PAPER RECYCLING SUPPLEMENT - Throwing Its Weight Around

As the seemingly insatiable demand for recovered fiber in China grows, domestic paper and paper board mills are having a difficult time trying to compete for tonnage.

The idea that the domestic market has and always will be the major driving force for the paperstock industry has been ingrained into the minds of many tradition-bound people in the U.S. market. But this concept is showing some wear as the rather static buying of domestic mills is compared to surging offshore demand.

Increased offshore shipments to Chinese mills have driven the demand side of the equation away from many domestic mills. To some extent, the economic health of North America’s paper business is uncertain, as occasional plant closings have grown more frequent in the past several years.

A FEW GOOD MILLS. While paper production in the U.S. may be consolidating to a few large mills, overseas, especially in fiber-poor China, mills have picked up the slack with strong buying for many of the lower grades of recovered fiber.

This point was hammered home by Bill Moore, principal of Moore & Associates, an Atlanta-based consultant to the paper and paper recycling industries. During a presentation at the 2003 Paper Recycling Conference & Exposition, held earlier this year in Chicago, Moore said the U.S. paper industry "will lose 6.5 million tons of capacity in the 2000 to 2003 period," and noted that some 56 paper mills have shut down in the past three years.

During the same time, new capacity is coming on line in Asia, and especially in China.

Looking at the trend line over the past year and out into the future, the situation doesn’t seem likely to abate any time soon. In fact, some handlers of the grade expect to see even greater demand from offshore markets as new capacity continues to come on line there.

For domestic mills, the situation could become even more difficult. As one broker notes, "To compete, domestic mills are going to have to raise their prices." However, in a market where sluggish demand in North America still plagues many grades, it is difficult for many paper companies to justify paying more for feedstock material when they have constrained demand for the finished product.

Buying Across the Board. Reputations die hard in the paper recycling business. In what now seems like the distant past, Chinese buyers were characterized as jumping into the market to buy a tremendous amount of material only to then exit the market.

This maneuver would cause prices to run up as strong demand helped soak up any excess tonnage, only to be followed by an inevitable dip back in prices when Chinese parties cut their orders.

However, now there is a more rigorous approach by many Chinese buyers. Not content to only come in when fiber is needed, some of these paper companies have established marketing and procurement arms in the U.S. and Canada. These North American procurement operations have allowed the mills to buy a much steadier amount of fiber from throughout North America.

While this has lessened the boom/bust cycle that used to be created, some vendors feel that the result is steadier, stronger prices, which will put much greater pressure on domestic mills to raise their prices.

One West Coast broker said that while domestic paper stock dealers would rather ship domestically than to longer distances, the price disparity for product between the two parties has grown by enough that more paper stock dealers are shifting their attention to moving greater amounts of recovered fiber offshore.

Freight rates are showing some signs of stability, which is making offshore shipments even more enticing, according to some dealers. An added situation is that demand for fiber from Europe to the Pacific Rim has dipped as more European paper stock operations are finding nearby destinations supplying mills on the continent.

This tightening of supply comes amid pressure by the financial community that could further shrink the number of North American destinations. Institutional investors have been scrutinizing the management of mills that run less efficient papermaking machines. Some of these older mills, a West Coast executive says, could be closed, further reducing the number of paperstock consuming mills in North America.

The pressure to scale down North American manufacturing operations is not restricted to paper makers. During the past several years, more manufacturing and basic materials companies are feeling pressure on their supply lines as strong competition from Chinese interests makes it more difficult for them to remain competitive.

While China continues to play a more active role in the paper stock market, it is not the only nation increasing its intake of recovered fiber. But several of the traditional export homes for recovered fiber, even if they are pulping more scrap paper, are also generating and collecting more recovered fiber to feed their pulpers. In fact, says one West Coast exporter, South Korea, which has been a large buyer of many grades of recovered fiber, could end up being a net exporter of many grades within the next several years.

The reason for the switch has been the successful implementation of collection programs in South Korea. Both that nation and Japan could end up being competitors with U.S. paper stock exporters.

Some other Asian countries, including Indonesia, Taiwan and India, are boosting their demand for recovered fiber. This has helped propel the grades to a much stronger position.

While China has been helping boost the bulk and low grade markets, higher grades of recovered fiber are moving offshore at a decent clip, although there isn’t nearly as much of a frenzy of buying. With the paper industry and, by extension, converting operations still trying to run better schedules, the market for pulp substitues continues to tighten as less supply is available.

STILL MORE TO COME. Putting it succinctly, Steve Sutta, president of paper recycling firm Sutta Co., Oakland, Calif., says, "Demand is unbelievable." As others have noted, China continues to play the key role in the market, soaking up a tremendous amount of recovered fiber.

Adding to the strong present demand now, says Sutta, is that over the next several months more capacity is coming on line in China. This will stoke demand even more. "There is 140,000 tons of new capacity coming on line in China," he says. Even if these operations run at 80 percent of capacity, demand will still be tremendous.

While OCC seems to be the grade that many people equate with the offshore market, the grade that has been generating a significant amount of interest as of late has been mixed paper.

With higher prices for grades such as OCC, mixed paper (which was in the doldrums until several years ago), is now commanding a price that at times nears that of OCC.

At the present time, mixed paper in some regions of the country is at or around $80 per ton. This level was unheard of a few years ago. However, as Asian mills continue to snap up as much tonnage as possible, there is increased interest in these substitute grades. And with lower labor costs in place, some Asian buyers are purchasing more of these lower grades and then spending additional money on manual sorting.

In the short term, demand is strong, although the increased activity by China, as well as Indonesia, has not resulted in soaring OCC prices.

One source notes that Chinese buyers have been resisting any hike in prices paid. There is tension between the two sides as the greater amounts of recovered fiber needed haven’t as of yet translated into higher prices for the raw material.

One thing that is holding back prices has been the inability of mills, whether in North America or overseas, to hike prices for their finished products.

Sutta says that linerboard prices aren’t showing signs of climbing any time soon. This will likely keep a cap on raw material prices. However, if mills boost prices, (which may not happen until the middle of next year), a good portion of the increase will go toward the higher prices for the recovered fiber.

The old newspaper (ONP) grades have also been seeing some strengthening markets, especially for the de-inked and overissue news grades. With more communities going to a single-stream collection program, some mills are expressing concern over the damage this could have on their paper equipment. At the same time, with the newspaper industry still struggling, the supply of overissue news has declined. The result has been higher prices for less material.

Pulp substitutes haven’t been enjoying the same renaissance as some of the bulk grades have been seeing. However, movement for these grades offshore remains favorable. The lack of supply has kept demand for the supply strong. The result is firmer prices for many of these grades.

The strength in the grade has been coming from countries such as Indonesia, which have been playing a more active role. While still far smaller than the Chinese market, the lack of supply is helping keep prices for the grade at a fairly competitive level.

Reflecting the differences between the domestic and offshore markets, the most recent figures from the American Forest and Paper Association, Washington, show that while domestic consumption of recovered fiber posted a decline of more than 4 percent for the first seven months of the year, exports have been rocketing, with the most recent numbers by the U.S. Commerce Department indicating that total exports are up more than 20 percent from the same time last year.

This difference highlights some of the dilemmas facing a number of domestic paper mills.

At the same time a number of North American companies under increased pressure to "rationalize" (cut back) production levels to meet demand, continuing levels of capacity are being added within Asia, resulting in a tilt in the demand difference between mills outside North America and domestic buyers.

What does the future hold for the export market? All indications are that the Chinese growth will continue through the foreseeable future. While the torrid pace seen over the past several years will probably abate, the demand will still be enough to provide a strong incentive for domestic paper stock dealers to look offshore for more of their tonnage.