Packaging pays off

Features - Commodity Focus // Paper

Domestic and export pricing for recovered fiber has skyrocketed, while paper stock dealers struggle to maintain supply.

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March 3, 2017
Megan Workman
© Beka_C | Istockphoto.com

The secondary fiber industry is a true textbook case of supply versus demand as any engaged recycler would recognize. Fortunately for many in the recovered paper market, demand, domestically and overseas, has been strong. Supply, on the other hand, has experienced a shortage among various grades. As demand has grown, supply has lessened.

In addition to solid demand, pricing for recovered fiber has skyrocketed and set records over the last five months, with old corrugated containers (OCC) and mixed paper seeing the most considerable gains. These gains have been a result of steady export demand from China as well as from a boost in buying by domestic mills, which have been running strong. Furthermore, a robust U.S. economy has played a role.

For the fourth consecutive month, export pricing climbed in February from the previous month for every secondary paper grade shipped out of every U.S. port (with the exception of flatness in some regions in previous months for sorted office paper [SOP] pricing).

Material recovery facility (MRF) and mill operators, brokers and other sources say they have a positive view of secondary fiber markets in 2017. However, that positivity will be challenged by freight rate increases, changing recovered fiber specifications and maintaining supply in a shrinking market.

Positive pricing

OCC pricing topped $136.11 per ton in February of this year, a figure last seen in April 2012, when it sold for $137.69 per ton. The price per ton for OCC did not top $90 in all of 2015.

December 2016 marked only the third time in the last two decades that OCC pricing increased domestically in early December.

Since September 2016, export OCC pricing has increased by $50 per ton. “This increase should have a direct effect on plant profitability as long as all of the costs stay in line,” says a broker based in the Northeast.

Mixed paper also has seen impressive gains in pricing. As for export pricing, February was the fourth consecutive month that mixed paper set a new high in pricing. At $89.17 per ton, mixed paper saw its pricing nearly double from February 2016, when it sold for $46.39 per ton.

“What we are seeing is rising prices, which shows demand is higher than supply,” says a source in the Pacific Northwest.

Amazon effect

Beyond pricing, sources cite changes in generation, such as the decline in boxes recovered from retailers, while more boxes are being shipped directly to homes.

*Average U.S. national price per short ton for material delivered FOB. Prices used with permission from PPI Pulp & Paper Week (incorporating Official Board Markets). Free trial available: www.risi.com/rt.

An East Coast-based recycler refers to what many call the “Amazon effect” when he says, “You used to go into a store and come out with something in a plastic bag, and now you’re ordering it online, and it’s showing up in a cardboard box.”

The paper and packaging recycler based on the East Coast says “virtually 100 percent” of boxes generated by retailers are collected for recycling. If single-stream curbside collections brought in more OCC, recyclers wouldn’t mind this shift in generation. “But, in reality, you get less than 50 percent recovery [of OCC] from most residential recovery programs,” the Northeast-based broker says.

As a result, much of the OCC collected via single-stream residential programs is sold as mixed paper.

A large exporter based in California says single-stream recycling, in combination with lighter-weight boxes, has had a real effect on OCC supply.

Additionally, the quality of recovered paper has declined because of single-stream collections. On top of that, the cost to sort and clean these loads has increased, recyclers say.

“All of those factors came together to squeeze corrugated, and I don’t see that changing in the near future,” the West Coast-based exporter says.

Lighter-weight boxes also have eaten into domestic paper stock generation, he says. The average box today weighs 25 percent less than typical 55-pound linerboard, he says. While this is not a new issue, it has lasting effects. “This has been going on for a number of years, but we’re really starting to feel it as the same number of boxes don’t give you the same weight,” the West Coast-based source says.

Transportation troubles

Lightweighting has been a trend among several recyclable packaging materials, including paper, aluminum and plastics. The move mostly has served to decrease costs related to transportation for consumer product companies.

When it comes to transporting recovered paper, sources say rail service on the West Coast has diminished, resulting in additional costs to use third parties.

A Seattle-based source says it costs more to transport material to downtown Los Angeles from Long Beach than it would to ship to Shanghai from Los Angeles.

Ranjit Baxi, president of the Brussels-based Bureau of International Recycling (BIR), reports in the organization’s January 2017 BIR World Mirror on Recovered Paper that exporters are likely to be faced with increasing freight rates for oceangoing shipments well into 2017.

Baxi writes, “The Hanjin Shipping bankruptcy, the realigning of shipping alliances and the possibility of mergers have greatly affected both availability of containers and shipping space, resulting in sea freight rate increases and delays to shipments during last year’s final quarter.”

Domestically, a continued lack of drivers on the trucking side has some sources concerned this could lead to increased transportation costs as the year progresses.

Dominant player

China continues to be the major importer of U.S. recovered fiber. Other countries increasing their import volumes include other Asian markets, such as India, Indonesia and Vietnam, Baxi says. Korea and Taiwan also import recovered fiber as needed in significant volumes, sources say. Nonetheless, China remains the dominant player.

“If China stopped buying, the market would change; trust me,” says the Pacific Northwest source. “Whatever they do or don’t do affects markets.”

At the 2017 Paper Recycling Conference India, held in Mumbai in February, Bill Moore of Atlanta-based paper recycling consulting firm Moore & Associates said some 250 million tons of recovered paper were consumed globally in 2015, up from around 130 million tons in 1997.

On the supply side, exports of scrap paper from North America appear to have stabilized at around 20 million tons, while Europe is shipping out closer to 7.5 million tons, said Moore.

The global supply limit has been a factor in the rising value of OCC and other scrap paper grades in late 2016 and early 2017, he said. “OCC prices are going to be strong” throughout 2017, Moore predicted. “There will be a lot of incentive to source locally” in India and other Asian countries.

As other countries grow their domestic collection of scrap paper, sources speculate what that means for the U.S.

The East Coast-based recycler questions, “At what point will China not buy from the U.S. anymore? Then what do we do with all of that paper?”

He adds of the U.S., “We need strong domestic markets to sell that paper.”

The first half of 2017 will see high pricing and demand for recovered fiber grades as well as increased freight rates. Time will tell how those in the industry manage these hikes along with supply shortages and issues related to quality and costs.

The author is associate editor of Recycling Today and can be contacted via email at mworkman@gie.net.