Slowly but steadily

Market prices for just about all grades of recovered paper have moved up slowly but steadily through the spring and summer of this year, peaking in late August. The average market price increase in all recovered paper grades from the market bottom in March to August was 12 percent (not market-size adjusted).

But much of the story lies in the movement of bulk grades versus that of higher grades. In August 2016, prices for the bulk grades mixed paper, old corrugated containers (OCC) and old newspapers (ONP) were up almost 39 percent, 18 percent and 39 percent, respectively, from one year earlier.

Pricing for higher grades, however, offset these gains by being flat to negative over the last year. August sorted office paper (SOP) prices were up less than 1 percent over the last year, with many other high grades down from 5 percent to as much as 15 percent. (Later in this article, I will present information on why high grades have performed differently than bulk grades.)

China again showed its importance to the global recovered paper markets. After tepid buying in the first quarter of this year, the country’s imports of recovered paper rose every month throughout the second quarter. It had been a China price rally that many believe was sparked by very low inventory levels at the major Chinese mills. This export buying activity primarily has been responsible for the rally in the bulk grades. But when inventory levels at China’s mills recovered, buying slowed, which led to a price drop in September.

U.S. domestic mill pricing for bulk grades has advanced to keep up with export pricing to maintain their supply.

While bulk grades pulled back in September, high grades generally showed price gains.

US paper and board production

Overall U.S. production of paper and board in the first half of 2016 at almost 39 million tons was down 1.1 percent over the same period in 2015. Most grades declined, with newsprint decreasing most steeply by 5.2 percent, while linerboard and tissue declined by 2.9 percent and by 1.2 percent, respectively.

Bucking the downward trend were the important grades to the recycling sector—recycled paperboard and corrugated medium—which were up 1.8 percent and 2.5 percent, respectively. Through the end of July, corrugated box shipments were up 0.3 percent year to date over the same period in 2015.

Recovered fiber supply

While U.S. paper production has declined, things are looking up for the recovered fiber supply/processing/material recovery facility (MRF) side of the business after a fairly deep bottom cycle that lasted almost two years.

Overall demand for recovered paper remains fairly well balanced with supply. It’s times like these that suppliers want more tonnage and find it difficult to get it.

Commodity prices, processing fees and increased service charges to residential and commercial customers have moved the collection/processing industry back toward financial health.

OCC and board grades

Also showing signs of health is the global and U.S. corrugated box business. This many-decades-old packaging business continues its shift to recycled-fiber-based board. Driving this movement is the acceptability of recycled fiber boxes, improvements in technology for making containerboard from recycled fiber and consumer acceptance of this “green” packaging.

The conversion of printing/writing and newsprint mills to recycled-fiber-based containerboard is increasing the global demand for OCC. The recent startup of the Parenco repurposed machine in the Netherlands is a newsprint machine conversion. The last such conversion in the U.S. was an old newsprint mill in the Chicago area, specifically Alsip, Illinois, that had been converted to coated recycled mechanical paper and just last year reopened as an OCC-based containerboard mill.

OCC remains the fiber source of choice for most of the world’s new containerboard production. International Paper has closed the acquisition of the Spanish Holmen newsprint mill and has begun conversion of that relatively new asset to containerboard. The Kruger former newsprint machine in Trois-Rivieres, Quebec, is getting ready to start consuming OCC to make linerboard. In Europe, LEIPA is moving toward conversion of a graphic paper machine to produce containerboard. Moore & Associates expects to continue to see more conversions of graphic paper machines to containerboard in many parts of the world.

Mixed paper

Mixed paper remains a bit of an enigma grade. The switch to single-stream residential collection programs has been steadily increasing the supply of the now major subgrade: residential mixed paper (RMP). Demand for RMP is limited in the U.S. domestic market (with the exception of Pratt Industries), which leaves China the world’s major user of the grade. But even during China’s buying lulls, mixed paper prices have held up fairly well.

High grades and printing/writing papers

The bloom is off of recycled-fiber-content printing/writing paper grades. With the closing of the Auburn, Maine, market deinked pulp mill, less capacity remains for producing recycled-fiber-content printing/writing papers. Those of us who have been around the industry for a while remember the fanfare and major buildup of capacity to produce recycled-content office paper based on President Clinton’s Executive Order for federal offices to ramp up their use of it in the mid-1990s. Much of that deinked pulp capacity has been shuttered over the last 15 years.

A good example of what is happening in this sector is the trend in recycled fiber use in books. In the U.S., after rising from 4 percent recycled fiber in book paper in 2004 to 23 percent in 2009/2010, the level has fallen off since and was at roughly 13 percent in 2014.

A number of things have caused the downturn in the production of deinked freesheet pulp and paper, the most important one being the significant and continuing decline in the use of office/printing/writing papers in general, replaced by digital communications. Secondly, the economics of producing recycled fiber printing/writing papers always have been marginal, and users of the grades are reluctant to pay a premium for recycled content.

The bleached tropical hardwood virgin pulp market is showing more than ever its effect on SOP/high grades in the short and long term. At RISI’s Latin American Conference in mid-August, José Carlos Grubisich Filho, the CEO of Eldorado Brasil Celulose, spoke about the need for the Brazilian pulp industry’s major players to consider mergers and said he expects consolidation in the sector. Brazil’s bleached hardwood kraft (BHK) market pulp capacity more than doubled in the last 10 years from 7 million metric tons in 2006 to 15 million metric tons for 2016, according to Boston-based RISI’s capacity figures. Recent demand for BHK has been lackluster as the major consuming market for the pulp, the global printing and writing sector, declines. This market imbalance will persist for some time and likely will worsen, affecting the recovered paper high grades market.

The announcement earlier this summer by Resolute Forest Products that it is discontinuing the use of SOP/ledgers grades at it newly acquired tissue mill in Hialeah, Florida, is symptomatic of the potential effect on the high grades market. The mill will use a combination of excess deinked pulp from another one of its mill and virgin pulp.

Another factor in the sluggish high grades market is the lack of use of the grades by that recovered paper importing giant, China. While exports of deinking high grades are growing, the main markets remain India, Canada, Mexico and Korea. Those markets combined do not come close to the recovered paper import demand from China. The percentage of high grades exported is much less than the percentages of mixed paper, OCC and ONP exported.

Export

Through spring of this year, China’s imports of recovered paper from the U.S. were down 8.8 percent over the same period in 2015. The country’s imports of recovered paper fell further in July, with the total tonnage dipping 7.9 percent from June to 2.21 million metric tons, according to data from China Customs as reported by RISI.

Korea, another large importer of U.S. recovered paper, was down 1.3 percent for the same period. But, by the end of June, China had picked up its buying activity and was 0.6 percent over the first half of 2015. Through July, China’s industrial production was up 6 percent over the same period in 2015.

India continued its upward trend in importing U.S. recovered paper, increasing 17 percent from January to July in 2016 compared with the same period in 2015.

A series of second-tier importing countries, including Mexico, Taiwan, Indonesia, Thailand and Vietnam, also has shown stronger buying this year. From January to May 2016, exports of recovered paper from the U.S. to Mexico were up more than 22 percent compared with the same period in 2015. But digging down into the specific grades, one finds two different stories: OCC and ONP imports were down 6 percent and 25 percent, respectively, while mixed paper and high grades were up 115 percent and 35 percent.

Other factors at play

A number of other factors could affect demand for and pricing of recovered fiber grades going forward.

Quality. We continue to hear more stories of quality claims in the industry becoming effectively a second round of price negotiations. In the U.S., it has occurred mostly in overseas export, but in Europe it has been reported widely within the continent. The specific complaint is that moisture and quality claims are being made on a high percentage of shipments when they arrive in the importing country. The cost and ability to push back on these claims is difficult for sellers, so settlements are the norm.

This type of secondary price negotiation is becoming more widespread in all types of commerce. Have you tried to sell a house lately? The property inspection report/condition has become a standard second round of price negotiations. Gone is the axiom “buyer beware!”

PSI specification changes. Some of the most significant changes to the Institute of Scrap Recycling Industries (ISRI) Paper Stock Industries (PSI) Chapter guidelines/specifications in a long time are happening this year. At the end of 2016, ONP Nos. 6, 7 and 8 and mixed paper Nos. 1, 2 and 3 will be dropped to be replaced by new grades: sorted clean news, sorted residential papers and a new grade definition of mixed paper. The effect of this on the industry may be significant, but it is a bit early to judge the full impact. The Paper & Plastics Recycling Conference in Chicago, hosted by the Recycling Today Media Group, will feature a panel discussion of this topic during the PSI Session. Time will tell the impact of these important PSI specifications changes. A key will be how RISI recovered paper price indices react to the changes.

Transportation. Global ocean container shipping rates remain at low levels. The container shipping industry currently has about 30 percent overcapacity, which will take some time to absorb. Orders for new container vessels are at record lows, and scrapping of older ships remains high. The reduction in vessel capacity combined with an uptick in global business is what it will take to make the ocean shipping business financially well again.

The recent news in the transportation sector is the bankruptcy filing by Hanjin lines. This seventh-largest global container shipper entering receivership has had two effects: cargoes stranded at sea and also an almost immediate uptick in spot container shipping prices.

Europe. As global market prices for recovered paper have moved up, the domestic and export markets in Europe have strengthened. The weaker euro and particularly the British pound have effectively lowered the costs of European supply relative to the U.S. In particular it is worthy to note that in the post Brexit U.K., it seems to be business as usual in recovered paper, no doubt in part in light of its very weak currency.

Despite the uncertainty these factors present, bulk grades likely will continue to have an advantage over high grades in the months to come.

It seems as if it is always something in the world of recovered paper. Just when you think paper stock markets are going one way, they turn and go the other. Frequently when forecasting, the caveat “barring unforeseen circumstances” is used liberally as the recovered paper markets seem to have more than their share of unforeseen events.

The author is principal of Atlanta-based Moore & Associates, a paper recycling consulting firm specializing in strategic analysis, pricing and market research for the paper recycling industry. He can be contacted at MARecycle@aol.com.