Commodity Reports - Paper

Wait and See

Looking at 2008 as a whole, the year offers some sharp contrasts. The first half of the year saw recovered paper commanding stable, high prices. The market was plagued by skyrocketing operating and shipping costs thanks to the high price of fuel. Recyclers also struggled with a container shortage that cramped their ability to ship to lucrative export markets. While those costs chipped away at margins, steady demand, particularly from China, kept prices high and the industry robust, even in the face of worsening economic news in the United States and around the world.

However, the worldwide economy caught up with the commodity markets in the fourth quarter of 2008, and recovered paper suffered falling prices, as did its fellow secondary commodities. The market seemed to anticipate China would be roaring back to life following its Olympic hiatus, but the expected surge in the country’s productivity never came. With the export destinations quiet and domestic capacity shrinking, demand and prices fell for all grades.

While many recycling industry professionals had expected a downturn, the speed and severity with which the market for recovered fiber contracted caught everyone by surprise.

The fallout from the global economic problems has many in the recycled paper industry operating in a sort of "wait and see" mode. While the market is certainly down overall, there is some regional variance to supply and demand trends. One Midwestern recycler reports that material is still coming in, albeit at a slightly slower pace than what is typically seen during the winter holiday season. Furthermore, the material that is coming into recycling facilities is getting harder and harder to sell. "Pricing is very weak, and movement is weaker yet," he says. "A lot of material is not finding a home."

In the Southwestern United States, a recycler reports that most recovered fiber is moving, though some grades are a tougher sell. "OCC is a challenge, and so are low grades," he says. "Our deinking grades we’re able to move, you just have to adjust your pricing."

Many recyclers are waiting for the export market to open back up. "The key is China," says the Midwestern recycler. "The question is, ‘When will they start buying?’"

Some recyclers are reporting that their customers are pushing back in some cases where they have to charge to take material for recycling. Some customers—particularly haulers with their own landfills—might opt to landfill material if it becomes financially advantageous. In theory, this could ease oversupply. However, the Southwestern recycler points out that many recyclers are warehousing material. When the mills work through their current inventories and come back to the market, the material that has been stockpiling at recycling facilities will have to be worked through first.

Recyclers also are waiting for general economic improvement to drive business. "We need a pickup in economic activity," says the Midwestern recycler. "We need paper mills operating rather than shutting down."

However, the trend domestically points to more paper companies shuttering mills, including Sonoco. The company announced the permanent closure of its Rockton, Ill., uncoated recycled paperboard mill in December. The mill had the capacity to produce about 38,000 tons per year of recycled paperboard used primarily to supply coreboard and edgeboard markets.

However, the prevalent attitude among many recyclers is that the industry will certainly turn around—the question is when. "We’ve had bad markets before, and we’ll live through it," says the Midwestern recycler.

(Additional news on paper recycling markets, including pricing information and consuming market reports, is available at www.RecyclingToday.com.)

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