Where to?

So much of the recovered paper business depends on where the various global economies stand—affecting both the supply and demand sides. The ones to watch in this business are the U.S., China and Europe.
 

Economic overviews

UNITED STATES. After a very sluggish first quarter of 2015 (0.2 percent growth in gross domestic product, or GDP), the second quarter surprisingly bounced back sharply—3.7 percent growth in GDP (after a preliminary 2.3 percent estimate). While stable to somewhat increasingly favorable business conditions persist in the U.S., a breakout to consistently higher GDP growth just doesn’t seem to be in the cards. Whatever happened to 4 percent growth?

But the U.S. economy is good enough that the box business remains fairly strong, meaning decent demand from domestic mills for OCC. Consumer spending and housing activity (especially in multifamily residential properties) are up. Consumer sentiment remains high, though it actually decreased a bit in July from June. Over the last six months, however, consumer sentiment has been at its highest level since 2004.

CHINA. What can we say about China, with its slowing economic growth? Its GDP growth looks poised to reach a mere 7 percent for the year (which pales compared with the 10-plus percent growth seen for years during the past decade). However, China’s economy as a whole is much larger than it once was, so, on an absolute basis, the slower growth is not as bad as it may seem on the surface.

A recent development in the country could affect growth negatively in other parts of the world, however. Chinese authorities sharply devalued the renminbi in mid-August. According to an article dated Aug. 10 from the New York Times, “The central bank set the official value of the renminbi nearly 2 percent weaker against the dollar. The devaluation is the largest since China’s modern exchange-rate system was introduced at the start of 1994.”

The New York Times article also notes that the Chinese central government’s rapid devaluation of the renminbi illustrates growing concern that the country may not meet its goal of 7 percent economic growth in 2015 despite increased government spending on infrastructure projects and the central government encouraging state-owned banks to lend money to companies that want to invest in new factories and equipment.

According to Boston-based RISI, an information provider to the global forest products industry, the devaluation of the renminbi has had a profound effect on the Asian recovered paper market, as Chinese buyers have halted their imports of material, worrying the currency’s value will decline further.

Additionally, the Caixin China Purchasing Mangers’ Index for general manufacturing, which is a gauge of nationwide manufacturing activity, fell to its lowest point in five years in July. At 47.8, the index indicates a contraction in manufacturing in the country.

Despite this recent news, overall recovered paper imports in China for all regions in 2015 through June was virtually the same as for the corresponding period in 2014, according to China Customs.

However, China’s business conditions relating to the paper industry and the country’s volatile stock market also must be considered. Most experts say China should not be counted out, and I’m in that camp. A law from China’s Ministry of Finance effective July 1 allows for a 50 percent rebate on value-added taxes for paper and board mills that manufacture end products with more than 70 percent recovered paper. This should provide some help to the financially struggling paperboard mill sector.

China also has had a number of mill closures for a variety of reasons, though environmental issues lead the pack. Overcapacity in many grades has held board grade machine operating rates low, resulting in restrained demand for OCC and related grades. The low operating rates have been a significant drag on the finances of China’s board mills. This situation is the result of rapidly building new capacity for a decade and the current moderate demand for finished products.

EUROPE. Unemployment and inflation have been stable as of late in the 19-nation eurozone. Joblessness has been stuck at 11 percent for a number of months.

While some feel the economic situation in Greece is on the road to solution, many others feel that the latest developments are more “kicking the can down the road.” If Greece remains a drag on the eurozone, the bigger question is contagion and spreading of the ills to other southern European countries.

The good news is that the latest indicators point to the most serious economic issues as being confined to Greece, while other countries that were having problems have been improving. But growth remains elusive throughout most of the European continent.
 

Macro market movement

After experiencing a slump for the last year, bulk grades of recovered fiber came to life in the second quarter of 2015, largely based on increased buying from China and good, steady demand from the U.S.

The prolonged time at the bottom of the pricing cycle is a sign of strong supply generation regardless of price. Not nearly as much supply is being pulled from the marketplace as prices decline as has been the case in the past: Residential curbside and many business generators are recycling not for economic reasons but for environmental reasons. To these generators, lower recovered paper prices have a very limited impact on their desire to recycle—hence, when the market gets into a pricing trough, it will stay there longer than in the past, when supply decreased, and prices increased in response.

After exports of bulk grades moved up about 20 percent from early May to late June, the offshore market came to a halt in July and has retreated somewhat since then. Many sellers attribute the run-up in export prices to Chinese mills restocking inventories. Deinking and other high grades were fairly flat over the last quarter as those grades had experienced price increases earlier this year.

With the port strike/slowdown settled on the U.S. West Coast, material is moving better. However, recovered paper being the last material to move because of its low value relative to finished goods, it will take a while to work off the inventory that was accumulated earlier in the year.

After the upward movement in export prices for bulk grades of recovered paper, domestic prices also ticked up in June through August. The gap between export and domestic prices had reached its typical widest level in late June, contributing to the domestic price increase.

One drag on U.S. recovered paper prices is the strength of the U.S. dollar versus other major global currencies. Asian importers have been favoring European and Middle Eastern sources, which have a cost advantage over U.S. suppliers in light of the dollar’s strength.

In the face of declining export prices, the domestic market for most grades has remained fairly flat. OCC prices have been an exception, with the middle/southern portions of the U.S. experiencing price movements of $5 to $10 higher for August. The strongest market is the southwest, where the Mexican influence referred to previously is adding demand.
 

Breakdown by grade

OCC. Before reaching its peak in late June, the price for U.S. OCC delivered to China had increased $40 per metric ton over the three-month upturn starting in March (the lowest OCC prices since the first quarter 2009 market meltdown). At the market top, U.S. OCC delivered to the port in China exceeded $200 per metric ton. Since the late June peak, delivered U.S. OCC prices to China have been off by about $25 per metric ton.

New York export prices for OCC did tick up by about 1 percent in the last week of July, ending about a month of downward movement. Additionally, OCC export volumes and prices for shipments to Mexico went up in June/July versus May.

Domestic OCC supply and demand appear reasonably in balance, with steady if not slow upward movement in demand. New U.S. capacity for producing containerboard from OCC will increase demand over the next one to four quarters. Pratt’s new greenfield Indiana mill, starting up this fall, will add significant OCC (and also mixed paper) demand. But containerboard machine conversions (from newsprint and writing paper machines), restarts and creep expansions also will add to good prospects for OCC demand over the next 12 months.
 

Mixed paper.

Surprisingly, mixed paper prices have been less volatile than OCC prices. Domestic U.S. users of mixed paper are limited, and China’s imports set the market.

Many say they feel the relative tightness of the mixed paper market is not because of tight supply but rather because of lingering concerns related to Green Fence quality issues that lessen the supply of high-quality mixed paper.

As noted previously, the startup of Pratt Industries' containerboard machine in Indiana will create significant new domestic demand for mixed paper in a region that produces a large supply of the grade and has become dependent on long distance, costly exports to the West Coast. Pratt—the largest user of mixed paper in the U.S.—has been the bright star among the domestic mill companies for the grade.
 

ONP.

We seem to talk very little about ONP (old newspapers) grades these days, with good reason. As a grade group, the decline in tonnage is precipitous. Throughout the entire world, the production of newsprint and the reading of newspapers continue their steady decline, which is now a decade old. Recycled-fiber-based newsprint production is only economical where electricity costs are high, resulting in high cost thermomechanical pulp production.

The supply of “board” grade news (Remember No. 6 ONP?), has shifted almost entirely to residential mixed paper (RMP). ONP used in recycled paperboard (cartonboard/boxboard) now is basically the same in terms of price, composition and quality as RMP.
 

Deinking high grades.

Pricing for SOP (sorted office paper) and related deinking high grades went the opposite of falling board grade prices in the early part of 2015. But they have held fairly steady over the last three months as OCC and mixed paper prices moved up.

In what is usually a slow supply time of the year, there is speculation that the U.S. tissue mills (and those in other countries, also) have been using higher levels of virgin pulp in their furnish mix, softening demand for deinking high grades.
 

Pulp substitutes.

Prices for pulp substitutes move in lock step with their virgin counterpart pulp grades. The pulp business is fairly good, even with soft demand from China and significant tropical hardwood bleached pulp capacity increases. Some pulp mill downtime in China has propped up the market, holding pulp substitutes at fairly stable prices.

Going forward, however, the major capacity additions to the bleached short fiber pulp supply will put downward pressure on the market as one of the largest sectors that uses this pulp, printing/writing papers, declines.
 

Determining future direction

While the market has a chance to break out to the high side (and it looked like that might happen in the March to June time frame), right now after the recent pullbacks in the bulk grade pricing, stable pricing going forward is the consensus.

While price corrections always are possible, few expect significant downward movements unless some economic upheaval occurs.

The author is president of Moore & Associates, based in Atlanta, and can be contacted via email at MARecycle@aol.com or through the company’s website, www.MARecycle.com.