Clear Sailing

The strong rebound in paper stock markets throughout
the past 18 months should continue to hold up fairly well through the next several months. The strength of recovered fiber markets, however, is not spreading to many of the materials’ end consumers who continue to languish with a confluence of difficulties—some are their own doing, others are more macroeconomic in nature.

A key driver for paper stock markets throughout the past year has been the strong demand for many of the grades—especially those on the lower end—from Chinese and, to a lesser degree, other Asian mills. Old corrugated containers, old news and mixed paper have all seen renewed vigor throughout the past several years.

Reflecting the surge in the export market, a recent report pegs paper stock exports at a value of nearly $8.4 billion, more than a 100 percent increase from export figures in 1999.

This increase, many speculate, will continue through the next several years as more mills outside North America open.

BAD NEWS. Several areas of the paper market have seen improvement, though the newsprint industry, one of the most hard-hit grades, continues to face sluggish demand for finished product and a refrain of voices claiming declining quality issues arising from the growing supply of ONP (old newspaper) generated from single-stream sources.

The number of newsprint mill closures that have taken place throughout the past several years reflects the difficulty in the newsprint market. Abitibi-Consolidated has shuttered two newsprint mills because of a host of problems. While not directly attributed to the poorer quality of the available fiber, the inability to find reasonable markets for the grade, as well as healthier pricing, has led to the closure of more mills. The overall effect has been a continued decline in North American newsprint capacity.

According to the American Forest & Paper Association (AF&PA), Washington, newsprint capacity declined by almost 5 percent from 2003 to 2004, marking the fourth consecutive year for decline. Ominously, AF&PA’s annual survey of the market states that there is little sign of new capacity scheduled for either 2006 or 2007.

The old newspaper market continues to be propped up by continued purchasing by offshore mills, predominantly in Asia. While this improvement has allowed for a more bullish outlook, some modest dark clouds can be seen on the horizon.

Several North American newsprint mills, such as Bowater Inc. and Abitibi-Consolidated, are struggling to move their finished product. This has put a cap on higher prices for the finished product. Further exacerbating many of the difficulties has been stronger prices for ONP raw material.

The pressure from suppliers and end markets has put some newsprint mills in the United States and Canada in a continued bind.

Making the overall situation even more difficult has been the number of single-stream programs cropping up throughout the country. Originally pushed by municipalities on the West Coast, this trend has been gaining adherents from other regions of the country.

A number of mill buyers say they have seen the resultant degradation of ONP in light of the growing amount of material coming from single-stream programs.

"There is no such thing as No. 8 news (a much cleaner grade of old newspaper)," one mill buyer says. Instead, several newsprint mills say the quality of "No. 8 news" is closer in quality to No. 6 news.

Going further down the quality stream, several mill buyers add that what once was considered to be a No. 6 news grade is now considered to be more of a mixed paper grade.

Several consuming mills point out that out throws and contaminants have soared as a percentage of the material coming into their mills, with some saying levels are as high as 10 percent when they reach the mill.

Another mill official says that many paper stock dealers aren’t doing their jobs unless they have several of their bales rejected. This mindset has permeated the market, further intensifying the sometime adversarial relationship between buyer and seller.

While there have been some complaints about the quality of the ONP coming into domestic mills, China, as well as other Asian countries to a lesser degree, has continued to drive the market throughout the past several years.

China has made attempts to clean up the material being shipped from the United States, as well as by other countries (most notably China’s AQSIQ standards). However, the perception, and quite often the reality, is that processors and brokers of ONP will find a ready market in China for much of their fiber, reducing the demand for a cleaner grade of ONP.

There have been some modest givebacks recently, but there appears to be a fairly upbeat outlook for ONP through at least the first half of this year.

MIXED MESSAGE. If the old news market has seen a bit of a renaissance, the mixed paper market is playing the role of Lazarus. For many years, the grade was considered dead. (Some recyclers have ended up using floor sweepings leftover from the processing operations as a mixed paper grade.) Through most of the 1990s the grade was moving at either $0 or at negative prices at the mill.

This minimal grade, however, has come roaring back. The grade has seen price levels soar to record highs, with some mills, domestically and overseas, actively seeking it.

One factor in the rebound of the grade has been its relative availability. ONP and OCC are reaching a higher recovery level, with the AF&PA claiming that their recovery levels are far greater than 50 percent. While there may be some quibbling about the actual recovery level for these two grades, it is fairly well accepted that most of the ONP and OCC that is readily obtainable has been collected and marketed. This leaves the remaining material more challenging to collect.

However, mixed paper, despite the surge in its demand and price, has yet to see a significant boost to recovery. According to the most recent statistical information, the recovery of mixed paper is hovering at around the 36 percent level, indicating that mixed paper collection levels have quite a bit of room to climb.

While the amount of mixed paper that is still accessible is great, many companies and communities remain hesitant about adding or expanding programs to include this grade. More of it is being collected, but many processors still remember the days when mixed paper markets were limited to only a few sources.

Another factor helping to drive the mixed paper market is the move by some mills, especially those in China, to look to offset the heavy buying of ONP and OCC (old corrugated containers) with greater mixed paper purchasing. In the recent past, mixed paper was considered an extender, or a way for a mill to augment higher-priced OCC. However, more recent trends have shifted this outlook. The need for an increased amount of recovered fiber is forcing more mills to build systems that allow them to take in a wider range of grades, including mixed paper.

In their favor, many mills in China are able to do a second sort of the grade at labor costs far less than those in the United States.

Another factor leading to the improved mixed paper market has been the investment in equipment in China. While the sorting methods in countries such as China are very rudimentary in comparison to the West, the machines there that eventually consume the material are some of the most sophisticated equipment in the world. This has given many of these mills greater flexibility in handling a wider range of materials.

Mixed paper prices have soared during the past two years, and there doesn’t appear to be any signs that the grade will return to the rather dour levels seen in the last decade.

With greater amounts of some of the other grades becoming more difficult to recover, there doesn’t seem to be any better alternative than purchasing more mixed paper.

ALL BOXED UP. Old corrugated containers (OCC) continues to be the major grade of recovered fiber. Whether being shipped to China to feed some of the recently built world-class machines or going to domestic mills that have been running better schedules, OCC has been holding firm at fairly high prices. Although they have come down from more recent highs, the overall trend has been to raise floor prices for OCC.