World Recovered Paper Outlook

Expectations are strong for domestic paper stock markets moving into the next millenium. Stronger paper and board demand conditions in 2000 will eventually lead to firmer market conditions for recovered paper. The most gain will occur in the Far East and Latin America, as markets in both North America and Europe remain sluggish. However, the recovered paper usage rate will rise, reflecting strong growth in recycled-based capacity for Western Europe newsprint and North American tissue grades.

Recovered paper market conditions will rebound strongly in between 2001 and 2002, spurred by a coordinated upturn in worldwide paper and board demand. Recovered paper markets will also benefit from renewed investments in deinked pulp capacity due to its attractive capital and environmental costs, compared to wood pulp. Recovered paper will account for 46 percent of worldwide paper and board production in 2002.

A cyclical downturn in paper and board demand in 2003 will undermine market conditions for recovered paper. Production of paper and board will slow as the major industrial economies of the world soften. Recovered paper consumption will still climb at a respectable pace as the healthy profit margins of the past two years and greater capital availability in the Far East lead to renewed investments in new deinked pulp capacity.

U.S. Demand

Projected domestic recovered paper demand growth will suffer under the weight of weaker paper and board production despite further additions to recovered paper-based capacity over the next two years. Weak underlying production will contend to restrain growth despite the addition of more than 1 million metric tons of new recovered paper-based capacity. Stronger underlying paper and board production will join increases in recovered paper usage through the next decade. The usage of recovered paper will increase due to the attractive production cost economics for newsprint and tissue and lower average capital costs, compared to virgin pulp.

ONP consumption will expand at a relatively slow pace over the next several years due to several developments. Domestic demand will slow as U.S. newsprint production moves sideways over the next two years following last year’s gains. Second, moving into the next decade, domestic newsprint producers, faced with the prospects of a low growth market, will place all expansion plans under tight scrutiny. Finally, a sustained price premium for ONP, compared to mixed papers, will promote advances in cleaning and deinking technology, leading to incremental increases in the use of mixed papers.

Despite weaker projected demand growth as compared to the first half of the 1990s, domestic ONP consumption will continue to move upward.

Domestic newsprint producers, forced to comply with the new Cluster Rules, will be spurred on by attractive production cost economics and lower average capital costs compared to virgin pulp. Newsprint manufacturers Donohue and Alliance recently moved in this direction by announcing their plans to shutter virgin pulping capacity in favor of deinked pulp.

During the past few years, the saturation of containerboard markets with capacity has led to a significant reduction in the number of OCC-based projects. Chronic overcapacity in the domestic containerboard market will limit the number of major new recycled paperboard projects over the next two years to just one — Solvay Paperboard.

Since the pace of recovered paper-based capacity expansions has dropped off considerably, containerboard production will have a greater say in determining the domestic consumption of OCC over the next two years. RISI forecasts domestic production of linerboard recording a marginal gain during this period. This is partially due to a weak export market, which has the potential to shift more linerboard back into the U.S. The outlook for corrugated medium production is not as bleak, since the export market is not significant for these grades.

Domestic demand over the remainder of the forecast will be increasingly dictated by OCC’s relative cost and quality characteristics compared to virgin fiber. Lower average capital costs for recycled pulp versus kraft pulp should sustain OCC-based capacity growth as producers grapple with tougher environmental regulations. However, as market conditions tighten raw material choices for future capacity expansions will more often hinge on the variable cost and end use qualities associated with the usage of OCC versus pulpwood.

Consumption of high-grade deinking papers fell in 1997-1998 despite the startup of four major tissue expansion projects totaling more than 100,000 metric tons. The decline can be attributed to a net reduction in deinked market pulp capacity, which continues to suffer from high average production costs relative to virgin pulp. It is likely that domestic demand for high-grade deinking will recover from its current lull. Additional demand for high-grade deinking will come from integrated tissue and printing and writing paper capacity as high processing costs prevent the construction of new deinked market pulp capacity.

Recovered paper will maintain its relative cost advantage as opposed to virgin fiber in the production of tissue papers. Currently, four major tissue projects will add 300,000 metric tons of new integrated recovered paper capacity over the next two years. These projects, combined with steady growth in the commercial and industrial tissue market, are expected to help boost the high-grade deinking furnish share in the production of tissue papers.

High production costs and sludge disposal costs are major barriers to the effective usage of recovered paper in the production of most printing and writing paper grades. Printing and writing paper producers should increase their usage of high-grade deinking papers as both deinking technology and sorting methods improve. However, consumption growth will continue to be constrained by high production costs associated with the usage of recovered paper. Contaminants (such as stickies) and the move toward higher mineral fillers and coating content in uncoated and coated grades are expected to continue to be obstacles to major increases in the usage of deinked pulp.

In 1998, weak recovered paper pricing across all grades left little incentive for most paper and board manufacturers to increase their usage of mixed papers. The low price of mixed papers relative to the price of other recovered papers will be an essential element governing the use of mixed papers.

Tight market conditions for OCC in the next decade are expected to cause recycled paperboard producers to expand their usage of mixed papers. Similar market forces will motivate tissue and newsprint producers to increase their usage of low cost mixed papers. The actual share of mixed paper in each grade of paper and board will be highly dependent upon the required characteristics of the end use.

The forecast for U.S. exports of recovered paper calls for overseas recovered paper demand to slow compared to historic trends. Although Far Eastern demand for U.S. supplies will continue to grow, weaker Canadian and Mexican paper and board markets over the next two years will hold down export demand growth.

A coordinated improvement in global economic conditions in the early part of the next decade should lead to stronger paper and board output while improving the investment climate for new recovered paper capacity. However, tempering Far Eastern demand growth for U.S. generated supplies of recovered paper will be an upswing in domestic supplies in the Far East and the growing role of Europe in world export markets. Europe will further its recovery efforts, gradually increasing its share of the Far East market and undermining the need for U.S. generated supplies of recovered paper.

Demand for U.S. recovered paper grew 4 percent in 1998 and that led to a 45 percent recovery rate, up from 44 percent in 1997. We predict that total recovery will reach 48 million metric tons in 2003 and the recovery rate will increase to 50 percent. Unfortunately, the goal of a 50 percent recovery rate by 2000 will be three years too late.

Western Europe Demand

Recovered paper-based paper capacity in Western Europe surged the past five years. These advances in recovered paper usage came about because of large investments in research and equipment motivated by lower production costs and the improved profitability associated with the use of recovered paper. Enhancing the cost position of recovered paper was the sudden appearance in the marketplace of abundant supplies of recovered paper, generated by a rapid upsurge in Germany recovery efforts.

Growth in domestic consumption of recovered paper will continue to climb during the next five years. The usage of recovered paper will increase due to the following: attractive production cost economics for newsprint, tissue and most packaging grades; abundant supplies of low cost recovered paper as packaging recovery efforts expand across Western Europe; and further advances in deinking/sorting technology, allowing for the usage of a greater range of recovered paper grades.

Historically, the consumption of deinking grades in Western Europe was almost entirely a function of market economics without much interference by governments. The problem of virgin fiber limitations in Western Europe fueled the increased usage of deinking grades in the production of paper and board. Deinked pulp usage was also a function of the reduced energy requirements achieved by shifting from mechanical to deinking pulp in the production of newsprint and tissue.

The attractive cost economics of deinking grades was given an added boost in the 1990s as governments instituted collection programs for recovered paper. These programs, which are well established in several major European countries, increased the supply and lowered the price of the deinking grades, compared to historical levels. The attractive cost economics of recovered paper proved to be a boon to capacity growth based on deinking grades.

Favorable production cost economics and abundant supplies will allow for a big increase in the use of deinking grades. Nearly a dozen newsprint and uncoated mechanical manufacturers have announced their intentions to add some 1.5 million metric tons of capacity from 1999-2001. Deinking pulp will play a dominant role in nearly all of these projects.

Unfortunately, domestic consumption of deinking grades in Western Europe will be held down by sluggish underlying paper and board production and limited gains in other segments of the paper and board market. High processing costs associated with the use of recovered paper will limit the role of deinking grades in printing and writing papers. The use of recovered paper in the production of tissue and packaging grades is already at high levels, restricting the additional use of deinking papers.

Much of the strong upswing in consumption witnessed in the first half of the 1990s was a result of increased availability of low cost corrugated supplies in Western Europe. Germany’s 1991 Packaging Ordinance was behind much of the upsurge in supplies. The unprecedented law required the recovery of 80 percent of all packaging by 1995 with industry responsible for a private packaging collection system. Flush with corrugating supplies from Germany, domestic manufacturers responded by boosting the recovered paper furnish share of packaging grades.

The expanded use of corrugating material in western Europe will be limited since the furnish share of corrugating within its major end-use market, packaging grades, is already at very high levels. Boosting the usage rate much beyond its current levels without significantly altering the quality and appearance of the product is unlikely. Consequently, we suspect that much of the tonnage made available by the directive will probably end up on the export market.

The author is manager, Recovered Materials, Resource Information Systems Inc. The following is  an excerpt from a presentation Clapp gave at the Summer PSI Forum.

Trade

Net exports of recovered paper from Western Europe rose dramatically in the past three years due to the increased availability of less expensive OCC. Western Europe emerged as a major recovered paper supplier to fiber poor regions of the world as domestic markets failed to respond to the sudden appearance of inexpensive supplies from Germany. Western Europe accounted for an increasing share of the Far Eastern market as its supply imbalances worsened (an estimated 27 percent of total Far Eastern recovered paper imports in 1998, up from 25 percent in 1997 and 20 percent in 1996).

Europe will further its recovery efforts over the next five years and increase its role within the global recovered paper market. Worldwide economic conditions will improve in the early part of the next decade, leading to stronger paper and board demand and East, Western Europe will be in an excellent position to take advantage of this growth. Recovered paper supplies in Western Europe will outpace domestic demand growth despite the growing list of capacity announcements. Most of the surplus tonnage will take the form of corrugating as Western Europe outside of Germany adopts the provisions set forth by the EU Directive on Packaging and Packaging Waste.

Strong growth in domestic consumption of recovered paper and a strong upsurge in net exports over the next five years are expected to keep the rate of growth in demand ahead of the annual increase in paper and board consumption. Our aggregate recovery rate will rise from an estimated 49 percent in 1998 to 53 percent in 2003.

Far East Demand

Preliminary data indicates that Far Eastern recovered paper consumption climbed slightly in 1998 as the aggregate recovered paper usage rate slipped slightly. This result is not surprising given the poor conditions that characterized the packaging sector of the paper and board market. Economic problems in the Far East severely weakened containerboard production due to sluggish regional demand and the difficulty in selling Far Eastern containerboard abroad.

The outlook for regional recovered paper demand reveals a turnaround in market conditions as underlying paper and board demand recovers from its current lows. Further improvement in Far Eastern economic conditions in 2000 will lead to another gain in demand for recovered paper.

The use of recovered fiber in printing and writing papers in the Far East fell in 1998 as the recovered paper usage rate slipped. The recent decline in the use of recovered paper was due to an increase in virgin-fiber based capacity based upon low cost supplies of tropical hardwood. In fact, RISI forecasts virgin fiber furthering its penetration of the Far Eastern printing and writing markets over the forecast. Large investments in tropical hardwood-based printing and writing paper capacity in countries such as Indonesia will increase the role of virgin fiber while causing the recovered paper usage rate to decline by 2003. Consumption of recovered paper in printing and writing grades wills till climb despite furnish share losses to virgin fiber. Support for recovered paper will come from a healthy average annual gain in the production of printing and writing papers.

The combination of healthy economic growth, rising literacy rates and continued media deregulation will lead to an increase in regional newsprint production in 1999-2003. Complementing the upswing in newsprint production will be a solid gain in the recovered paper usage rate as major growth markets such as China add recycled-newsprint capacity.

Tissue papers

Regional tissue production climbed slightly in 1998 as strong tissue production in China was offset by declining output in countries such as Japan and South Korea. RISI foresees the production of tissue papers improving over the forecast, supported by stronger economic conditions through the Far East. RISI project a total of almost 4 million metric tons of recovered paper will be consumed by Far Eastern tissue manufacturers in 2003.

Packaging Paper and Board. Recovered paper consumption in packaging declined in 1998 under the weight of weak containerboard markets. Demand for packaging will improve in the next decade as regional economic conditions rebound and as paper packaging gains market share in place of traditional materials. Investments in recovered paper capacity will also improve in the later years, leading to a further rise in the usage rate.

Although recovered paper consumption slipped a bit last year, recovered paper net imports jumped significantly. Poor growth in paper and board consumption in several countries forced many producers to increase exports, reducing the amount available domestically for collection. These countries had little recourse but to increase their imports of recovered paper to offset the shortfall in domestic supplies. South Korea provides the most striking example. South Korean paper and board consumption dropped almost 24 percent in 1998, while production decreased only 7 percent. In spite of a dramatic increase in collection rates, South Korean imports still jumped more than 30 percent.

RISI expects Far Eastern net imports of recovered paper to increase from 1999-2003. The forecast calls for total imports to rise, but additional tons will become available from within the region, almost entirely from Japan.

Japan has only recently emerged as a major exporter of recovered paper. The economics of exports recovered paper from Japan are favorable since the country’s high solid waste disposal costs have led to strong recovered paper collection efforts and abundant supplies. Demand and supply conditions should remain loose as Japans’ Packaging Source Separation and Recycling Law targets containerboard manufacturers. The law, similar to Germany’s Packaging Ordinance, would require containerboard producers to take back their manufactured products in 2000. Recovered paper exports have the potential to climb rapidly as Japan’s domestic recovered paper-based capacity fails to absorb the additional tonnage.

The recovery of paper in Japan will continue to climb due to an increase in the usage rate of deinked pulp in tissue and newsprint and to a strong annual rise in export demand. RISI does not foresee the recovery rate recording a sizable increase as underlying paper and paperboard consumption climbs on average 2 percent a year from 1999-2003.

Recovery rates outside of Japan will be pushed higher by the expanded use of recovered paper in most paper and board grades, with the exception being printing and writing papers. David Clapp.

The author is manager of World Recovered Paper Service for Resource Information Systems Inc. The presentation was given during the PSI Summer Paper Forum.