thinks the "last 10 miles" transportation is the cost to focus on, their 1,600 stores, e.g., their local warehouses, will by necessity be stocked with more goods. The velocity through the Wal-mart system will likely be slower than the velocity through the Amazon system. Simply, there are more nooks and crannies at Wal-mart to fill and maintain, about 16 times more. While Wal-mart's "last ten mile" transportation costs may be lower than Amazon's, they will be losing efficiency when compared to Amazon in their own fulfillment centers.
Slower velocity means goods sit in boxes longer. Whether this will be a one time issue as Wal-mart fills their supply chain or a longer term issue, it seems like more boxes are in the future, even if the business doesn't grow overall. Yet, we know the overall business is continuing to grow at an amazing rate.
Another angle one could also argue is that a large portion of the boxes sitting at Wal-mart were offshore sourced. Thus, little impact on the domestic box business. This may be so, we don't know.
Nevertheless, we think the ISM link may be somewhat uncoupling from its traditional leading indicators.