Holding pattern

The heavy snow that blanketed much of the United States has ended (hopefully), though its impact on paper stock markets continues to reverberate. During the cold and snowy first quarter, recyclers were unable to get trucks and trailers to make deliveries, according to some reports. As a result, many paper and board mills were running with low raw material inventories.

With the spring thaw, equipment availability has improved greatly, though some consumers are still trying to rebuild inventories. Several sources also say that the tough weather as well as the sluggish economy have reduced the overall number of available drivers, which is a modest source of concern for some paper recyclers.

Representatives from a number of paper mills say they have built up their inventories and are paring back on new purchases.

While not gangbusters, as of mid-April, domestic orders appear strong enough to keep material flowing steadily. The steady buying from domestic consumers is running counter to the offshore market, which has quieted down somewhat. Earlier this year, Asian consumers, particularly those in China, were purchasing bulk grades, especially old corrugated containers (OCC), aggressively. This helped to boost prices by $25 or more per ton. At that time, a number of exporters said they were optimistic this upward trend, along with fairly healthy domestic buying, could keep prices for bulk grades fairly strong.

Moving into April and the second quarter of the year, however, it looks as if buyers for Chinese mills are content with their recent purchases and have cut back on new orders. Therefore, OCC has given back much of its earlier increases. Most affected by the dip in pricing have been coastal recyclers, especially those on the West Coast, who remain heavily dependent on Chinese mills. The decline in new orders may last for a few months as Chinese paper mills work off inventory. At the same time, Chinese mills are using more domestically generated material.

Along with OCC, double-lined kraft (DLK) cuttings, old newpaper (ONP) and mixed paper are seeing softer pricing on the export side, though a number of exporters say they don’t expect prices to fall too low as long as domestic mills operate at fairly decent schedules.

While the domestic market is in something of a holding pattern, some executives of paperboard mills are conveying a bullish outlook for the second half of this year. Following Sonoco’s release of its first quarter results, company President and CEO Jack Sanders commented, “Much of the negative impact from severe winter weather occurred in January and February. As weather improved in March, we saw a strong rebound in customer orders across most of our businesses and a sharp improvement in operating performance. Entering April, customer orders appear to be running at more normal levels, in line with volume expectations and our second quarter earnings guidance, which anticipates continued improvement in operations.”

One indicator of the relative health of the domestic paper industry is the degree of downtime mills are taking. Presently, mills appear to be taking downtime for normal maintenance.

A growing trend among domestic mills is the shift toward converting machines from producing newsprint to producing paperboard and kraft paper grades. The move has been driven partly by the steady drop in newsprint demand, which is not expected to abate anytime soon.
 

Recently, Packaging Corp. of America (PCA), based in Lake Forest, Ill., announced plans to shift one of its machines at its DeRidder, La., paper mill from producing newsprint to making kraft paper. While the shift will result in an increase in OCC usage, PCA plans to use more nonrecycled raw material at the facility.

PCA’s conversion follows SP Fiber Technologies’ (formerly SP Newsprint) recent decision to convert one of its paper machines at its Newberg, Ore., mill from newsprint to packaging. The company halted newsprint production on one of its paper machines Jan. 15, 2014, while it updates the paper machine. SP says it expects to have the conversion completed by the end of the first half of 2014. However, the company notes that it will continue to produce recycle-content newsprint on another machine at the mill.

SP’s conversion at its Oregon mill follows a similar move the company made in Georgia.

Prices may be solidifying for many paperboard grades, but other industry segments continue to struggle. According to recent figures from the American Forest & Paper Association (AF&PA), Washington, D.C., total printing and writing paper shipments decreased 3 percent in February compared with one year earlier, with total inventories decreasing 3 percent from January levels.