Road to Recovery

Recycling professionals are no strangers to the cyclical nature of business. Even in 2007 and early 2008, when prices for recycled paper were trading at record highs, the prevailing market sentiment was one of cautious optimism.

A recycler reported in the Paper Commodity Report in the October 2007 issue of Recycling Today that the ever-present fear in such a booming market was the possible fallout from such inflated rates. "There’s always a fear that prices will drop," he is quoted as saying. "All you need is a couple of mills to say, ‘We’re full,’ or to see manufacturing have a downturn, then the mills will be full of paper. It’s an old axiom, ‘The higher it goes, the steeper it falls.’"

When the bottom did fall out of the recovered fiber market in late 2008, it happened so suddenly that it left many people in the industry reeling. Only now at the end of the first quarter of 2009 are these recovered fiber professionals beginning to find their footing.

The recovered paper market has seen its share of slumps, but some sources inside the industry say the current economic situation is somewhat unique from the average market downturn.

"In my 30 years I have never experienced anything like this," says Jonathan Gold of the Newark Group’s Recycled Fibers Division, based out of Salem, Mass.

For one thing, the current recession has touched nearly every industry. "Other downturns affected our business, but they didn’t affect everybody," says a Texas-based recycler. "The focus was narrower. This is so global and widespread—it seems to be in every industry," he adds.

The speed of the decline also caught many off guard, says Jonathan Sloan, president with Canusa Hershman Recycling Co., Branford, Conn. "The size of the drop is something we’ve seen in the past. The difference is how short a time this took to happen," he says. "If you go back and look at pricing in the summer of ’95, we had OCC and news over $200 per ton. You look at it by December, and it was $25 or $30 per ton, so you had five or six months for that to take place."

This decline was far more rapid, he adds. "You look at what happened between October and November, and we had a huge drop in pricing over a three-to-four-week period, and that to me is the difference," he says.

The level of fear also is something the market hasn’t faced any time recently, at least not to such a high degree.

"The fear in the marketplace has created pullback from companies in terms of additional capital investment," says Mary Aldrich, sales manager for Fargo, N.D.-based recycling company MinnKota. "That’s really what’s different from other market downturns and other historical times. We’ve always continued to move ahead knowing that everything is cyclical. Historically, it’s always been short term. This, we’re feeling longer."

The recession has had an impact on the generation of recycled paper from a couple of different perspectives, says Sloan. "We’ve had some customers disappear because of them not being able to make it through tough times," he says. "In addition, with the sharp decline in pricing, we’ve had people essentially stop recycling."

Practically all grades have been affected by the recession.

Old corrugated containers (OCC): Domestic production of containerboard had been declining before the current downturn, however, China’s voracious appetite for OCC made up for this decline. The current decline in consumer spending has translated into less demand for manufactured goods and the boxes required to ship them worldwide, which means a decline in the amount of OCC going to recyclers.

The situation is not entirely bleak, says Aldrich. "With box plants seeing a decrease in capacity, the mixed grade is going all over the world," she says. "I see the large single-stream [processors] putting a lot of their material into the marketplace in export, which is great because it moves a lot of that material off the domestic market. That’s really what is helping to create a bit of a balance."

Old newspaper (ONP): ONP faces similar supply pressures stemming from the troubled newspaper publishing industry. "Everything is interrelated, and there is a cause and effect," says Ralph Simon, vice president of fiber supply and marketing for SP Recycling Corp., Atlanta. Less advertising makes for smaller, lighter issues, which require less newsprint. Falling circulation for daily newspapers has been well-documented, which means less ONP tonnage coming from municipal programs, many of which are struggling now that they are facing declining or disappearing revenue from recyclable commodities.

Sorted office paper (SOP): While newsprint and corrugated mills have been shuttering production, tissue mills have fared relatively well, even in the downturn. This has kept SOP moving, though at far lower prices than the grade enjoyed in early 2008.

Activity and pricing picked up some during the first quarter of 2009. Asian markets bought more material in advance of Chinese New Year at the end of January, and overall low supply throughout the first quarter has pushed prices upward into the $70-per-ton range for OCC.

In the last weeks of 2008 and early 2009, recyclers were happy to move material at all, so any uptick in price was a welcome development. However, some suggest that increased demand from Asia does not necessarily indicate ramping up in manufacturing or production of more boxes. Rather, since freight rates have plummeted, some speculate that mills are building inventory and taking advantage of cheaper shipping. "I don’t think we’re going to see sustained improvement in pricing until demand picks up, and I don’t see that happening any time soon," says one recycler based in the Midwest.

Low prices have placed an even stronger emphasis on quality. At such low prices, recyclers have to take extra care to make sure the material they are supplying meets the mills’ specifications if they want it to move.

"Mills will not tolerate the material that they were forced to take, like single-stream material that doesn’t meet specification, because there was nothing else available," says Gold. "Paper mills want to purchase the specification that they paid for."

Aldrich says, "Especially now, they are watching quality, from moisture content to out-throws."

Sloan says this pattern is typical of any down market. Of course, quality requirements differ depending on the mill. Recyclers and packers can adjust, depending on where orders are coming from. For instance, if a recycler doesn’t have orders for mixed paper for the export market, he is likely to slow his system down and sort for the cleanest material possible.

"In this kind of market, quality always sells," says SP’s Simon.

Looking ahead, many paper stock dealers predict the same for the fiber market as they are for the economy in general—a tough 2009 with improvement in 2010.

"Things are up out of the doldrums," says one Midwestern recycler. Some say that while they don’t expect vast improvement any time soon, they don’t anticipate another sharp decline, either.

Aldrich says she thinks the market will level by the third quarter of 2009 for bulk grades like news and OCC. And while she says she thinks prices will rise substantially again, she doesn’t think it will happen in 2009. "We’ll eventually get back up there. I have a feeling we’ll get to where we can live on it—$75 or $80 per ton—but I don’t think we’ll see $100 per ton soon."

Sloan says he has seen encouraging signs in the market in February. "I’ve been very surprised at what the market has done in getting strength back," he says. "I’m not saying the next year is going to be great, but I’m pleasantly surprised that there has been some return to a little better pricing and movement in February."

Large macro-economic wheels need to get turning again to spur the kind of active and lucrative secondary commodities market enjoyed before the recent downturn. However, the fact that material is moving—domestically and overseas—is an encouraging sign to recyclers and consumers of recycled paper. Prices may be far away from their historic highs, but after a near halt to business in late 2008, movement and stable prices are a welcome change.