Working through the worst of times

It’s been the best of times for containerboard producers and the worst of times for recyclers and material recovery facilities (MRFs) trying to sell recovered fiber in 2019.

“It all depends who you’re asking,” says a broker in the Midwest. “Mills would say it’s the best time—they have the best pick right now. If you’re talking about a processor, these are some rough times because fixed costs in some cases and operating costs are exceeding revenue.”

Old corrugated containers (OCC) prices experienced a long, slow slide downward from $105.84 per ton in November 2017 to a low point of $25 per ton in June 2019. Mixed paper prices declined sharply in the fall of 2017 and into the beginning of 2018. Since the middle of 2018, mixed paper prices have remained near $0 per ton.

For containerboard mills, low secondary fiber prices have had positive effects on their bottom lines.

“From a mill perspective, the decline starting in 2018 and continuing through 2019 has brought very good returns to the containerboard side of the business,” a national mill operator says. He adds that it’s not just recovered fiber prices dropping; virgin pulp pricing also has dropped significantly this year, which has put pressure on sorted office paper (SOP) prices and demand.

Adam Josephson, director and equity research analyst at Cleveland-based KeyBanc Capital Markets Inc., describes the market for recovered fiber as “weak,” adding that it’s been weakening for a few years now.

“The market started to go downward toward the end of 2017 when China turned much more restrictive on the recovered paper that it would import,” Josephson says. “And the market has been downhill since, but what changed perhaps a year or a year and a half after the China effect came into play was that the domestic market also started to weaken.”

Many recyclers express that this summer’s market conditions for recovered fiber have been some of the worst they have experienced in decades.

“I’ve been through bad markets, but what’s different here is that the millions of tons the global industry was shipping to China stopped,” says a broker on the East Coast.

Josephson adds that China certainly triggered the downturn in recovered fiber markets in 2017. However, he says the global economy has been weakening much of this year, which has exacerbated the downturn for recovered fiber. He stresses that OCC in particular is largely influenced by global economic factors.

“This is not a U.S. phenomenon by any stretch,” he says. “You have weak demand for recovered paper seemingly everywhere in all major regions. It’s a global commodity, and global commodities ebb and flow. When the global economy is healthy, commodity prices tend to be high. When the global economy is on its back, which is the case now, global commodity prices weaken and go quite low—OCC is no different.”

Finding movement abroad

Moving recovered fiber has been especially challenging in 2019. The broker on the East Coast says it’s “a constant battle in today’s market to move material and know from day to day where pricing is going to be and where quality standards are going to be.”

The national mill operator says many countries have been oversupplied with recovered fiber in recent years as China has scaled back its imports.

“All of the excess material and supply—not just in North America but around the world—had to go somewhere,” he says. “Countries like Indonesia, India and Taiwan were inundated in 2018 and it continued this year. If there’s excess supply and not enough demand, that’s what happens. Latin America and Mexico have seen the same thing—they got inundated with materials.”

China has closed its doors when it comes to mixed paper, but the nation still buys higher grades like double- sorted corrugated. However, geopolitical factors, including tariffs, are making it tougher to export even high grades of recovered fiber to China.

“When a Chinese paper mill has to pay 15 to 25 percent more for U.S.-generated material versus buying material from Canada or Europe, that’s something that the industry didn’t ever deal with before,” the broker from the East Coast adds.

“I think the real problem in 2019 started when the trade issue became a legitimate trade war,” a MRF operator in the Midwest adds. “Recyclers need to recognize that we become the collateral damage of the trade issue. Trade wars are good in the short run, 30 days or so. This has been nine months.”

After China placed stricter requirements on its imports for recovered paper, several other countries in Southeast Asia have talked about following suit by implementing restrictive standards and inspections. In August, the Institute of Scrap Recycling Industries (ISRI), Washington, reported that Indonesia revised its Recovered Paper Import Standard. The Indonesian government directed preshipment inspection companies to inspect materials for a 0.5 percent prohibitives tolerance.

The broker on the East Coast says only Indonesia has come up with a formal inspection process like China’s, but he adds, “I think the trend is that countries who receive export material will move toward stricter quality and more reliance on their own material internal generation and look at inspection processes to put in place to provide some protection.”

Conceivable capacity

With fewer export markets available in the past year, a lot more recovered fiber has stayed in the mainland U.S. Recyclers who have contracts with mills have fared better, a recycler in the Upper Midwest says.

“Mills are full,” she says. “Stuff isn’t moving and it’s a tight market. We do know they have shut some people off who were not committed, but they are taking care of the companies that have committed to them.”

Many mills, including Cascades, Georgia-Pacific, International Paper and WestRock to name a few, took more downtime than usual in 2019, making movement tougher for recyclers and brokers. The national mill operator says many mills had high inventory levels and decided to take downtime to ensure containerboard and tissue prices didn’t decline.

Yet some companies have announced plans to build containerboard mills or convert mills to produce containerboard this year, which offers some optimism to recyclers. “I think you’re going to start to see surprised tightness show up in the next couple of years,” says Chip Dillon, a partner at Stamford, Connecticut-based Vertical Research Partners. “I don’t know if it’s in the middle of 2020 or the middle of 2021, but some time you are going to see the price inflect in some small way.”

Dillon says these new projects offer reasons for optimism; however, he says not all proposed projects will happen. He places them into three categories: Chinese companies starting operations in the U.S. to make pulp, existing players and new players.

“I think the real problem in 2019 started when the trade issue became a legitimate trade war.” – a MRF operator in the Midwest

In that first category, China-based companies such as Nine Dragons and Shanying International are opening mills in the U.S. to make pulp that can be shipped back to China. Dillon says these projects offer the domestic recycling industry the most opportunity because they are more likely to occur and have even started operations in some cases.

The second category includes existing paper mill operators that have announced plans to convert a mill to produce containerboard or to open new mills. This includes companies like Pratt Industries, which you can read more about in the cover story beginning on page 38 of this issue, Bio Pappel, Green Bay Packaging and Cascades. He says these projects are likely to occur, but some of the announced projects could fall through.

The third category are new players in the industry that have announced plans to start containerboard mills, including CorrVentures in Albany, New York, and Crossroads Paper in Salt Lake City. Dillon says these projects are more speculative and less reliable than those in the first two categories.

“Containerboard is used to make boxes,” Dillon says. “About 90 percent of the places that make boxes are owned by people who make board. So, if you’re Crossroads or CorrVentures, you have a limited number of places that make boxes to sell to.”

Looking ahead

Analysts and recyclers alike say recovered fiber prices likely hit a bottom this past summer and the only place left to go is up. However, it likely will be a slow ride uphill as 2020 approaches. Factors such as a possible recession and the continued trade war could slow gains in recovered fiber pricing.

“Forecasting for 2020, there may be a little upward trend in pricing,” the national mill operator says. “It won’t be significant—a lot of that has to do with how the economy does. We’re not real bullish on 2020; we don’t think things will go through the roof. There are a lot of big question marks about the future of where the economy is going to go.”

Current market conditions have changed how MRFs and recyclers do business. The MRF operator in the Midwest says MRFs now must communicate with suppliers to let them know the sliding costs of commodities.

“There’s been a quantum shift,” he says. “Things aren’t going back to normal; China is not coming back to buy a million tons.”

Quality standards for recovered fiber also will continue to get stricter domestically and abroad in 2020 and beyond.

“Quality has changed, and people are working harder on quality,” the broker in the Midwest says. “Everybody is tightening up their quality. In times of low price and low revenue, [recyclers and MRFs] have had to spend more money. It’s forcing companies to relook at contracting policies on material and then [at] robotics versus labor.”

The author is managing editor of Recycling Today and can be reached at msmalley@gie.net.