Markets in Turmoil

2008 Paper Recycling Supplement - Taking a Respite
By Dan Sandovaldsandoval@gie.net10/27/2008 11:33:32 AM

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Paper markets are being tested, but for now they seem to be holding their own, albeit at lower prices. Prices for many recovered fiber grades have slid back from much higher prices earlier this year. With the financial maelstrom sweeping through the global economy, there continues to be even greater uncertainty in the market.

For several recyclers contacted, the credit concerns have put a bit of a freeze on any new investments, which could work to slow some expansion projects.

Meanwhile, domestic paper companies, which have seen a steady drumbeat of bad news, soft demand and limited pricing power (until recently), are starting to show signs of life on their balance sheets (at least for a few of the companies).

This follows a decade of tough markets for domestic companies, especially in the board segment of the industry. During the 2008 Paper Recycling Conference, James Porter of Rock-Tenn Co., Norcross, Ga., noted that gross North American board capacity has been reduced by 3.5 million tons, around 10 percent, since 2001.

RELATIVE STABILITY

For many paper recyclers, the hurly-burly of market volatility for such materials as scrap metal, plastics and other commodities has not been a part of daily life. Relatively stable and strong markets for most grades of recovered fiber have been in place through most of this year, as well as through a large part of last year.

The strength in the price of secondary fiber has come despite the continued uncertainty surrounding the domestic paper market.

In fact, there continues to be significant upheaval in the production side of the paper industry, with more closings of plants as well as acquisition and merger activity.

From a top-down approach, the annual capacity report by the American Forest & Paper Association (AF&PA), released earlier this year, notes that domestic paper and paperboard capacity has continued to decline since the beginning of this decade. Adding to the overall sluggishness in the domestic paper industry, the AF&PA also projects capacity declining by 0.7 percent this year, though the group does expect capacity to improve by a modest 0.2 percent in 2009 and to increase by 0.3 percent in 2010.

Broken out by individual commodity grades, the AF&PA notes that newsprint capacity continues to plummet, with the figure for 2007, 5.32 million tons, down nearly 30 percent from a domestic capacity peak of 7.46 million tons in 2000.

Printing and writing (P&W) papers also saw a decline in 2007 to 25.3 million tons, a 1.2 percent drop from the previous year. Further, the group says it expects P&W capacity to decline by 3.7 percent this year and by 1.4 percent next year before stabilizing by the end of 2010.

Tissue paper capacity is one of the few grades of paper that has displayed some improvement. While the grade has declined in 2006 and last year, the AF&PA says it expects to see tissue capacity improve by 2.4 percent this year. The AF&PA attributes the improvement to the start-up of a number of new tissue machines that have been installed throughout the past 12 months.
Going further, tissue paper capacity is expected to grow by 1.7 percent next year and by 1.8 percent in 2010.

The news is more upbeat in the paperboard segment of the industry. For instance, linerboard posted a 1.9 percent increase in capacity last year and is scheduled to increase by an additional 2.4 percent in 2008. Additionally, capacity is expected to continue to improve by 0.5 percent next year and by 0.1 percent in 2010, bringing the annual capacity rate increase to 1 percent per year.

Meanwhile, corrugated medium capacity declined by 2.8 percent last year and is expected to post an even sharper 3.1 percent decline in 2008. The declines are attributed to the closure of four machines. However, signs indicate that capacity will turn positive in 2009, posting nearly 1.4 percent growth. Additionally, 1 percent growth is forecast for 2010.

Total recycled paperboard capacity, which includes folding and set-up boards, declined 3.5 percent in 2007 to 5.23 million tons. Reductions within the overall category ranged from 5.1 percent for folding boxboard to 4.7 percent for set-up and 1.9 percent for other types of board.
Decline in recycled paperboard capacity in 2007 followed a string of declines that began in 2001 and were particularly large in 2005 (-4.7 percent) and 2006 (-3.1 percent). However, this year’s AF&PA survey points to a modest re-expansion of recycled paperboard capacity during the next three years, with increases projected at 1.2 percent in 2008, 0.5 percent in 2009 and 0.1 percent in 2010.

The increase in 2008 capacity is the result of the rebuilding and restarting of a previously shut paper machine that produces recycled paperboard.

SHORT-TERM WOES

Recyclers looking at the market as 2008 winds down demonstrate a mild sense of pessimism toward many of the grades. However, while many recyclers say they foresee sluggishness as the year draws to an end, some predict modest improvements by early next year.

HEADLINE NEWS

There has been a well documented reduction in demand for newspapers and newsprint within the United States. (See the "Opposing Forces" feature in the August 2008 issue of Recycling Today.)

While this has caused turmoil on the mill side for producers of newsprint, it has at times had a positive effect on the ONP (old newspapers) markets for recyclers.

The sharp drop in newspaper sales has meant there is less ONP available at the present. With the fall and winter seasons approaching, many manufacturers of cellulose insulation, who are large consumers of the grade, are scrambling to line up enough of the material.
A situation of reduced supply in tandem with increased demand has recyclers expecting a healthy price for ONP if that scenario develops.The outlook for OCC (old corrugated containers) and ONP (old newspaper) matches this pattern. One big caveat is the condition of the United States, and, by extension, the global economy in 2009. If there are signs of an improvement in the global economy, the market for the bulk grades should be in better shape.
One Midwestern recycler terms the bulk grade market "sloppy" and says he expects it to remain that way for the next several months.
While domestic mills are doing their part with fairly steady orders for material, the offshore market, notably China, has reined in its purchases, which is softening export demand. One recycler says that China is still placing orders, but there is plenty of material to go around, which is helping to keep prices down.

One larger OCC exporter notes that throughout the past several months a number of older Chinese board mills, which had been significant consumers of OCC, have closed because of difficult economic conditions in the country. It is unlikely that these mills will reopen, the exporter says.

A factor that has contributed to the closure of these mills was the decision by the Chinese government to pare back the number of smaller mills and focus on the sustainability of the larger, more efficient operations. The result has been fewer buyers of bulk grades, such as OCC, ONP and mixed paper.

In a presentation during the UBS Global Paper & Forest Products Conference, held in mid-September in New York City, Greg Cottrell, vice president of the recovered fiber group for Caraustar, based in Austell, Ga., highlighted the tremendous growth in the Chinese market expected throughout the next several years.

In the short term, the market is overall trending toward the soft side. However, Cottrell noted that by 2010, China would add 26.5 million metric tons of capacity, while removing 6.5 million metric tons. The net result is that total production capacity by 2010 will be around 90 million metric tons. With this much capacity, the estimated need for recovered fiber will reach around 50 million metric tons.

Illustrating China’s dominance as a consumer of recovered fiber, of the roughly 20 million tons of recovered fiber exported from the United States, about two-thirds is shipped to China.
While the demand prospects overall look promising for paper stock grades, Cottrell pointed out that one of the few areas that held strong potential to grow on the collection side was mixed paper. The reason: While OCC and ONP have high recovery levels, mixed paper is far lower, giving the grade more positive growth possibilities.

Container availability is still an issue for some recyclers and continues to pose a challenge for recycling companies that have opted to move their material offshore.

Cottrell noted that container rates had opened up a bit, but still were more expensive than in the recent past for shipments to China. "Containers are available, but expensive," Cottrell said.
One large West Coast paper stock dealer notes that container problems are easing a bit at many of the ports, though they still are a challenge. Steve Sutta of The Sutta Co., Oakland, Calif., says that while the situation is easing in Oakland it is still relatively tough to get containers at that port as well as some ports in the Northwest. However, the Los Angeles port has a much better container situation, he says.

MIXTURE OF SUN AND CLOUDS

In the eastern half of the country, one of the bigger impacts on the lower grades will be the start of the new Visy mill in Louisiana. Several recyclers have said the mill would be a significant consumer of many lower grades of recovered fiber, including OCC, ONP and mixed paper.
Matched with this mill is the Visy mill in Conyers, Ga., which is following a similar trajectory in regard to recovered fiber purchases. This should be a net benefit for paper stock dealers in the South and the Midwest.

While this should result in some positive news for many recyclers of the bulk grades, there also are some areas of uncertainty. With International Paper only recently completing its acquisition of Weyerhaeuser, some recyclers are uncertain how this may play out in the paper markets going forward. (See "Planned out on Paper," starting on page S18.)
One move so far has been the closure of one of Weyerhaeuser’s machines in Valliant, Okla., which was a significant consumer of OCC.

Some of the de-inking grades also may be under price pressure as of late. The lackluster strength of the tissue market, as well as a lack of anticipated offshore orders that did not transpire, has resulted in softer prices for many of these grades. On the supply side, the continued flourishing of the document destruction business is resulting in more material being brought onto the market.
"The market is not as good as it was earlier this year," one paper recycler notes. "OCC continues to be soft. I expect to see further softening through the rest of this year," he adds.
One of the few grades that is holding up fairly well has been mixed paper. Several recyclers say some consumers are taking advantage of the spread and buying more mixed paper.
Even with the challenges in the recovered paper market, on a macro perspective, the paper recycling industry has been growing at a fairly decent clip. The recovery rate for both OCC and ONP are greater than 70 percent, with OCC nearing the 80 percent level.
Further, according to a recent presentation by Michael Oswald, senior vice president and general manager of Smurfit-Stone Recycling, based in Chicago, reaching the AF&PA’s goal of a 60 percent recovery level by 2012 would require further innovative steps forward.
Oswald said much of the easy-to-reclaim material already had been recovered, leaving material that was more difficult to capture.

Smurfit-Stone has taken a partnership approach with some waste management firms to jointly access greater amounts of recovered fiber, he noted. This partnership approach between Smurfit-Stone and waste haulers or municipalities has allowed the company to operate sorting lines at transfer stations and landfills as a way to extract more recovered fiber from the market.
The author is senior and Internet editor of Recycling Today and can be contacted at dsandoval@gie.net.