2013 was a year in which many of the market trends for OCC (old corrugated containers) in 2011 and 2012 were reversed. Price volatility moderated in 2013, spot market prices were higher than contract prices and the Pacific region no longer held the title to the highest-priced market in the country.
Forest2Market began collecting and reporting open-market OCC prices in April of 2011. Since that time, prices have ranged from $82.87 per ton to $181.99 per ton, a spread of $99.12 per ton. We began collecting data for OCC moving under contract in October of 2011. Since that time, contract prices for OCC have ranged from $81.66 per ton to $168.05 per ton, a spread of $86.38 per ton.
Table 1 (above) shows the high and low volume-weighted average price, as well as the spread, for OCC in 2012 and 2013, the two complete years for which we have data. As the data show, price volatility was elevated in 2012: $57.48 for open-market purchases and $57.90 per ton for contract purchases. The partial data set for 2011—April through December—for open-market purchases showed even higher volatility of $63.27 per ton. Similarly, price volatility for contract purchases in just the last three months of 2011 was $45.93 per ton.
In 2013, this high volatility trend was reversed. The spread for open-market purchases was $14.86 per ton, 26 percent of 2012’s volatility. The spread for contract purchases was $18.71 per ton, 32 percent of 2012’s volatility.
Figure 1 (above) provides an alternative view of volatility. This box-and-whisker graph shows the spread between the highest and lowest prices paid in a given month for open-market OCC transactions in the Southeast region of the U.S. The black diamonds indicate the volume-weighted average monthly price for OCC. The green boxes in the graph represent the bulk of market transactions; 75 percent of all trades occurred within this price range. The remaining 25 percent is split between the two whiskers, with the entire upper whisker representing the highest priced 12.5 percent of all transactions, and the bottom whisker representing the lowest priced 12.5 percent of all market transactions.
When market price volatility is displayed in this fashion, it is possible to isolate the periods with the highest and lowest volatility. The period in which price volatility for this data set was at its highest can be found between September and December of 2011.
The transaction data in October 2011 indicate the market dropped $16 per ton, or approximately 8.5 percent, from an average of $189 per ton in September to $173 per ton in October. Seventy-five percent of all transactions in October occurred within the range of $165 to $180 per ton.
Only 12.5 percent of transactions occurred below the $165 mark. A whopping 87.5 percent of the market traded above $165 per ton during October. While the longer bottom whiskers in September and October indicate downward pressure on pricing, the data show November’s dramatic market reaction was needless.
Despite the fact that 87.5 percent of all trades in October 2011 were above $165 per ton, new price announcements in November 2011 caused OCC prices to plummet. They fell 26.5 percent in November to a volume-weighted average of $127 per ton. Volatility was extreme in November as well, with the spread between highest and lowest price of $101. In December 2011, the spread was $79 per ton. Together, these are the two highest price spreads since Forest2Market began collecting data.
Volatility continued to be an issue in 2012, with four months registering a greater-than-$60-per-ton difference between high and low prices and an average spread of $50 per ton. This trend reversed in 2013, as volatility was more muted, with an average variance of $43 per ton and five months with a less-than-$40 spread.
The understanding of market volatility is extremely important to a mill’s pricing or procurement strategy and a generator’s or supplier’s sales strategy. In a volatile market, volume and price changes are heightened. Understanding price relative to the market informs pricing strategies. For example, if a supplier’s mill customer values price stability, a supplier can demonstrate it is providing price stability in a very volatile market and that doing so carries a risk premium (i.e., a higher price). That risk premium can be calculated and verified using real data. Alternatively, if a mill buyer has an appetite for price risk, then the mill can take advantage of lower priced opportunities in a volatile market. But, to take advantage of price volatility, supporting data are essential.
Contract versus open-market prices
Comparing contract and open-market data reveals another trend that has reversed since the end of 2012 (Figure 2, below). Between October 2011 and August 2012, contract prices were higher than open-market prices in only March and July of 2012. Since September 2012, however, this trend has flipped; open-market prices have been higher than contract prices in all but two months: September and October 2013.
One of the reasons for this shift was the drop in demand for high quality OCC when the Green Fence was raised by China. Because these tons moved to the domestic spot market in 2013, the premium for high-quality OCC began to show up in open-market prices.
In 2011 and 2012, as a result of demand from China and other Asian countries, prices in the Pacific region were consistently higher than those in other U.S. markets. Figure 3 (below) shows the relative position of each of the six United States regions compared with the national average.
In 2013, however, China’s Operation Green Fence led to a reversal in the Pacific region’s price trend. While remaining above the U.S. average, the Pacific region switched places with the Southeast, where OCC traded at $15.56 per ton above the national average.
As Figure 3 (below) shows, OCC in the Pacific, Southeast, Atlantic and Southwest regions consistently traded above the U.S. average, while prices in the Midwest and North Central regions traded below the national average. Clearly, when it comes to OCC pricing, location does matter.
The year ahead
The major factors that led to shifts in market trends in 2013 will continue to influence OCC markets across the U.S. in 2014. Seasonality, demand from China and the availability of high quality data describing market prices and trends will all play a role. In general, however, though we believe OCC prices will move higher in 2013, we also believe the market will look more like 2013 than it did in either 2011 or 2012. In effect, we believe we will continue to see dampened price volatility in 2014, which will disadvantage brokers and generators of OCC as their higher profit opportunities in the market will be limited by uncharacteristic market price stability.
The author is vice president of marketing and sales for Charlotte, N.C.-based Forest2Market, a producer of Market2Mill recovered fiber price reports. More information is available at www.Forest2Market.com.