Paper Supplement -- Searching for the Silver Lining

For long-suffering paper stock dealers, the end of the basement level prices can't come soon enough.

The paper stock market appears to be acting more and more like the overall stock market. As prices for many grades inch lower every month, some optimists have called it the bottom. Like the market, however, bears are still out and about.

While markets for many grades have dropped sharply over the past several months, most dealers still see more pain in the market before there is any turnaround in paper stock markets.

MANY SEGMENTS, SAME TUNE

For old corrugated containers (OCC), the most widely handled paper stock grade, the recent stabilizing in market prices masks concerns. Despite signs that there has been some modest price rallying, it is due more to the decline in generation, rather than any overall uptick in demand for the processed material.

Holding out some promise has been the offshore and Mexican markets. While exporters have been enjoying some modest improvements during the latter part of this past summer, there continues to be concern that any improvement on the offshore market will be short lived. And, if the turnaround fizzles, any nascent improvement on the domestic side could hammer already slumping grades.

The domestic market also is struggling with uncertainties. Over the past several years mergers and acquisitions have been accelerating. Georgia-Pacific Corp., Atlanta, has acquired Fort James, which was a combination of Fort Howard Paper and James River. The combination of these companies is shrinking the number of operating tissue producers. At the same time, the financial problems of American Tissue, Hauppauge, N.Y., and its subsidiaries are casting a pall over the tissue segment of the business.

The newsprint industry is well on its way to becoming the domain of a handful of large producers. Abitibi-Consolidated, Montreal, and Bowater Inc., Greenville, S.C., have been buying up newsprint mills throughout North America as well as adding to their portfolios with strategic acquisitions in other parts of the world, such as Asia.

The paperboard industry, one of the few competitive environments for the paper industry, also is seeing increased acquisition, with the proposed acquisition by Weyerhaeuser, Federal Way, Wash., of Willamette Industries, Portland, Ore., only the most recent move to bring the paper industry into the hands of a few large players.

This swing toward a handful of large, multi-national operations is generating some concern on the part of some paper stock dealers. Some processors note that while the ability to work with individual mill purchasing officials has helped them in tough markets, a move by larger companies could mean more decisions being made at corporate headquarters. This could damage an already uncertain relationship between supplier and buyer.

OCC’S Low Generation

The slumping U.S. economy is resulting in sharp drops in the generation of new material at many recycling plants. Over the past several months, as the economy continued to slow, many handlers of the grade reported seeing a significant drop in the amount of material coming through their door. With OCC prices so low, some smaller collectors opted not to collect material. Further, with a slow economy, less material is being generated. This caused a sizable drop in the amount of material coming to the recycling plant.

Reflecting the sharp drop in demand for OCC has been the steadily declining production of recycled paperboard. The most recent figures from the American Forest and Paper Association, Washington, show production of this grade down 4.2 percent over the first seven months of the year to 8.989 million tons.

Another indicator of the relative weakness in the paperboard industry is the lack of any strength in the operating rates at box shops. The most recent figures from the Fibre Box Association, Rolling Meadows, Ill., shows a sharp drop in shipments and production at these operations. As these conduits for the paperboard report disappointing numbers through the middle of this year, the demand for fiber will likely continue to remain weak. The result is less demand for OCC to make new linerboard and corrugated medium.

Demand that is down overall is coupled with less material being collected, helping keep the supply and demand in balance. Prices, after dropping sharply through the first half of this year, seem to be stabilizing.

Even with the difficult environment for OCC, there still appears to be some difficulties with many of the mills. Inventories of recovered fiber are high, with little sign of any sharp turnaround over the next several months.

ONP — No Reason to Stop the Presses

Consolidation has left North America with two large newsprint companies – Abitibi-Consolidated and Bowater. Ostensibly, a smaller number of players should translate into greater opportunities for mills to hold the line on pricing. With fewer producers, there should be better opportunities for newsprint companies to control inventories and maintain price stability. However, after holding up better than OCC during the first half of this year, the overall slowdown in the economy is forcing these two companies, along with other newsprint producers, to take a host of machines off line.

Newsprint analysts are forecasting slumping finished newsprint prices over the next several quarters, which may create more problems for this segment of the paper industry.

As prices for the newsprint slump, more downtime could be taken at mills throughout North America. This will add to the overall listless markets that are being forecast for the next several quarters.

Paper stock dealers are already gearing up for some slowdowns in demand and possibly weaker prices in the near future. The level of downtime, along with the uncertain near term market for old newspapers (ONP) in Asia, is creating some growing concern from some paper stock dealers that prices for the materials could take a sharp tumble over the latter part of this year.

With the general softness in the U.S. economy, production of newsprint is down. However, some handlers of the grade are expressing concern that end-of-year generation should increase with the start of the holiday season. As more ONP is collected, there could be some further softening of the grades.

High Grades Show Some Strength

Pulp substitutes, and, to a lesser degree some de-inking grades, have been showing some improvement during the early part of this fall. The most obvious reason for the improvement has been signals that pulp markets could be bottoming out.

This upward trend, however, follows sharp declines in price over the past several quarters. The biggest reason for the improvement is the significant amount of both temporary and permanent downtime being taken.

Over the past several quarters, as pulp prices have declined, many pulp producers attempted to balance supply and demand by cutting down production. These trends included idling some less-efficient operations permanently. On the West Coast, there have been some recently announced closings, which continue to shrink the overall supply.

Several mills in Western Canada and the western part of the U.S. have recently shut down. This could help take additional tonnage off the market.

Along with the ample amount of downtime being taken, several pulp producers have been attempting to take advantage of the situation by hiking market pulp prices.

This move has helped boost many pulp substitute and de-inking grade prices. However, despite some short-term improvements, there does not seem to be much enthusiasm for any long-term sustainability of the strength. Prices, which plummeted during the first half of this year, are only showing a modest improvement. And, with the end of this year likely to generate even greater amounts of tonnage, there could be the inevitable backsliding of prices.

Exports: Murky at Best

For many vendors, the export market traditionally holds promise. Although there are a host of uncertainties surrounding this sector, for exporters who have developed strong relationships large block sales to Asia, Latin America and Europe have helped keep movement up and prevented supplies from backing up too significantly.

Lately, though, there are even greater uncertainties about short term markets. Demand has been fluctuating fairly strongly with prices moving in accordance. The environment is similar to the paper industry in North America. Low grade inventories are high, forcing some mills to cut their new purchases.

The closely watched Chinese market is of particular interest to many exporters. Over the past several years this segment has become a more pivotal player in the overall paper recycling industry.

The grades having the biggest impact for paper stock dealers are OCC and ONP. Due to the growth of several paper mills in China there have been some strong swings in demand, as well as prices. However, reports from vendors shipping there see high inventories still keeping prices from coming back to any great degree. One sign of optimism has been the ability of Chinese buyers to reduce some inventory, which could help the country be a steadier buyer.

With the overall slowdown in the paper industry, many of the larger mills in Asia have been able to build up their inventories for the holiday orders, reducing the opportunity of any stronger orders through the fall season.

At the same time, many of the Asian interests are expecting to see an increase in generation. This will undoubtedly allow some Asian mills to lessen their demand for the recovered fiber as the year comes to an end.

The export market also is witnessing some difficulties with quality issues. It appears  many of the problems that were seen have eased back. With many of the Asian mills now having the opportunity to build up inventories of much cleaner fiber, more buyers are looking for much cleaner grades of fiber, especially some of the lower grades.

The Asian market, especially China, has captured the interest of a good portion of the paper recycling industry. However, Mexico continues to be a significant consumer of recovered fiber. And, according to a host of paper industry veterans, the country is expected to see steady, strong growth taking place over the next several years. (See the exclusive interview with Raul Garcia, Waste Management’s sales manager for Latin America, starting on page S24).

While opportunities aboundin Mexico, like other destinations, there are areas to study closely. Reputations and relationships continue to be a key factor in conducting business in Mexico. Similarly, innuendo, rumors and other potential pitfalls relating to credit worthiness continue to plague this ever-developing sector of the paper industry.

The European market seems to have lost its luster as a destination for a significant amount of U.S. paper stock. As a percentage, this region of the world continues to slip as a major player.

Despite the downbeat mood of the market, most paper stock dealers say that they have been in tough markets before and plan on sticking around to see this one end. The only question being asked is when the end will come. 

The author is senior editor and Internet Editor with the Recycling Today Media Group. He can be contacted via e-mail at dsandoval@RecyclingToday.com .