Fibre-rich diet

[The following article is an excerpted transcript from the presentation by Bill Moore at the 2017 Paper Recycling Conference India in February.)

I became intrigued about old corrugated containers (OCC) and recovered paper pricing and what was involved with it when I started this company about 35 years ago, and about 25 years ago I really started doing some in-depth pricing analysis. I’d like to share some of the things I’ve learned over the years and update that information and touch on global aspects of pricing.

Long-term on OCC, looking back at United States average prices, as the business became global by the late 1990s prices tended to move in step around the world. Before that, in the 1970s and '80s, you might see very different prices even within regions of the U.S.

Even in the 1990s, I remember seeing OCC prices in Scandinavia that never moved during one of the most volatile price periods in the rest of the world. They had a cartel and they had control of pricing, and their prices in 1994 and 1995 were the same as they were in 1993.

UPS AND DOWNS

Going back to about 1988 to 1992 and before that, if you were in the business you can remember how problematic it was because of the low prices ($34-$35 per ton for OCC). The U.S. and Western Europe were really in oversupply. I remember selling mixed paper out of Seattle (in the United States) for minus $10 FAS (free alongside) per ton going to Asia. I was paying the mill to take it—that’s how bad it was.

Then there was a Mount Everest peak ($145 per ton average in 1995) and then there was a quick crash (to $71 average per ton in 1996). In the space of three months in 1995, the price of OCC went from $250 per ton to $50. It was a real bad downturn.

China started to enter the market more in 1996, helping to bring those prices back up (to $67 to $88 per ton from 1996 to 2000), then we had the 2001 recession, which brought the yearly average price of OCC back down to $50.

Subsequently, China and the world economy have recovered, and so has OCC pricing. If you look at OCC pricing and match it against global GDP, you get a reasonable correlation. So, when we came out of that recession, that’s when China really started buying.

In 2016, prices picked back up after a three-year downturn, mostly in the second half. The first quarter of 2016 was really low-priced, but by the fourth quarter things were raging and prices have continued to rise in early 2017. It has been almost unprecedented—as high and fast of a rise for a three-month period as I’ve almost ever seen.

More recently, OCC export prices show U.S. OCC continues to have a price premium, although sometimes the spread comes together when compared with German and United Kingdom export prices.

Studying delivered prices shows that Indian mills pay quite a premium for U.S. double-sorted OCC, certainly over standard OCC delivered to China or select OCC delivered to India.

Examining Boston-based RISI, a provider of information and pricing to the global forest products industry, OCC FAS prices for New York exports for 2016, we see the first quarter was pretty sluggish. Then followed a run-up for a few months, a pullback in September, and since then through January 2017 it has reached quite a peak ($193 per short ton).

MIXED REVIEWS

Switching to the mixed paper grade, mixed paper prices in Europe are generally a lot higher than in the U.S. The primary reason for that is there is a lot more domestic (continent-wide) demand for mixed paper by the European mills compared with the U.S. mills.

In the U.S. it’s much more of an export grade—about 70%—and a lot also is exported from the U.K. But on the continent, in Germany or the Netherlands, a lot of board mills tend to use mixed paper. The European percentage exported is much less than half.

The U.S. mills just don’t see the need to use mixed paper. They have a lot of virgin fibre and pulp options and they have good sources of OCC. Even more important, they haven’t spent the money on stock prep systems to handle mixed paper.

One exception is the Australia-based Pratt company, which moved into the states about 20 years ago and has built four mills. Of the domestic mixed paper consumed in the U.S., Pratt uses about 70% of it, because they have put in place the pulping equipment that allows them to use it. They’ll make containerboard with as much as 50% to 60% mixed paper content. Thus they have a lower furnish cost than most of the other containerboard producers.

Looking at pricing on mixed paper, you still see U.S. fibre containing a premium over mixed paper exported from the U.K. In December 2016 and January 2017, while U.K. mixed paper pricing bumped up just a little bit, U.S. mixed paper quickly began following OCC in a spike upward. Mixed paper is like that, because buyers will start using more mixed when the U.S. OCC price is up.

I like to look at the ratio in value of mixed paper to OCC since people use it as a substitute. Looking at the price differential from 2008 to 2016, one can see that the trend line for mixed paper’s value is actually down slightly, but throughout this period it has averaged between 59% and 64%.

However, if you go back to the 1990s, you’d see figures closer to 20% or 25%. It was just a grade that nobody was really interested in. But when China entered the market and started to become a big buyer of mixed, we saw it starting to run at that 65% average or so.

Mixed paper runs strong when OCC runs hot, but can also really bottom out, such as hitting 45% of OCC’s value in the first half of 2009.

My guess going forward is that we’re going to be in the 60% to 65% trend line for a while, and when the market heats up mixed paper can make it up to 70% or higher. Mixed paper is always linked to OCC pricing, and I think we’re getting close to the top of the market now [in early February 2017]. We’re a lot closer to the top than we are the bottom.

There is a lot of strength in the market and I think we’ll probably hit the top in the second quarter of 2017. I don’t think it will run up as fast as it did in the previous few months, but I feel more strength and maybe another 10% or 15% or maybe 20% in price rises, and then we’re going to hit the top. I think the top is looking to be around $275 to $300 per ton delivered to Asia.

That’s the pain point, after which mills just can’t get board price increases enough to support the business, and then they actually start to use some more unbleached kraft material. It does not take a lot of substitution before that will pull the OCC market right back.

But I don’t see a crash in the second half of 2017; I feel a lot of steadiness in the market. Business conditions now are OK. Europe is starting to show some signs of life and in the U.S. GDP might be headed up a little bit, and China seems to be perking up a bit.

Thus, I’m fairly bullish on OCC right now and on mixed paper I’ve got the same bullishness. However, I do think we’ll see mixed paper back away from a 75% or 80% value of OCC it might hit during a peak bull market, and it will probably fall back into the 70% range. We may be near the top and it’s a very volatile price grade: It gets very soft at the bottom and very hot at the top.

Bill Moore is the owner of United States-based Moore & Associates and he can be contacted at marecycle@aol.com.