External forces

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 United States, China and Europe.
 

Economic overviews

UNITED STATES. After a sluggish first quarter of 2015 (0.2% growth in gross domestic product, or GDP), the second quarter surprisingly bounced back sharply—3.7% growth in GDP (after a preliminary 2.3% estimate). While stable to somewhat increasingly favorable business conditions persist in the U.S., a breakout to consistently higher GDP growth doesn’t seem likely. Still, the U.S. economy is good enough that the box business remains fairly strong, with decent demand from domestic mills for old corrugated containers (OCC).

CHINA. GDP growth in China looks poised to reach a mere 7% 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.

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% 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% 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, 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 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% rebate on value-added taxes for paper and board mills that manufacture end products with more than 70% 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 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% for a number of months.

Good news for the region 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 movements

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

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 ones. 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.

After exports of bulk grades moved up about 20% 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.

After the upward movement in export prices for bulk grades of recovered paper, U.S. domestic prices also ticked up in June through August. The gap between export and domestic prices reached its widest level in late June.

One drag on U.S. recovered paper prices has been the strength of the U.S. dollar versus other major global currencies. Asian importers have been favouring 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 U.S. domestic market for most grades has remained fairly flat. OCC prices have been an exception, with the middle and southern portions of the U.S. experiencing price movements of $5 to $10 higher for August.
 

Breakdown by grade

OCC. Before reaching its peak in late June, the price for U.S. OCC delivered to China had increased $40 per tonne 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 tonne. Since the late June peak, delivered U.S. OCC prices to China have been off by about $25 per tonne.

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, was expected to 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. 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’ Indiana containerboard machine will create 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.

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 continues its steady decline. Recycled-fibre-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 and 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 some tissue mills 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 fibre pulp supply will put downward pressure on the market as one of the largest sectors that uses this pulp, printing and writing papers, declines.
 

Determining future direction

While the market has a chance to break out to the high side, 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. A version of this story originally appeared in the October 2015 edition of Recycling Today magazine.