Buffeted by Uncertainty

The roiling of the paper stock market continues to haunt paper stock dealers. A turnaround this year is hoped for, although optimism is muted.

A rallying cry over the past several months has been “I have seen it worse.” This rallying cry is being expressed as paper stock markets struggle to break out of the difficult market conditions that seems to be hammering many grades.

The overarching problem that appears to be suppressing markets over the past several months continues to be the difficult world economic condition. Newsprint producers continue to slash production to balance supply and demand; order books remain soft as the hoped-for economic recovery falters; and the offshore market, which many hoped would help soak up excess supply, is only coming in with modest upticks.

Looking toward better markets by the middle of the year still is possible, although short term issues haunt many paper stock dealers. Typically the early part of the year is a time of slow production and reduced generation.

THE PRESSES HAVE STOPPED

While the slashing of production has created sizable problems, another issue that is being factored into the overall malaise of the market lately has been the Enron debacle. With its collapse, the company also shut down its Garden State newsprint mill in New Jersey. As it wound down operations, the mill was dumping more finished newsprint and recovered fiber on the market, creating greater problems for the grade.

The low grade market also is being hamstrung by continued problems with inventory levels. Recent statistical figures show that the production of newsprint and linerboard, both huge consumers of recovered fiber, have been declining sharply over the past several months.

The most recent figures from the American Forest and Paper Association (AF&PA), Washington, point to the less than stellar performance of these two groups. In their most recently reported statistical information, the AF&PA shows that newsprint production in the U.S. declined by a whopping 12.3 percent to 6.4 million tons in 2001, compared to 2000’s production of 7.35 million tons.

For the paperboard segment, production declined by 4.4 percent to 46.8 million tons from 2000’s 12-month production total of 49.0 million tons.

While the overall mood of the market is somewhat downbeat, depending on the region, some vendors express much graver concerns about markets in 2002. On the East Coast, inventory levels for many low grades are soaring, and some recyclers say that movement has come to a halt.

Prices, which remain at a low level, have shown very little sign of an upswing in the near future. This confluence of high inventories, reduced demand and low prices is creating tremendous pressure on many paper stock dealers in the region.

John Gold, vice president of Recycled Fibers, an integrated paper and recycling company headquartered in New Jersey, says the combination of sluggish movement and declining prices is creating the worst of both worlds.

A similar scenario is taking place in the Midwest. With domestic board mills slashing orders for raw material, many paper stock dealers are scrambling to move the tonnage they are handling. Added to these difficulties, prices have been inching downward, even though prices are at levels not seen in several years.

While the low grade market is suffering, some regions of the country are seeing some improvements for de-inking grades and pulp substitutes. Several sources note that the growth of Georgia-Pacific into the tissue business has allowed the company to become a more active buyer of cleaner grades of de-inking paper, as well as grades such as coated book stock, lightly printed sulphate and several other pulp substitute and de-inking grades.

A host of vendors note that cleaner de-inking grades are holding up fairly well, despite sharp declines in some pulp substitute grades.

LOOKING FOR THE SILVER LINING

Predicting where markets will be several months out is always a guess. Paper stock dealers, brokers and consumers of recovered fiber all say that markets “should” be in better shape by the second half of 2002. However, much of this optimism is influenced by macro economic conditions, including a hoped-for overall improving economy, the impact multiple rate cuts will have on the overall manufacturing sector, and the return to strength of offshore buyers.

While these are positives, many paper stock dealers express concerns that while the industry will improve, the length of time before there is a turnaround could be far enough away that many smaller operations will end up going out of business.

One large packing operation says he has never seen the market this tough. Along with soft prices, the movement of the material remains sluggish at best. “We have so much material in warehouses, and we have nowhere to ship it.”

With such a large backlog of supply sitting in warehouses waiting to find homes, any modest spurt in demand by paper mills will likely be met with more than enough recovered fiber. This will keep a lid on any price strengthening over the first half of this year.

However, despite the somewhat bleak short-term outlook from most paper stock dealers, there are some signs that a strong recovery, along with sharply higher prices, could arise later this year.

The reason for this optimism could be the hangover of this most recent slump. With paper stock markets in an extended slump, less material is being collected and processed. There also are more reports of smaller operations, as well as large waste management concerns, reducing their collection. As the economy improves, the extra material required will not be available, creating a much tighter market.

Added to this scenario, many vendors will be stepping out of the business altogether, leaving fewer companies willing to step in and handle the material.

The export market also will likely play a more active role moving further into the year. Led by Chinese interests, a host of Asian mills will be looking to buy more recovered fiber as mills and machines ramp up.

While there are some hopes that exports will pick up, several shipping concerns announced plans to hike their freight rates. The result has been a sharp increase in the per-ton cost for shipping recovered fiber to Asia.

While balancing supply between the U.S. and Europe has allowed many Asian mills to keep prices from soaring too quickly, over the past several quarters the overall supply has diminished, leaving fewer potential sources from which to purchase the recovered fiber.

GRADING THE GRADES

The pulp substitute market continues to feel the pain being experienced by the pulp market. Over the past several quarters pulp markets have been sliding downward. Despite significant cuts in production, most market pulp producers do not see much of a turnaround in markets for the next several months.

As a direct substitute, most pulp subs have been seeing steady price erosion. Demand has held up somewhat, primarily due to the decline in generation. As mills run at much slower schedules, the supply of material has declined. This trend has allowed pulp substitute markets to not totally collapse from a steep oversupply.

At the same time, despite a reduction in the pulp substitute availability, there isn’t any significant push for more of the supply, especially as market pulp prices remain fairly weak.

 Many of the middle tier grades have held up fairly well over the past several months. Manifold white ledger, sorted white ledger, coated book stock and a host of other grades have seen some slippage, although more recently the relative strength of the tissue industry, typically a significant buyer of many of these grades, has been able to run at better clips.

Several sources point to Georgia-Pacific’s strategy as a major benefit for de-inking grades. Following up on its acquisition of Fort James, the company has begun a drive to purchase cleaner grades of recovered fiber. This push for improved quality fiber has firmed up some markets.

Several paper stock dealers in the Southwest also point to the Mexican market that is increasing its intake of many grades of recovered fiber from the U.S., especially ledger grades and coated book stock.

One avenue that has yet to filter down into the de-inking market is the Korean paper industry. Mills in South Korea typically are major consumers of sorted white ledger, among other de-inking grades. While still purchasing enough material to feed their machines, orders into Korea haven’t spiked up enough to drive markets on the West Coast.

 This trend is also being seen in some regions of the Northeast. Despite prices that have been fairly stagnant over the past several months, a number of handlers feel that de-inking grades could show some significant improvements by the second half of this year.

Meanwhile, low grades continue to struggle. Old corrugated containers (OCC) and old newspapers (ONP) continue to put a major drag on the market. ONP markets have been tumbling over the past several months from the lack of any end markets for the material, including a dearth of offshore orders.

The North American newsprint market is dominated by two producers: Abitibi-Consolidated and Bowater. Over the past several quarters, these two large producers have looked to cut their production. At the same time, newsprint producers have been unable to push through price increases. With little sign of any strengthening in the newsprint market, it is unlikely these producers will be increasing their intake of ONP as a raw material.

Many newsprint mills are reportedly sitting with high inventories of raw material on hand, thus keeping demand down.

The highly publicized acquisition of Willamette Industries by Weyerhaeuser is only the latest of a number of high-profile global acquisitions that are changing the landscape of paper companies in North America.

The rapidly consolidating paper industry is leaving some vendors concerned that larger operations will control much more of the fiber supply. This scenario could then put even greater pressure on recovered fiber collectors and brokers as they work with consumers.

Over the next several months a number of other acquisitions are pending as the forest products industry continues to consolidate. The author is senior editor of Recycling Today.