Ready to ship

The secondary commodities boom sparked by China’s emergence as the world’s second-largest economy continues to tail off, however mills that produce containerboard and packaging grades in China and around the world have retained their appetites for old corrugated containers (OCC) as critical feedstock.

Overviews presented by two forest products industry analysts at the 2015 Paper Recycling Conference Europe, held in Madrid in late October, point to continuing weakness in the production of communication papers (newsprint and printing and writing papers) but ongoing strength for packaging grades.

Economic stability in North America, Europe and China will be needed for packaging grades to remain on their healthy course, but if the world’s economy can weather some fundamental changes in China, paper recyclers should see healthy demand for OCC in the near term.
 

Wider circumstances

Per-Ove Nordström of the Stockholm office of McKinsey & Co., said the global economy has “bounced back from the Great Recession, but current growth remains on weak side.”

Although investors and corporate managers were eager for a “spike” or demonstrable rebound from the 2008-2009 financial crisis, Nordström said the more methodical recovery was not unusual and could be interpreted positively. “Typical recoveries from severe crises last for a long time,” he commented.

A global “heat map” of economic indicators created by Nordström showed variations in the recovery of different sectors in the world’s largest economies. The real estate sector continues to struggle in the European Union (EU), according to Nordström, while the employment rate also remains alarmingly high in the EU.

Nordström expressed concern that quantitative easing (QE) efforts in the United States and in Europe may not have lived up to expectations in terms of increasing business investment. Some economists, he said, fear “secular stagnation,” wherein “despite low interest rates and more money flowing into the economy (as a result of QE), nothing happens.”

The worrisome parallel, Nordström said, is with Japan and its “lost decade.”

About the QE process, Nordström added, “Given the amount of money that has been put into the economy, the results are disappointing.”

Nonetheless, the United States had no alarming “bright red” categories on Nordström’s heat map but also showed none of the bright green coloring that indicated a resurgence.

The emerging economy of India, however, receives bright green shading in its trade figures, thanks in part to reforms being championed by the Narendra Modi government.

With the exception of the recent turmoil in its equities market, China’s economic indicators predominantly have been positive in the years following the financial crisis.

Of concern to Nordström, however, have been recent downward revisions in gross domestic product (GDP) growth rates in several nations, including cumulative downgrades in China’s GDP growth that reflect either weakness or, at the very least, important changes within the world’s second largest economy, he said. Many of these changes are likely to directly affect China’s role in the global recovered fiber market.
 

A pivot in China

Recyclers not only of paper but also of all materials have experienced a dramatic shift to their business models in the past two decades as China’s economy has rocketed to its current status as the world’s second largest.

According to Nordström, China in 2014 consumed from 44 percent to 59 percent of some metals, minerals and ores and also consumed 31 percent of the world’s pulp and recovered fiber.

China’s role as the workshop of the world and its impressive annual GDP growth rate both have played a role in the country’s hunger for raw materials and the accompanying global boom in commodity prices.

Currently, however, a couple of pivot points in the Chinese economy have shifted the supply and demand imbalance away from the situation that existed in China’s fastest-growing years. The effect of these pivots can be seen in global metals and ore prices, which declined sharply throughout most of 2015.

Nordström said recyclers should not expect a return to the former imbalance in 2016, as “economic indicators point toward downward pressure on the Chinese economy” in the near term.

That downward pressure has manifested itself in a purchasing managers’ index (PMI) that has been consistently below 50 (the growth level) for several months. Some of the negative numbers, Nordström said, are “to be expected [as] China is changing the composition of its GDP away from manufacturing toward the service sector.”

Riku Kallio of Finland-based Pöyry Consulting told conference delegates the “Chinese economy is facing the next stage of development—a move to a ‘sustainable and welfare-enhancing’ regime [that] will mean lesser reliance on the export markets in the long term.”

For paper mills in China, “That means there will also be more domestic recovered paper potential,” Kallio commented.

Although China’s finished good export rates (and containerboard demand for that sector) may have passed their peak growth years, current conditions should keep that nation’s demand for imported OCC (and some other grades) steady.
 

OCC still on the shopping list

China’s tonnage of imported recovered fiber may have peaked (at least temporarily) in 2011 and 2012, but the nation’s paper and board makers are still bringing in considerable amounts of scrap paper.

According to Kallio, when 2015 numbers are gathered, Chinese imports of recovered paper are likely to increase compared with 2014’s volume.

Pöyry Consulting forecasts show that China and India are likely to improve domestic recovered paper collection figures in the years ahead. “We are expecting that both countries will rely more heavily on domestic OCC [by percentage], but that doesn’t mean that [net] imports will decline,” Kallio said, “because the overall demand for recovered paper will increase more rapidly still.”

Pöyry’s forecast calls for China’s demand for imported OCC to increase by 8 percent by 2020 compared with the 2014, while India’s demand will increase by 22 percent from its smaller base.

The two countries have very different containerboard sectors, Kallio added, noting that China’s paper machines tend to be four-times larger than those in India and that the overall packaging and board sector has “put a lot of capital into the industry—it has modern assets.”

One of the advantages of China’s modern mills and paper machines, he noted, was the ability to pulp and screen lower quality grades of recovered fiber, allowing mill buyers to purchase more opportunistically from suppliers of this material around the world.

Recyclers in North America and Europe will not have to turn to China to sell much of their OCC, as the grade also will be in high demand from mills on those two continents.

According to Kallio, containerboard producers in Europe already make 80 percent of their products with recovered paper. In stark contrast to that, paper manufacturers in America sometimes use as little as 30 percent scrap paper as feedstock as an annual average, but that number can rise when recovered fiber prices are affordable.

“Demand [for OCC] in the U.S. market will slowly start increasing,” predicted Kallio. “The U.S. has been able to export [since it only needs recovered fiber for 30 percent of its furnish], but that is something that is changing already.”

The health of paper and board packaging globally permitted Nordström to say, “On the positive note, after all, this is a growing industry. [Paper recyclers] as a group are part of the solution, and the outlook for you—if you are sellers—is that it looks very good.”

The author is editor of Recycling Today and can be contacted at btaylor@gie.net.