Counting on China

Features - Commodity Focus // Paper

China has dominated the global containerboard market for roughly a decade, and its actions will continue to affect the recovered paper sector.

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March 10, 2016

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When discussing the recovered fiber market with brokers and packers in the United States, one country consistently is brought up more than the rest. China has dominated the global containerboard market for roughly a decade thanks largely in part to its strong economic growth. However, in 2015, the world’s most populous country experienced an economic slowdown and saw a devaluation of its currency, the yuan. Yet, it ramped up production overall.

However, sources have said that Chinese and other overseas paper mills are consuming much more of the scrap paper generated within their own countries, decreasing demand for U.S. exports.

This also is true for Mexico, which has backed off from buying paper stock from the U.S. as it generates and collects more of that material internally to meet the needs of its paper mills.

Additionally, like China, Mexico saw its currency, the peso, weaken against the U.S. dollar, making imports from the U.S. less attractive.

TAKING TIME OUT

While export markets for recovered paper grades have declined in recent months, a large West Coast-based exporter says he is somewhat more optimistic concerning the upcoming months in 2016.

He predicts exports will bounce back in March. In addition, Mexico’s interest in U.S. recovered fiber will expand as “Mexico will start buying more,” the exporter says.

Despite his anticipation for an improved export market, the West Coast-based exporter points to China’s Lunar New Year celebrations as a factor for the current quiet period from that country. This is on top of the country’s slower economy.

“Since November, export demand started dropping,” the exporter says, adding, “And No. 1 is China’s slowdown economywise.”

A number of Chinese paper mills halted production for the Lunar New Year, says a broker based in Seattle. Nine Dragons, one of China’s largest containerboard makers that uses predominantly recovered fiber, cut paper and board output from its four mills by 354,000 tons, according to the broker.

“That’s an enormous amount of downtime that’s being spread out over a period of over a month,” the Seattle-based broker says.

Furthermore, China has excess containerboard capacity, the broker says. “They’ve got too much capacity across the whole grade structure and, because of too much capacity, there’s a lot of downtime being taken around the Chinese New Year,” the broker says.

In November 2015, a Midwest broker said a “double whammy” had occurred regarding exports from the U.S. to China as that country’s economy “is well-documented as slipping and slowing down” in addition to sourcing more scrap paper grades internally.

PICK AND CHOOSE

Beyond its slowing economy and overcapacity situation, China is rumored to be taking further actions that potentially could affect the recovered paper sector throughout 2016.

Lee Cornell, director of mill supply for First Star Recycling, based in Omaha, Nebraska, says China may tighten its incoming material quality regulations again, implementing another initiative that is similar to that of Operation Green Fence, which the country introduced in early 2013. “Which would make sense when there’s excess supply as they can be pickier, and that can affect things greatly,” Cornell says of China.

In this slower market, Chinese buyers also have more opportunities to decline premium paper grades, the Seattle-based broker says. He explains how the growth of single-stream recycling has created a fine line between No. 8 old newspapers (ONP) bales and mixed paper bales.

“Most single-stream news is really not very good; it’s like mixed paper, and you can’t really tell the difference between the two. And, unfortunately, the Chinese are starting to recognize that as well,” the broker says.

He describes how Chinese buyers are recognizing that while they could purchase either a No. 8 ONP bale or a mixed paper bale, “there’s very little difference, so why not buy mixed paper for $10 less than news? Why pay a premium?”

The Seattle-based broker adds, “There’s a lot of that going on.”

Ekman Recycling Executive Vice President Phil Epstein agrees. Ekman Recycling is a subsidiary of the brokerage firm Ekman & Co. AB, based out of New Jersey.

Epstein says because of single-stream recycling, bales of news are beginning to resemble bales of mixed paper.

He explains, “When you look at a bale of news, very rarely will it have more than 60 percent newspapers in there. You’re going to have magazines, junk mail, office papers, etc. It could be used to make newsprint, but in terms of the composition of the grade, it’s not going to be 90 percent news, which is what it used to be, because there’s not much news being collected anymore.”

To cope with periods when certain mills choose not to buy recovered paper, Epstein says his firm is geographically diversified enough to find sufficient activity.

“There are months where if India is not active, we ship those tons to different markets, maybe South Korea or Canada,” Epstein says.

“The packers will really have to tighten their belts and be prepared for what could be a really tough year.” – a Seattle-based broker

Moreover, companies are expanding their business models beyond paper to handle additional materials to make up for the loss in recovered fiber volumes.

*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.

A supplier based in the Northeast echoed this point in October when he described how his company is “in the business of managing discarded materials.”

He explained, “We don’t just do fiber anymore; we’re in plastics, metals and electronics … It’s not just a fiber-based company anymore.”

MAKE THE GRADE

While prices for ONP have remained stable or have dropped, and sources continually have reported less demand for the grade, several sources point to a more successful 2016.

Cornell says No. 8 ONP as well as old corrugated containers (OCC) may see times of increased demand, especially for clean bales, he says.

The exporter based on the West Coast agrees, adding that generation of ONP has declined, leading to higher prices for available material since the start of the year.

As for deinking grades more broadly, the Seattle-based broker says that while they “did nothing but drop in 2015,” he sees pricing leveling off.

OCC pricing is beginning to show stability, according to figures reported through Boston-based RISI’s PPI Pulp & Paper Week. The material experienced a few months of glut in the market. However, after a three-month decline in pricing, according to PPI Pulp & Paper Week’s Feb. 5 pricing survey, prices for this recovered fiber grade had dropped in only one region, and exports to China remained steady for orders purchased for February delivery.

RISI also reports that an OCC supply-demand imbalance remained in the Southeast and Midwest domestic markets; however, mills were said to have held firm in terms of the price they were offering to suppliers of this material.

Epstein says, “Domestic mills have been running pretty well, and that’s one of the main reasons OCC pricing has remained as steady as it has in the last nine to 12 months because the export demand has been very, very weak. If the domestic demand hadn’t been as strong as it has been, we would see OCC prices plunge.”

HISTORIC LOWS

The exporter based on the West Coast says that in addition to China’s economic slowdown, another factor affecting recovered fiber prices is transportation-related costs. However, the impact of transportation costs has been more favorable, as low oil prices have made freight rates the cheapest they have been in recent years.

“With lower fuel prices, it helps all forms of transportation: rail, truck and steamship,” the Seattle-based broker says.

“Ocean freights in both directions are at historic lows,” he adds.

In this slower market, Chinese buyers also have more opportunities to decline premium paper grades, says the Seattle-based broker.

Low energy and fuel prices also have reduced operating costs for paper mills, Epstein says.

The Northeast-based paper stock supplier says that with the lower prices most secondary commodities have been selling for lately, without the low oil and energy prices, some facilities would have shut down. “Can you imagine if fuel was higher? You’d see closures all over the place,” the supplier says.

Despite the benefits to paper packers and mills arising from low oil and energy prices, the West Coast-based broker says he anticipates a challenging year ahead for all of the players involved in the recovered fiber markets.

“The packers will really have to tighten their belts and be prepared for what could be a really tough year,” he says.

Epstein adds, “You’ve got to wonder when are things going to get better? It’s very tough to be overly optimistic for 2016.”

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