Record Prices Shake Paper

Many grades of recovered paper are finally enjoying high prices, but these prices are also causing market shifts.

The paper stock industry has never seen markets like they are right now. From the depths of market turmoil as recently as 1993, paper stock markets have exploded, reaching record price levels. Added to these stronger prices has been a surge in both domestic and export orders. Many packing plants, which operated at or close to losses for several years, have seen improved markets push some grades up by several hundred percent.

The strength in markets over the past 18 months has helped clean up the balance sheets for many recycling companies. However, the higher prices are hitting many consuming mills very hard. Additionally, many of these facilities are passing those costs down the line. While price increases are part of business, the flurry of price increases happening in such a short time is putting significant stress on many parts of the paper industry.

According to industry reports, newsprint prices have shot up 20 percent from the mark established at the same time last year. An additional price increase slated for May is expected to push prices up an additional 20 percent.

While prices are climbing, finished newsprint is in short demand. The price of raw material, additionally, is playing a factor, as operating rates of close to 100 percent are resulting in significant demands for raw material to feed their supplies.

OFFICE PAPER

In addition, the prices for many grades of office paper have escalated dramatically over the past year. According to a number of sources in the Midwest, the increase in some grades has been as much as $235 a ton. Factoring in the yield at many of these plans of around 70 percent, the extra cost between last year and this year is well over $300 a ton. These costs are starting to have a major impact on many operations.

Rod Johnson, marketing manager for Superior Recycled Fibers, a deinking pulp operation in Duluth, Minn., has serious questions about the long-term impact this is having on the paper recycling industry.

While acknowledging there are growing demands by printing and writing mills for recycled-content material, Johnson notes that there are factors unrelated to the economy which have been pushing up the price of the material. "As we go through this trend the recycling industry could be slowing down its use of recycled materials," he says.

Even with higher pulp prices pushing up the price of printing and writing paper, Johnson points out that recycled-content paper is still at a competitive disadvantage in the market place.

With these higher prices, and consumers being squeezed, there could be a greater move toward taking a vertical approach in the industry. The possibility of a mill either starting, or taking an equity position in a collection infrastructure could be a viable option to offset higher costs. While present market conditions are difficult, and a number of newer operations are slated to come on line within the next 12 months, questions about the future of the market abound.

Johnson notes that his company, as well as many other paper deinking facilities, has already been attempting to dip lower into the paper stock stream to use greater amounts of sorted office mixed. A possible new area could be using greater amounts of residential mixed paper.

Kieran Devery, formerly president of Kieffer Paper, a deinking mill located in Brownstown, Ind., agrees that escalating prices could cause problems.

"As we must pass along the price increases to printing and writing mills, those increases will start to impact where they are going, and whether or not many mills can continue using the material," he says.

Devery, who retired at the end of last year, adds that higher prices are being partially forced up due to basic supply and demand. To release pressure, he says, "mills will have to go down lower into the supply stream to get material."

Deinking pulp facilities are not the only area seeing higher-than-expected paper stock prices affect their bottom line. Many tissue and towel paper manufacturers are having to compete with printing and writing mills for available tonnage.

Higher prices are not necessarily the major problem affecting many tissue and towel mills at the present time, stresses Richard Elder, a spokesman for James River, a large producer of tissue and towel products. However, the record prices for scrap paper are also driving many of these operations into their present difficulties.

Recent figures from the U.S. Bureau of Labor Statistics show that the index level for both mixed paper and high-grade deinking grades have soared in price over the past seven to eight months. With some grades climbing by more than 500 percent, it is impossible to pass along prices to the end consumer quickly enough to maintain margins. For mixed paper, the index, which assigns 1982 the figure 100, was holding fairly flat at around the 50 level. However, starting at the end of the first quarter last year the index has soared, with the December figure of 282 close to a 600 percent increase in raw material value.

The extra expense is made doubly difficult if the facility lacks modern equipment such as a sophisticated automation system.

These higher prices for office paper are expected to remain fairly lofty for at least the next year. In fact, some handlers of the grade see that with the combination of new capacity coming on line, the limited availability of supplies and the expansion of grade possibilities, prices could continue to climb throughout the next two years.

In the short term, new capacity will pick up the slack. But longer term, when markets start to cool off, these outlets will not be there. So when markets do fall, the fall could be much swifter.

Richard Spiegel, an equity analyst with Standard & Poors, New York, says that while prices have been sluggish in the tissue industry, there have been some recent price increases. Because of this, he sees some possibilities for the tissue industry, especially the larger operations.

Further down the road, there will probably be a shakeout. Any shakeout will benefit larger operations. However, Spiegel cautions, there is a significant amount of difference of opinion on the overall picture, with some investment companies expressing conflicting opinions on the direction the tissue industry is moving.

Nowhere have markets turned as dramatically as they have for old corrugated containers. Where less than two years ago some mills were paying between $15-$20 a ton at the mill, now some mills are reportedly paying in excess of $180 a ton. Even more, there are signals that prices could continue to climb. Several large OCC consuming mills have either just started up or will be buying material for startup later this year and early next year. The impact of these startups has been severe. When Cedar River Paper entered the Midwest looking for OCC and mixed paper to supply its recycled board mill in Cedar Falls, Iowa, prices shot up. Other mills began competing for available tonnages.

In other regions, surging demand brought on by new capacity continues to push prices to previously unreachable levels. According to a recent Franklin Associates report, the OCC recovery level is between 60 and 63 percent right now. Bill Franklin, with Franklin Associates, Prairie Village, Kan., feels the maximum recovery level is between 70 and 73 percent.

To meet these levels, collectors will have to go through a number of non-traditional sources to obtain supplies, including rural areas, residences, and smaller generators that were overlooked earlier, Franklin points out. While these new areas could bring in additional tonnage, the cost will also be much higher.

While the supply and demand for OCC is climbing, soaring prices for OCC have forced some mills to substitute greater amounts of mixed paper or old news. While this reduces total raw material costs, substituting for other grades results in higher prices for grades such as mixed paper moving from an almost valueless level to a price that makes the material worth collecting.

In the longer term, higher prices for OCC, as well as some substitute grades, could force serious re-thinking on the parts of many mills considering building recycling systems. There already has been talk that Domtar Paper’s plan to build an OCC-to-fine printing and writing paper mill in Windsor, Quebec, could be tabled due to high OCC prices.

Many paper stock dealers are less sympathetic to the plight of paper mills. Several paper processors point to the number of paper stock dealers that were forced to close during the early part of the decade due to low prices. The shakeout in the supplier side of the business, according to many processors, was not helped by many mills which continued to push prices lower, with some reports of mills dropping below floor prices. Presently, with the shoe on the other foot, many processors are making up the difference. Superior’s Johnson, however, points out that some processors "are making an ungodly amount of money."

Devery puts it more succinctly: "They could be killing the golden goose."

 The author is senior editor of Recycling Today.

OPPORTUNITIES OPEN UP FOR PLASTIC

Like paper, post-consumer grades of plastics — specifically polyethylene terephthalate and high-density polyethylene containers — are experiencing record prices and resulting market changes. Prices for these grades have doubled or even tripled over the past six months as the availability of virgin resins has decreased and more capacity to use recycled resins has come on line. As a result, the supply of PET and HDPE has tightened, prompting some consumers, such as Procter & Gamble, Cincinnati, and the Clorox Co., Oakland, Calif., to decrease — or limit increases in — the use of recycled resins in their products.

"After supply comes up, we’ll resume use of recycled content," says Tom Rattray, P&G’s associate director of environmental quality. "In fact, we’ve got some applications that will go beyond our former use, but not if we can’t get it."

The price for recycled resins has been high because the supply of the resins hasn’t been able to match the demand, says Rattray. Many municipalities did not add plastics to their curbside programs because the cost was prohibitive. Others that began plastics collection have either discontinued it, or simply have not increased the amount they are collecting.

"I’m coming to the conclusion, along with a number of other folks, that we’re reaching a kind of natural collection plateau," he explains.

About 80 percent of existing curbside programs already collect plastics, according to Rattray, and the growth of curbside programs nationally is tapering off, except for the more challenging rural and inner city areas. "Continued education and promotion will get higher capture rates," he says.

One result of the higher prices is that operating margins for plastics recyclers are steadily decreasing, says Rattray, as the street price continues to increase and the pellet price is capped by virgin prices.

"There’s a limit of how much more you’re going to pay for a used car than the new ones are selling for," he says. "So what’s happening is the little guys are having a terrible time making any money and getting any capitalization."

STRONG DEMAND

Along with higher prices, a lack of quality caused Clorox to announce that it will not continue increasing recycled content in its containers at the rate previously planned, according to Terry Bedell, spokesman for Clorox.

"What we’re seeing with the stronger demand is less incentive to do quite as good a job as folks were doing a few months ago," says Bedell.

There is currently more recycling capacity than there are feedstocks to supply that capacity, he says. This was partially driven by greater demand caused by stronger worldwide economies, coupled with less virgin capacity due to several minor catastrophes.

"People who didn’t have long term contracts, who were buying on the spot market for virgin material, all of a sudden couldn’t get any at any price," he explains. "So to keep their operations going, they turned to buying recycled material, at the same time that laws were kicking in on the West Coast, and there was going to be an uptick in demand anyway. It was just overwhelmingly amplified by the need for some molders to find any material that they could run. All of those things came to a head during the last three or four months of last year."

Prices for HDPE are likely to stay high for another year or even two, according to Ron Grulich, plastics specialist for the Clean Washington Center, a Seattle-based recycling market development agency. Then there will be a burst of supply on the market that will bring the prices down somewhat. PET, on the other hand, looks strong through the year 2000.

"Estimates are that PET demand for recycled bottle material is going to be 1.1 billion pounds by the year 2000, and they’re only going to be able to capture about 800 million pounds given the current trends, so there’s going to be a gap which is going to drive prices up for the materials," says Grulich.

Municipalities that have only been involved in recycling for a few years need to learn from the current situation that commodity markets are cyclical, and so they must structure their contracts with collectors and processors in order to account for that, says Grulich.

"There’s a need to try to continuously increase the supply so when you get a burst like this you really capture a nice chunk of change out of the deal."

Foreign demand for plastics is also strong and growing, he adds, and is likely to stay strong for some time to come.

"Asia is growing, far outstripping its ability to add new capacity of polymers over there, and their growth rate is in the teens as far as annual growth per year in plastics use," says Grulich.

MORE RISK

Although some processors may be benefitting from the higher prices, those prices bring more risk, says Grulich. Unpigmented milk jugs have gone from about 10 cents a pound to as much as 30 cents a pound, he says, which means it takes more capital to run those operations.

"And if prices should go down, somebody’s going to get hurt," he says, "because if you overpay and you have a locked-in sale and all of a sudden the price drops precipitously, somebody’s going to lose some money there."

In addition, margins are undoubtedly being squeezed, as recyclers haven’t been able to increase the gap between what they are paying for the materials plus the processing cost and the amount they are able to sell the processed materials for in the marketplace. Even worse, startup manufacturing businesses such as plastic lumber producers planning to use recycled feedstocks are having problems, says Grulich, because they factored in lower material costs.

"They’re hurting," he says. "Plastic lumber guys had no intention of paying what they have to pay for feedstock. So they’re having to look at alternatives."

However, the positive side is that many plastics consumers now are realizing they can save money by using recycled plastic instead of virgin, which will increase long-term demand for recycled resin, says Grulich.