What is responsible for the sluggishness of the global recovered paper market: Operation Green Fence or the slowdown in real Chinese demand?
The global recovered paper markets have been unexciting since the second half of 2012, driven mainly by the lethargic world paper and board markets, the general world economy and especially by the financial crisis in the eurozone and the slowing of the Chinese economy. Real GDP (gross domestic product) growth in the eurozone registered at -0.5 percent in 2012, while China’s GDP growth slowed from 9.3 percent in 2011 to 7.8 percent in 2012, its lowest rate in the past decade. World paper and board output grew by only 0.45 percent in 2012 compared with average growth of 2 percent from 2000 through 2011. As for China, its total paper and board production expanded by only 4.2 percent in 2012, much slower than the average growth of 11 percent seen over the past 10 years. As a result, annual recovered paper prices declined by more than 25 percent for most grades in 2012.
Within the United States
After a soft year in 2012, U.S. domestic demand for recovered paper, especially OCC (old corrugated containers), grew in the first half of 2013, along with a strengthening economy and paper packaging markets. According to the American Forest & Paper Association (AF&PA), Washington, D.C., U.S. domestic OCC consumption totaled about 10 million metric tons in the first six months of this year, up by about 6 percent, or 500,000 metric tons, year over year. Export demand, however, was weak. According to the latest trade data, total U.S. recovered paper exports dropped by 4 percent, or 430,000 metric tons, year over year. China’s Operation Green Fence and its continuously weaker-than-expected general economy and fundamental paper and board demand have continued to put a damper on Chinese recovered paper demand, including imports, and have kept the global recovered paper market sluggish.
In the U.S. market, the average price of OCC dropped to $125 per metric ton in the first half of this year, compared with $145 per metric ton in the first half of 2012 and $175 per metric ton in the first half of 2011. The price of old newspapers (ONP) No. 8 plunged as well to $90 per metric ton in the first half of 2013, compared with $108 per metric ton in the first half of 2012 and $150 per metric ton in the first half of 2011. Similarly, the average price of OCC imported from the United States fell to $215 per metric ton in the Chinese market in the first half of 2013, compared with $231 per metric in the first half of 2012 and $269 per metric ton in the first half of 2011.
The average price of mixed paper in the U.S. market dropped further, reaching $75 per metric ton in the first half of 2013, down from $99 per metric ton in 2012 and $127 per metric ton in 2011.
Behind the Fence
China’s Operation Green Fence is believed to be one of the major factors dragging the global recovered paper market down. Operation Green Fence is a government-backed program set up to block illegal imports of waste into China. This initiative was launched in February by the General Administration of Customs of China (GACC) and will be in place from February through November of this year. No new regulations are involved in the initiative, as the existing regulations already limit the amount of nonrecyclable materials in imported scrap; however, enforcement of these rules has been lax. The new initiative was, therefore, set up to ensure the correct enforcement of existing regulations on waste imports by customs authorities at all major Chinese ports of entry. Because it accounts for the greatest volume among the major imported scrap products, imports of recovered paper, especially the lower grades such as mixed paper, have been particularly targeted since this operation was launched.
Since it was officially announced in February, China’s Operation Green Fence has gained a lot of attention. But how has this program affected the global market so far? According to GACC data, Chinese total recovered paper imports declined by only 1 percent, or 100,000 metric tons, year over year in the first half of 2013. Therefore, the effect of Operation Green Fence seems to be limited.
However, if we dig a bit deeper into the data, we see that most, if not all, of this drop was the result of declining imports into China from Western Europe. Among the top 15 recovered paper exporters to China, seven out of eight Western European countries and regions saw significant declines in their exports to China during the first six months of 2013. Chinese total imports from these eight Western European trade partners dropped by more than 10 percent year over year.
Meanwhile, Chinese imports from the United States, Canada, Japan and Australia all expanded quite significantly, with those from Canada and Australia increasing by more than 20 percent. It is still too early to say at this point whether the changes in the Chinese recovered paper import flows will be temporary or more permanent; but, this is definitely something that deserves people’s attention.
Among the major grades of recovered paper, OCC and ONP imports declined by 1 percent and 7 percent, respectively, year over year in the first half of 2013. Mixed paper, however, posted a 7 percent increase in imports during the same period.
Given that mixed paper has been the main target of China’s Operation Green Fence, this 7 percent growth looks very unusual. Chinese mixed paper imports sourced from North America and Western Europe expanded by 22 percent and 3 percent, respectively, year over year in the first six months. Mixed paper imports from Japan, well known for being cleaner than European and North American mixed paper, however, declined by 2 percent during the same period.
These figures inform us that this 7 percent growth in Chinese mixed paper imports may have come from the correction of recovered paper import claims under the country’s stricter inspection practices because in the past some mixed paper was being claimed as ONP/OMG (old magazines) or other higher grades when it entered China.
Slower fundamental demand for recovered paper from China was another factor in the sluggishness of the world recovered paper markets in the first half of this year. According to the National Bureau of Statistics, China’s GDP growth slowed from 7.7 percent in the first quarter of 2013 to 7.5 percent in the second quarter. According to National Bureau of Statistics of China, along with its weak industrial production and slow GDP growth, total Chinese paper and board production inched up by only 1 percent year over year in the first six months of 2013, while the production of newsprint contracted by 1 percent year over year during the same period. As a comparison, Chinese paper and board output had grown by about 11 percent per year on average over the past decade. Apparently, the sluggishness of the Chinese economy also has slowed its paper and board output and, therefore, has slowed Chinese total recovered paper demand, including demand for imported material.
When I was traveling in China in June and July, I saw stagnancy in domestic collection activities and weak prices for domestically collected recovered paper, even when imports weakened in conjunction with Operation Green Fence. I, therefore, tend to believe that the slowdown in Chinese paper and board demand, and the consequent slowdown in real recovered paper demand, has contributed more to the weakness of the global recovered paper market than has Operation Green Fence itself. The global recovered paper market’s next move will largely depend on where the Chinese economy and paper and board demand head, at least in the near term.
However, prices for certain recovered paper grades, such as OCC, stabilized or even moved up in the third quarter, especially in the U.S. and Chinese markets, as the recovered paper supply in the developed world weakened during the summer holiday season.
Demand also picked up in conjunction with the new recycled-based paper and board projects in North America and Asia. The new recycled-based containerboard capacity expansion in the second half of this year in North America, including Norampac’s Greenpac mill, Atlantic Packaging’s Whitby mill and the announced Boise’s DeRidder mill that is planned to start up in 2014, have supported the strong OCC demand—and the strengthening OCC prices in the third quarter—and will continue to put upward pressure on OCC pricing through the rest of 2013 and in 2014. The expansion in recycled containerboard capacity has been even stronger in China. According to RISI’s latest analysis, more than 2.5 million metric tons of new recycled containerboard capacity was started up in the first half of this year. Looking into the near future, 1.6 million metric tons of new recycled containerboard capacity will be coming online in the second half of this year, and 2.7 million metric tons of new recycled-based containerboard projects are starting up in 2014.
Looking further into the rest of 2013 and 2014, prices for bulk grades of recovered paper are expected to continue strengthening as fundamental recovered paper demand expands gradually along with the general economy and paper packaging demand, though Operation Green Fence and uncertainty in the Asian economy will continue to add some downward risk in recovered paper pricing.
Hannah Zhao, senior economist, Recovered Paper, is the coauthor of RISI’s special studies, Outlook for Global Recovered Paper Markets and The China Recovered Paper Market: A Comprehensive Analysis and Outlook as well as the World Recovered Paper Monitor, the World Pulp & Recovered Paper 5-Year Forecast and the World Pulp & Recovered Paper 15-Year Forecast. She works out of RISI’s Charlottesville, Va., office and can be reached at 434-978-2927-14 or at firstname.lastname@example.org.