Dropping Off

As the year 2008 sputtered to a close, many document destruction companies were in disbelief as scrap paper prices plummeted in the fourth quarter, leaving many wondering what had happened. Seemingly over night, paper values had declined by a staggering 50 percent. In some severe cases, companies were notified that they should start to make room to store bales in light of extremely high mill inventories and a subsequent lack of mill orders. How could the market change so quickly?

Looking back to January of 2008, office fiber prices stood at a 12-year high. Demand was strong, as domestic and international tissue mills were adding capacity and competing for North American fiber supplies to feed their operations. These market conditions were tremendous for the document destruction industry, as many companies were generating as much revenue selling their scrap paper as they were in destruction fees. For many companies, early 2008 brought one record-breaking month after another.

It wasn’t until May and June that we started experiencing the first decline in paper pricing. While not a huge drop initially, it was becoming a palpably different market environment. With prices still well above $200 per ton, there was little indication of the gravity of what was to come in the fourth quarter. Also, around this time, the ominous rumblings of the sub-prime mortgage crisis began surfacing.

By mid-October the global banking industry was in full meltdown. Credit lines were frozen, as foreign buyers and banks did not want to risk entering into transactions with banking entities that could become insolvent overnight. In the first weeks of November, export markets were grinding to a complete halt.

What was the impact on recovered fiber markets?

In 2007 the U.S. exported more than 18 million metric tons of recovered paper. Without demand from the export market, the available supply of scrap paper far exceeded the needs of domestic mills. Mill inventories in the U.S. became filled to capacity almost immediately, causing pricing for sorted office paper to free fall.

With inventories well beyond their capacities, these domestic paper mills then had to dramatically cut back orders from their suppliers. In a few cases, mills were canceling all incoming shipments for several weeks. This left many suppliers without an outlet and no other choice but to find warehouse space to store their excess paper until the markets opened up again.

Given the burgeoning warehouses full of scrap paper, pricing became less important than the critical movement of paper loads, as many document destruction companies did not have the capacity to store one or more truckloads of shredded paper. The West Coast has been the biggest casualty of this supply glut, as the vast majority of the scrap paper generated in this region of the United States is exported.

A small amount of relief was seen later in November and December, as scrap generation declined slightly.

At the open of 2009, we saw domestic prices for recovered office paper leveling out around $100 per ton, or somewhat less than half its value before the "storm" hit.

As the first quarter of 2009 progresses, the global banking situation has begun to show signs of stabilization and export orders and domestic mill orders have begun to flow again. Mills are still holding high inventories, but they are buying more regularly than they have been during the last several months.

What’s the outlook for the rest of 2009?

First and foremost, I think that the document destruction industry needs to get back to the basic premise that the majority of a company’s revenue should be derived from fees for destruction services. The revenues generated from the by-product of your service, recovered paper, should be considered an incremental profit center for your business.

At this point, Viking Fibres doesn’t believe prices will fluctuate very much either way during the course of the year. The mills that make tissue and toweling are probably among the strongest recovered fiber consumers in the recycling industry. However, the slowing economy also has negatively affected the demand for their finished products. This has caused many mills to cut back their production on some level. Normally this would affect the balance between supply and demand, but recovered paper volumes overall are down, therefore balancing the decrease in domestic demand.

As marketing dollars are being squeezed across the U.S., many companies have cut back on advertising in magazines and newspapers as well as on direct mail campaigns. As a result, the volume of scrap paper generated from commercial printers is down by as much as 20 percent.

All of these factors only contribute to the viability of the recovered office paper that document destruction companies generate. It is a reliable source of de-inking fiber that mills have become accustomed to using in their papermaking process.

Regardless of the current economic recession, recovered office paper volumes are still growing. As time moves on, and as regulations and legislation pertaining to identity theft and privacy continue to grow (as does consumer awareness of the need for securing personal information), so will the information destruction business. These trends are leading to the generation of more shredded office paper that needs to be recycled.

The consistent supply and quality of the recovered fiber that document destruction companies are able to provide to mills will continue to make them valued key suppliers to the recycling industry.