Market Forces

A number of factors affect the strength of the SOP market.

Every year I spend more than 150 days on the road visiting customers and suppliers. My travels take me all over the country to meet with document destruction companies, printers, packers and paper mills, maybe even you. Without any hesitation I can say this: The No. 1 question I hear during every one of those visits is, “What do you think the market is going to do?”

Sometimes I think it is a trick question, because the person asking does not always want to truly hear my thoughts; he or she more likely wants to hear “the right answer.”

A QUESTION OF PERSPECTIVE
If I am talking with a paper mill buyer, all he wants to hear is that the price is going down and that we have plenty of supply. This is because scrap paper is one of the highest cost components for recycled paper manufacturing, and a down market with lots of supply available is music to a mill buyer’s ears.

When I speak with a printer, he is more likely to want to hear about the “strong” demand for coated book, ledger or groundwood sections. On the other hand, the printer is likely to tell me how the paper mills are killing his company with price increases for printing papers.

When I speak with folks in the document destruction sector, they, too, want to hear that SOP (sorted office pack) pricing is going up.

In the end, the most common sentiment conveyed by suppliers is that as long as recovered fiber moves at a good price level, they will be fine.

This leads me to the second question that I am most frequently asked: “What is the likelihood of prices crashing again like at the end of ’08?”

This is certainly not the easiest question to answer, especially in writing, which gives readers the opportunity to tell me next year how wrong I was in 2011. I want to make it clear that I do not have a proverbial crystal ball.

With this disclaimer out of the way, we can discuss some market fundamentals and hopefully by the end of the article we should arrive at the same conclusion. Let’s look at some simple indicators that can help in forecasting.
 

SLAVE TO THE MARKET
The value of SOP and other grades of scrap paper is determined by free market activity. These commodities are subject to the simplest form of supply and demand. Demand goes up, supplies deplete, and prices go up and vice versa. It’s a pretty simple relationship.

However, subtle factors affect this seemingly simple supply-and-demand formula:
• Quality varies between packs and suppliers.
• The domestic market can be regionally price sensitive.
• Even though markets are regionally priced they are still influenced by global demand. (Therefore, for the sake of this discussion, we refer simply to “the market,” not the “domestic” and “export” markets, since a forecast should take both markets into consideration.)

For the SOP market to have strength and stability, the following factors must be in place:
• There must be a growing demand for products manufactured by paper mills.
• Consuming mills must derive a cost benefit from using recovered fiber as furnish.
• Mills must be able to sell their products for more than their cost to produce the products.

As simple as these factors sounds, the market can still get pretty get tricky. Throw in economic data from 25 to 30 countries, freight prices that are tied to global oil prices, variations in currencies and exchanges, geopolitics and global supply options, and trying to arrive at a long-term forecast for SOP becomes a little more like forecasting the weather.
 

CONTRIBUTING FACTORS
Ten factors further shape the SOP market. I will break them down for you in an effort to help you develop your own market forecast.

1. Luckily, SOP has found a strong consuming base in tissue and de-ink pulp manufacturing. Both of these sectors have enjoyed growth and stability throughout the last few years. Tissue manufacturing continues to benefit from population growth and demand from emerging economies, and de-ink pulp has benefited from recent record-high virgin pulp pricing. These are both positive factors affecting the SOP forecast currently.

2. Most global economies are emerging out of recession and seeing GDP growth.
The U.S. forecast was revised to 3 percent GDP growth with inflation to remain around 2 percent. Economic stability in the U.S. will lead to capital expenditures and new capacity expansion in the tissue sector. Again, these are positive factors for an SOP forecast.

3. Oil prices may climb steadily this year, and fuel prices are projected to follow.
This could have a detrimental effect on the market, potentially causing many mills to become even more freight sensitive, looking for alternative furnish to run that they can find closer to their plants.

4. The U.S. dollar has been fairly weak throughout the past few years. Baring major government intervention, currency and exchanges will probably fluctuate very little this year. Therefore, export to China, Europe, India and Mexico should remain stable. Ocean freight rates, again, represent the wild card. However, we will say that overall this is a positive factor for the SOP market.

5. Geopolitics also could be something of a wild card. Virtually any world leader could introduce a monkey wrench that could adversely affect commodity markets.

6. Although the economy is recovering, many industries are coming to grips with the fact that business will never come back to pre-recession days. One industry that is going to re-emerge differently is the printing industry. This industry will continue to shrink and consolidate during the next five years. Printers are also a tremendous source of furnish to paper mills, generating material in the form of excessive print runs and misprints. One “staple” grade generated by the printing sector is coated book, and for many years this was one of the main grades used in recycled tissue manufacturing. However, post-recession this grade has shrunk in supply and likely will never recover to earlier levels.

Many mills today are using SOP as a substitute for coated book. Shrinking supply of coated book, therefore, has a positive effect on the SOP forecast.

7. At the end of the day, all a mill really cares about is how much it costs to get furnish to its “head box.” This is the point in the paper making system where fiber hits the paper machine’s felt. Getting scrap paper to this point in the process is the mill’s true cost of recovered fiber. This includes the fiber, freight, processing, the material’s yield, how much gets thrown out as sludge, the cost of landfilling this sludge and de-ink processing. In practical terms, the SOP that cost a mill $250-per-ton delivered to the mill can in actuality cost $325 per ton to process, and that’s before de-inking overhead is taken into account. Now, a ton of coated book at the same price of $250 per ton can cost a mill more than $400 per ton to process.

Economics, however, are not the sole driver when mills are deciding whether to run SOP or coated book. Other factors have to do with the mill’s de-inking capability, sheet formation and ash content. In the end, however, I think the mills’ yielded price benefit of using SOP compared with coated book is a positive indicator.

8. If you study the historical price trends for SOP from 2000 to 2010, you will notice the average price rose from $104 per ton to $160 per ton. If we continue this trend line to 2020, we could forecast an average price of $220 per ton for SOP by 2020. Again, these are average prices that take market peaks and valleys into account. This would be a positive indicator for SOP markets going forward.

9. Not to sound like Mr. Miyagi, but we also need to consider the marketplace’s balance and sustainability. Consider this: If you know and understand that the cost to manufacture a product, say toilet paper, increases by 50 to 75 percent in a one-year period and the cost of toilet paper at the store has stayed flat or gone up by 2 percent or 3 percent, you can assume there is a good chance the mills’ margins are getting squeezed. This “squeezing” creates an unhealthy financial environment and can lead to financial risk or mill closures and payment defaults. This is currently a negative factor contributing to our SOP forecast.

10. Every industry has a life cycle, and the paper industry is not young. It is not dead; we have not gone paperless yet, though devices like smart phones and iPads will probably take a bigger bite out of the industry than what is currently forecasted. The paper industry is changing rapidly, however, and trying to re-invent itself. This could be considered a positive for our forecast, since the industry seems to be taking the necessary steps to ensure its sustainability.

There are certainly more technical and complex factors and indices to consider. However, if of the 10 factors listed above you find seven or more indicators to be positive, there is a good chance the SOP market will be stable and strong. If five to seven of the indicators are positive, you may find a good market with pockets of weakness. Lastly, if there are fewer than four positive factors, then the market likely will be negative.

As you develop your own recovered paper forecasting model, examine the technical data available about the market and consider the basic economic drivers.
 

 

Get curated news on YOUR industry.

Enter your email to receive our newsletters.

Loading...
Read Next

Products