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Traders and brokers of recovered fibre are cautiously optimistic about paper markets.

Lisa McKenna September 9, 2013

Traders and suppliers of recovered fibre appear to be adjusting to numerous industry changes, including the requirements posed by China’s Operation Green Fence. Conversations with brokers and industry consultants indicate a sense of optimism in recent weeks about the market going forward, as demand for some recovered fibre grades, most notably old corrugated containers (OCC), picks up from mills in China.

Other industry changes pertain to the supply and demand for recovered paper. Henri Vermeulen, vice president, recovered paper, for Smurfit Kappa Recycling B.V. based in the Netherlands, says the U.K. has replaced Germany as the key export supplier in Europe.

“In both regions, the recovered paper collection more than doubled between 1991 and 2013,” he says, adding that during that time frame, German recovered paper consumption increased more significantly. “As a result, the U.K. has the biggest recovered paper surplus in Europe, while Germany now has a deficit,” Vermeulen explains.

Among the grades in demand, OCC remains at the top of the list. Bill Moore, president of the paper recycling consulting firm Moore & Associates, based in Atlanta in the U.S., describes OCC as “the bellwether of the market.” He says its movement to China in recent weeks looks promising compared with the early part of the year.

Moore serves a broad range of paper industry clients based throughout North America, Asia, Europe and Latin America and he describes a change that he’s witnessed in export markets for paper over the last quarter, in a year that started out on the soft side.

“Over the last 60-plus days I think China’s buying has been increasing, with the price of OCC inching up slowly week by week from early June until now.” Moore says that while the market for OCC has shown slight signs of slowing in August, he considers those only as likely blips in what looks to be an otherwise strengthening market.

Industry insiders, Moore included, have pointed to the impending startups of new containerboard machines and duplex mills in China as further evidence that demand for recovered paper should continue to increase. A relevant issue, he adds, is the amount of inventory, or lack thereof, being held in Chinese mills.

“The Chinese mills had a lot of inventory in the second quarter. I believe it’s down a bit,” says Moore, adding, “I’m a little surprised paper markets haven’t moved a bit more, but they’re poised to go higher.”

However not all recovered fibre grades are showing the same level of strength as OCC. Traders say the mixed paper (MP), old newspapers (ONP) and sorted office paper (SOP) grades have been less in demand than OCC, for a variety of reasons.

Vermeulen points out that China cannot fulfill its recovered paper needs by itself. However, in light of an increased focus on quality, “mixed paper is becoming less significant in the export market,” he adds.

Similarly, Moore observes that there has been a cutback in the use of mixed paper in favor of OCC in China’s boxboard mills and that prices for the grade have fallen. “Mixed paper has definitely been soft,” he says.

“ONP, SOP and mixed paper are at the bottom and poised to go higher now,” says Moore.

Moore bases his characterization of the sluggish market for mixed paper on two situations: one, a moderate oversupply of mixed paper in the United States, and, two, the mills’ preference to run OCC as furnish material for containerboard.

“Almost all major collection programs collect mixed paper,” Moore says. “Then with the Green Fence and [China’s] sluggish economy, they’d much rather run OCC than mixed paper, as long as it’s in their price range.” Moore points out that the mixed paper grade is the only category suffering from an oversupply situation.

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Gary Sexton, vice president of Toronto-based Cascades Recovery, the recycling division of the Quebec-based paper maker Cascades Inc., offered a similar description of demand for OCC among Chinese buyers in comparison with other grades.

He says with a number of new containerboard machines coming on stream in China, there’s strong demand for corrugated to feed these mills, and inventories have reduced.

“There’s such a large appetite in China, particularly for corrugated,” says Sexton.

One U.S.-based global trader of recycled paper says some of the major newsprint mills he works with in China have taken downtime in recent weeks, leading to a drop in demand for ONP. However, he says shipments of mixed paper to China have resumed, leading to some recent price increases for that grade, he says.

“The Asian markets are a bit stronger than people anticipated,” he says.


Quality Fixes

Quality issues pertaining to recovered paper have been in the limelight ever since China implemented its Operation Green Fence in the early part of 2013. The effort entailed heightened scrutiny of secondary commodities entering that country’s ports, to prevent the importation of waste or subpar loads. As a result, some suppliers curtailed shipments to China, even if only temporarily.

In the months that have followed, many material recovery or collection facilities have worked to implement new operational methods to improve quality, industry insiders say. Most of these have involved additional labor, at additional cost, to yield improved sorting and purity.

Sexton confirms that attention to quality among processors has increased as a result of the Green Fence. “We are spending more time putting more labor on material from our municipal contracts to be sure we’re meeting with the specification of the paper contract or what the CCIC (China Certification & Inspection Group) inspectors will accept,” he says. “Today you’re a lot more proactive ensuring that the material that’s going on the container will be accepted when it reaches China.”

But, Moore adds, increasing quality also increases costs. “The generators have kind of taken it on the chin, but at some point they have to pass those costs back on,” he says. Because orders are contract-driven, he adds, the increased costs can’t be passed on immediately.


Price Gaps

An interesting development in today’s market, analysts say, is the fact that the spread in price between corrugated and mixed paper has widened to significant levels, reflecting the strong demand and preference for OCC as the raw material for containerboard. That spread is also bad news for the mixed paper grade.

Moore says the price gap between OCC and the other grades “is as wide as I’ve ever seen it.” It’s a scenario, he notes, that can’t sustain itself.

While the price of OCC has risen, Moore says, it still has room to go higher. In mid-August, Chinese buyers were nowhere near their breaking point when it comes to the price of OCC, Moore explains. “If their business picks up, OCC will follow. So will ONP and mixed paper.”

Sexton points out the higher price of corrugated also tends to have an effect on the composition of mixed paper: MRFs or packing companies likely will try to get as much corrugated out of the mixed as they can to be sold as OCC. “There’s probably less corrugated in the mixed paper because the spread is so high,” he says.

Meanwhile, the U.S.-based recovered paper trader says shipments of mixed paper to China have resumed, leading to some recent price increases for that grade as well as for OCC.

He says that while the demand for ONP is weak, the strong prices of the MP and OCC grades are leading to an unusual Catch-22 effect: preventing ONP prices from falling, much to the mills’ dismay.

“The mills want the price to drop, but the markets, because of the mixed paper prices, are kind of preventing that,” he says. This price compression between ONP and mixed paper grades, he says, means suppliers are less willing to sort for the ONP grade.


Future Trends
Further growth in the Asian paper market is likely to shift in the coming years, says Sexton.

“We’ve seen in the last 10 to 15 years tremendous growth in China in putting in machines that use secondary fibre,” says Sexton. “I think that has started to slow down.” Now, he says, new mill investments may take place in other Asian countries, using a different mix of materials.

“I don’t think we’re going to see significant growth in new machines like in the last five or 10 years,” says Sexton. “The new machines will probably be focused on virgin materials rather than recovered fibre.”

Meanwhile, the U.S.-based trader points to freight rate increases as a wild card to keep tabs on.

“Most of the major ocean carriers are announcing a GRI (general rate increase) for September,” the trader says. “If that goes through,” he says, “it can add anywhere from US$3 to US$5 per ton to the delivered cost.”

 


The author is managing editor of Recycling Today Global Edition.

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