OCC Faces Uncertain Future

The wildly fluctutating OCC market is causing a healthy dose of concern for new mills just coming on line.

When new paperboard mills slated to handle old corrugated containers came on line earlier this decade, mill officials looked at the price of OCC and saw a commodity that provided high quality raw material at a relatively low price. With OCC trading at around $50 a ton at the mill through most of the early 1990s, few could have predicted that by 1995 the same ton of OCC would cost $250 a ton.

This price jump, which took place at the beginning of this year, caught many paper stock dealers by surprise. The rise was particularly troublesome for many mill buyers, as higher-than-expected raw material costs stretched budgets sharply, cutting into profit margins.

All mills using the grade were hit with OCC prices that climbed several hundred percent in a span of less than one year. However, newer projects have the unenviable position of building inventory with prices chaotic at best, and supply uncertain.

Adding to the cloudy near-term future for OCC has been the export market. Foreign mills, particularly in Asia, which typically constitute around 15 percent of demand, helped drive up prices earlier this year as they competed with domestic mills for raw material supplies.

Lately, many of these same mills have begun extricating themselves from the market as prices have soared far past historical highs. According to a number of brokers, large-scale export orders could be limited until late summer or early fall. This news is prompting domestic and Canadian mills to begin lowering prices.

PRICE FLUCTUATION

Prices have recently begun to decline, and a level of stability has not yet been reached. The result is a climate of uncertainty and even hostility between processors and consumers. The dif-ference between the two sides is what the future holds for the commodity, as well as how recyclers and mills can come to an understanding about how to improve the situation.

Bay States Paper, which opened a recycled medium facility in Hyde Park, Mass., earlier this year, is one of the newer operations that are now struggling with uncertain OCC prices.

"As prices for OCC go up, mills will move down the wastepaper quality chain," says Richard Alexander, vice president of Bay States. "Mills are moving into box cuttings and mixed paper."

Although using lower grades of paper can reduce a mill’s raw material costs, there are issues which need to be addressed.

While OCC is generally a uniform grade, mixed paper and other lower-cost furnishes may have higher contamination or outthrow levels. A mill may save several dollars by purchasing a cheaper grade of fiber, but if 25 to 30 percent of the furnish is lost through sortation, a mill could end up paying more for less material.

Some mills also are not capable of switching between furnishes without expensive equipment enhancements, which could negate any short term cost savings.

BACKGROUND

James Pope, Eastern Region Sales Manager for Smurfit Recycling, Clayton, Mo., noted during a recent paper recycling conference that domestic OCC use increased by 3.8 million tons from 1990, roughly a 35.5 percent increase, while overall paperboard production increased by 3.9 million tons, or 23.6 percent.

The recovery of OCC also has been one of the greatest success stories in the recycling field, with a present recovery rate in excess of 60 percent, roughly a 16 percent increase from 1985’s recovery level of 46.4 percent, according to the Fibre Box Association, Rolling Meadows, Ill.

Of the OCC recovered, 9.758 million tons – representing more than 50 percent of the total end market – were recycled back into container-board. Other end consuming sectors include recycled paperboard, 3.487 million tons or 19.5 percent; tissue, 181,000 tons or 1 percent; other areas, 1.103 million tons or 6.2 percent; and exports, 3.375 million tons, according to the American Forest and Paper Association, Washington.

Smurfit’s Pope sees the maximum OCC recovery level hitting somewhere around 66 to 70 percent. While recovery is nearing what many people consider the maximum possible, demand for OCC continues to climb. Both new facilities and expansions of existing operations will continue to require greater amounts of OCC.

Pope adds there is a potential increased demand of OCC of 1.5 million tons.

"This seemingly small seven percent potential increase could have a material effect on prices and moves to alternate furnishes."

He notes that export demand would have only impacted prices primarily in the port regions. But now, with the rise in the intermodal system, export demand is likely to have a greater impact on all regions.

A CLOSER LOOK

Increased domestic demand for OCC, while national in scope, will be broken out into differing demands for material on a regional basis. New capacity to open up this year will arise in the Northwest, Southeast, North Atlantic and upper Midwest, as well as some select incremental increases, scheduled or planned, in many more localized regions.

The opening of huge consumers of OCC, along with smaller operations, is necessitating a change in philosophy on the part of purchasing agents. In the past, mill buyers were content to pull from a select geographical area. But with increased demand, many mills are looking to offset purchases in close proximity of the mill by buying material from hundreds of miles away.

FALLING PRICES

The spike in OCC markets is now being followed by a sharp downturn. After levelling off in May, prices for the grade started to fall last month, with mill buying prices down anywhere between $30 to $50 a ton. These declines are expected to last through most of this summer, with further price erosion possible through July, and possibly August. Handlers of the grade point to a number of factors for the decline. One opinion expressed by many is the slide in overseas demand. While countries such as Korea were active in the market during the first part of the year, OCC prices, which topped $250 a ton in many parts of the country, became "too rich" for many of these same mills. By pulling out of the market, foreign buyers hoped prices would fall.

On the domestic side, mills were running with limited inventories on hand. The fear of running out of inventory fueled competitive buying. At the same time, operating rates at U.S. mills were close to 100 percent of capacity, making it difficult to build inventories while running full out.

With summer often the slowest time of the year for production schedules, mills are starting to schedule maintenance downtime, which is cutting into overall demand. Bay State’s Alexander points out that with higher OCC prices, some mills will be looking at reducing their production to eliminate marginal supplies, where little if any profit is made.

Downtime is even more dramatic in Europe, with mills on the continent taking "the summer off," many exporters note. These two scenarios, along with the absence of the Asian market, is creating a surplus of the material on the domestic market.

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A STRATEGIC PLAN

There are sharply divided opinions on how long the downturn will continue. According to a number of paper stock dealers, the decline could last through the summer. By fall, prices could be back on a sharp upswing, with several handlers expecting prices to even top levels reached earlier this year.

Long term most handlers of the grade expect Asian mills to re-enter the market. This will undoubtedly have an impact on the price and availability of OCC for domestic mills. The questions several now ask is how strong the entrance will be, and how high the OCC prices could climb?

Several mill buying officials, however, point out that prices have reached a level that a number of issues will take a more prominent position in the market. For one, the recent run-up in prices drove more mills to using alternate grades. The increase in prices of OCC during the first quarter of this year caused more mills to take a more active look at ONP.

A further move was the use of mixed paper as a fiber substitute. Even when OCC was being sold for less than $50 a ton, the price of mixed paper was being sold for far less. However, as recently as the beginning of June mixed paper in some locations was being sold for around $150 export.

On the domestic side, there are a number of strategies being developed by mills to ensure that enough material, at a competitive price, is being brought in to the mill. Some options mills are employing include working more closely with generators to have material delivered to their door; allowing flexibility of grade usage to keep from requiring only old corrugated; and developing various programs to have material delivered at a cost effective price.

Where and when the market will stabilize is open to question. Some handlers of the grade say prices could reach $300 a ton by the end of this year, as new capacity in both North America and overseas starts up.

With the U.S. economy showing signs of slowing, the North American paper industry could see some slippage in demand. If this happens, now strong OCC demands could slow. Present markets are making future projections a guessing game.

The author is senior editor of Recycling Today.