Recovered paper markets have been in the bottom quartile of the cycle for a while, and something will happen in the future to kick them up.
Despite less-than-rosy outlooks for some segments of the paper industry, Bill Moore, president of the Atlanta-based consulting firm Moore & Associates, has a moderately bullish outlook for many paper stock grades in 2014.
Moore, who has spent more than 20 years tracking the recycling industry, particularly the paper recycling sector, says a number of changes are driving paper and paper recycling markets in the short and long term.
During the 2013 Paper Recycling Conference Europe, Moore talked with Recycling Today Senior Editor Dan Sandoval and provided his outlook on short-term markets for recovered paper as well as trends that are affecting paper and recovered fiber markets.
Recycling Today (RT): Can you sketch out a short-term outlook for paper grades?
Bill Moore (BM): I think there are a couple of things characterizing what is going on in the business. Clearly, on a global basis, production of graphic paper, printing and writing paper and newsprint are heading down pretty much everywhere in the world.
Coincident with the production decline in the prime products, there is a decline in recovery tons. That is quite clear.
The international flows and export of material are still vital parts of the business. People talk about China being out [of the market], but they are still buying a significant amount of material, and they will be back for more.
As for the overall market, to me, we have been in the bottom quartile of the cycle for a while now, and the market is not sloppy because of generation being down. Something will happen that will kick the market up.
The U.S. economy is moving along reasonably well.
China is slowly coming out of its funk. What has created some problems in China has been the significant overcapacity in many grades due to the robust building of mills, which resulted in operating rates that are low, especially in the board sector. A critical issue is what will the Chinese board producers do while market demand catches up with the production increases. Selling many of their products on the world market is not viable for Chinese board producers as their cost of production is high, especially compared to the U.S.
At the same time, the Chinese government has cut back on newsprint use, so the newsprint mills are running weakly, and ONP (old newspapers) demand is down. That is an artificial thing, the government suppressing demand, but the market trend in China is for use of less newsprint as in other parts of the world.
RT: How about markets for old corrugated containers (OCC)?
BM: For OCC, the Chinese government is shutting down small, older capacity based on ag residue/bamboo and small recovered-paper-based machines. However, when you build so quickly and so much for the past 12 to 15 years, you will have overcapacity, and that causes operating rates to be low, which causes lots of product to come on market, and margins are getting squeezed. It is not good for the business.
It takes a little while for demand for the product to catch up. That reflects all the way back to OCC. You can see it with prices at certain levels (when they get very high) of OCC delivered to China. There are no margins for the mills. The mills have to slow down their production. The mills are making less product, making lower quality board and sourcing more raw material locally. Until the excess capacity gets out the system and demand for fiber is higher, you will see constrained OCC prices.
RT: Quality continues to be a factor. Has the quality of recovered fiber improved?
BM: The Green Fence (an inspection policy China began enforcing in early 2013, which sought to force shippers of recyclables to meet earlier established quality specifications) has been a good thing for the industry. Something was needed to improve recovered fiber quality, and China kicked it off. Recovered paper quality had sunk to a low level but has gotten marginally better.
Look at Waste Management’s earnings report. They said sorting costs increased $10 per ton based on Green Fence. They have had to clean up low-quality material. They have had to add more people and lower the throughput, which resulted in extra costs. That makes sense to me. Now, [Waste Management’s] recycling business has been not as profitable as the company desires the last year-and-a-half to two years. You can’t have the largest collector/processor not make money in this business.
That extra cost for quality has to be borne by someone. It was needed because quality had slipped so badly. Green Fence was a necessary correction.
Now, the economics have to be corrected. There are only two ways to correct it. One is getting more for the material. If you can’t make money for that material, you won’t produce that material, and you won’t sell it. That is how it is in the product business. If market prices go up, there is more room for margins.
There will also be more pressure on generators, whether it is households, local governments, commercial, consumers, strip malls, etc., on material quality. Generators will pay more for collection. They will have less disposal discounts, or they are going to pay more for the collection service.
Education for households and generators will have to increase. Who will pay for education? Someone has to pay for it. On the residential side, it is the local government. The next round of city contracts will cost more. It will be built in; it has to be built in.
Processors will get smarter and more efficient, and they will be able to take some of the costs out of the middle to make higher quality material. However, they will not be able to take all the costs out. It will cost them more to make higher quality; but, they will get smarter and save money and produce better quality because we hit the bottom, and we couldn’t stay there.
RT: Do you see a move away from single-stream collection programs?
BM: I don’t believe there is any going back from single stream. The collection costs are just too high, and that is the driver. We can solve the quality problem—the largest burden being on the generators (education on material preparation) and less on the MRF (material recovery facility), though some optimization is needed. And even some costs passed on to the mills (but less than the generators and processors). They are always improving their stock preparation despite the fact that many paper mills have serious economic problems.
RT: How would you characterize domestic markets?
BM: The containerboard business is pretty good in the United States, mostly because we are exporting containerboard. We are the world’s low-cost producer. That has held up business.
However, I have a little fear about overcapacity with the new capacity and more capacity coming on stream. It is relatively easy to convert from newsprint machines to containerboard. All the new capacity will put pressure on containerboard, which will put pressure on the OCC market. But they also put pressure on oversupply of containerboard. But the U.S. is still a low-cost producer, and we can export more, up to a point. The U.S. is the world’s low-cost producer because of our low fiber and energy costs.
Tissue is a reasonably good business [with] reasonable profit margins. There has been some overcapacity as a result of building new tissue mills. I think we have hit the peak in recycled fiber for tissue. There will be shift toward virgin. At the high end of SOP (sorted office paper), you will see tissue mills using more virgin pulp. You will see new short fiber pulp mills coming online in the tropics, which will bring down SOP prices at the peak of the pricing cycle (which we are far from that now). There are series of huge virgin pulp mills coming online over the next few years. Most of them are chasing printing and writing markets that will be there.
RT: Is there enough fiber to meet mill’s needs?
BM: Tissue mills are very concerned about the consumer printing and writing paper business, and the printer grades, pulp subs and deinking grades are all going down. They can use pulp in a heartbeat, and there is no issue; they can put it right in the pulper, and it is virtually a 100 percent yield, and it will enhance product quality. And it will be competitive with recycled fiber at the top of the SOP price cycle.
With newsprint, just like with the tissue business, I think we hit the peak in recycled, and we are coming off of it. The shutdowns have been more so in the recycled end than in the virgin end. The people who have been able to use both virgin thermomechanical pulp (TMP) and recycled are running the recycled units as low as possible and making as much TMP as they can.
Whereas recycled tissue mills have a problem at the high end of SOP cycle, recycled newsprint mills have a problem with ONP use in probably 50 percent of the pricing cycle and only are OK at the bottom 25 percent where recycled fiber is really more cost-effective.
For printing and writing paper, they are not a big user of recycled fiber. It is a problematic sector from a product demand standpoint. Recycled printing and writing paper is a struggling area. It is very expensive; it has to be pushed by green and government regulations. While tissue, containerboard and newsprint economics for a long time favored recycled fiber, printing and writing paper markets do not favor it because of the costs.
There are bright spots. Futuremark has picked up on recycled green marketing. Their acquisition of Manistique Paper (a mill that manufactures 100-percent-recycled uncoated printing and packaging papers) has helped them. That is an example of a company making it. Their sales have been going up in a market that has been going down.
Other printing and writing paper mills are a mess. The printing and writing and newsprint industries are in the business of managing shutdowns. I don’t see any reversing for either of the grades.
There is a bottom, though I am not sure where it is, though it is a lot lower than many of us expected. We could see the downturn coming, but we thought the bottom would have already been there. We are close to the bottom with newsprint but not close to the bottom with printing and writing papers.
The downturn in the use of printing and writing papers started later than newsprint. The peak year for office paper use in U.S. offices on a per capita basis was in 1999, and from there it has been steadily going down. Much of the private sector has been using less paper for a while now, but now, governments, law firms, health care, and real estate agencies, all big users of office paper, are reducing their usage.
RT: Is there a trend toward merging grades?
BM: At the Paper Recycling Conference in Chicago, some folks were talking about blending grades into mega grades. SOP has supplanted white ledger, colored ledger is gone, and you really can’t get manifold white ledger; most packers will just call it white ledger. The same thing is happening in other grades of recovered fiber.
RT: Will consolidation and M&A play a role in paper and paper recycling markets in 2014?
BM: I don’t think we are going to see much merger and acquisition activity in either sector in 2014.
On the mill side, containerboard is already highly concentrated. There may be some deals in the paperboard/boxboard segment, though nothing is ahead in tissue and newsprint that I can see. However, there are some very weak players out there.
As for the recycling side, the big player on the MRF side is Waste Management, and it is highly unlikely they will do any large-scale acquisitions. And I don’t see any other big acquisitions in the cards. But there can always be small things.
The MRF business in 2014 will be one of cost containment and dealing with lower quantities and quality of paper. Operating rates in the MRF are below what they need to be.
I see a steady but slow recovery for paper recycling markets. OCC exports since the second half of 2013 have gone up around 8 percent, though there’s been a retreat in [October]. And the gap between export and domestic prices is almost as wide as it has ever been, and that can’t be sustained.
If the U.S. economy chugs along and there is some kind of compromise with Congress (which looked likely as of mid-December 2013), markets have a decent chance of going up in 2014.
Bill Moore is president of the Atlanta-based recycling consulting firm Moore & Associates, online at www.marecycle.com.