What happened to sorted office paper (SOP) prices in 2013? Perhaps I should ask what didn’t happen instead? As we rolled into 2013, there was anticipation in the market that things would continue improving from their 2012 levels. Most analysts and those in the industry thought the economy, housing, unemployment, business spending and, of course, SOP prices would improve.
Looking back at 2013, I think we can all agree that plenty of turning points were reached during the year. The housing market hit bottom and, in most areas of the country, began a slow reversal. The unemployment rate started to drop, albeit slowly. Throughout corporate America, whispers that companies were planning to spend some of the cash they had amassed since 2009 grew louder.
With this information in mind, the question that we all would like to have answered is this: Why didn’t SOP prices start the same upturn that the rest of the economy enjoyed?
The answer to this question lies in the fact that scrap paper prices are now directly connected to the rest of the world. Exports represent 40 percent of all fiber sales in the U.S.; they are a powerful driving force when it comes to fiber prices in North America. When looking for fiber prices to reverse fortunes, we need not look solely within North American borders, but we also need to understand the health and stability of the economies of our trading partners.
Predicting the future
What are SOP prices likely to do over the next 12 to 18 months? This, of course, is tricky. It’s more complicated than just supply and demand, as the value of scrap paper depends on so many variables as well as on the interactions among those variables.
At Forest2Market (F2M), every forecast starts with at least five years of historical data. These base data are necessary so that analysts can determine how the market has reacted to various factors in the past. The relationship between these variables and market price becomes apparent when analyzing the historical data and, through this, a model based on a deep understanding of the combination of factors that pushes the market higher or reins it in can be developed.
Because F2M began collecting transaction-based SOP pricing data in January 2013, I can’t provide a highly specific forecast for SOP prices in 2014. What I can do is share with you the factors that I look at when thinking about the future.
First of all, I want to have a comprehensive view of the market and of prices as well as a process for considering each factor that might affect these areas. I consider these factors in order of magnitude:
- Short-range factors (one to four months), including inventories at consuming mills, available supply and general market activity;
- Midrange factors (four to eight months), including holidays and seasonality; and
- Long-range factors (eight to 18 months), including key economic indicators in the U.S. and abroad.
Once I have a clear picture of all these factors, I try to understand how each of them, moving from the micro to the macro level, build or weaken the market. Eventually, I develop a conclusion that is based on whether the factors collectively sustain one another, conflict with one another or—worst case—line up negatively and point to a downward spiral in the market. Finally, I remember that people, the world and Mother Nature all are unpredictable. A good forecast must adapt and adapt quickly, as tomorrow almost certainly will look different than yesterday.
Short-range factors
SOP has found a place in away-from-home tissue and deink pulp markets. This still holds true. When building a forecast, I first look here. I ask the following questions:
- How are finished product sales?
- How much parent roll inventory is available (for internal conversion) and in the market (tons sold to other mills and convertors)?
- What is the finished inventory on hand? (Are mills flush with finished goods or are mills behind on production?)
- How many days of scrap paper supply are at the mill, and is the mill building or shedding inventory?
I keep a record of my conversations and interactions with brokers and traders, noting the date/frequency and the subject of the calls. I note whether the callers are net buyers or sellers and whether premiums are being offered or material is being discounted. Then, I analyze these notes on a regular basis to determine if there is a pattern to inform my forecast. Questions I might ask brokers and traders include:
- Is your phone ringing off the hook?
- Are you hearing from brokers from all parts of the country?
- Are there more buyers or more sellers?
- Are there loads at the local dealers’ floors or are dealers oversold?
- Is the guy that used to stop by with donuts trying to get your business now working part-time at Dunkin Donuts?
- Even worse, are you now frequenting the Dunkin Donuts drive-thru line trying to get that broker to take a few extra loads?
I know this sounds ridiculous, but you will be surprised to see how monitoring this type of activity improves forecast accuracy.
To get a sense of overall activity in the paper market, I also investigate the pulp market. In theory, a strong pulp market will lead to strong sales for large SOP consumers, such as deink pulp manufacturers. Keep in mind, however, that pulp is manufactured. Mills can be turned on and off based on market demand, while SOP is generated at its own pace, regardless of scrap market value.
Once I get to this stage of the forecasting process, I have a good feel for the state of the paper industry as it stands. From there, I move to the midrange factors.
Midrange factors
At this stage, I consider the current state of my business and the domestic economy. Then I ask business colleagues the same questions. I record the answers to consider when I’m finalizing my forecast. I layer over additional midrange factors, including seasonal and regional differences:
- Is a “purge season” upcoming?
- Is business this quarter better or worse than in the same quarter last year?
- Will upcoming holidays lead to lower collection volumes? Are mills running down inventory as a result?
- Will seasonal weather patterns cause collection problems?
At this point, I have an understanding of the paper business, the document destruction business and the seasonal effects that may cause a change in the document destruction business. I’ve pretty thoroughly identified trends on both sides of the table—mine and the paper buyers’. Now it’s time to add the long-range factors.
Long-range factors
Macroeconomic data for the U.S. are easy to find, as the government publishes current statistics. What can be more helpful, however, is a forecast of these factors. Every month, F2M produces a forecast of key economic indicators in its Economic Outlook. F2M’s 2014 forecast shows slow yet steady improvement for the U.S. economy in virtually all categories. Specifically, the improvements in GDP (gross domestic product) and the unemployment rate are both positive signs for the SOP market. I also look at consumer spending and travel data. I then identify the trends of all these indicators and tie them back to the performance of buyers (mills) of the product (SOP) and service (document destruction) that sustain supply levels.
Because exports make up nearly 40 percent of scrap sales in North America, once I have a clear view of the U.S. economy, I research the high-volume export buyers: China, Canada, Mexico and India. I consider the following:
- Detailed mill data of inventory levels and product sales (This information is, understandably, more difficult to attain; I often find that I have to rely on hearsay. As a result, I don’t put too much weight on these factors.);
- Consider lag times between the dates foreign mills negotiate prices, letters of credit are set up, material is purchased stateside, bookings are set up and material is shipped to and arrives at the mill;
- Midrange factors, such as seasonality and weather (The Chinese New Year, other religious and cultural holidays and Europe’s month of vacation in August should be accounted for.); and
- Economic factors, such as currency exchange rates, country specific economic stimulus, advantageous freight lanes and government policy changes (i.e., China’s Operation Green Fence).
By factoring in this additional information, I can make a reasonably reliable prediction about scrap market performance and pricing in the year ahead.
Looking back to look ahead
Looking back at the many items I surveyed as noted in this article, you probably came to the same conclusion that I did: Not much happened that would cause SOP prices to rise in 2013. The good news: SOP found a bottom in the $120-$150 range.
Because some encouraging (not great, just better) economic data lay ahead, my conclusion is that SOP prices are likely to improve a bit in the late spring of 2014 and into the summer. If the global economic climate does not improve in the next six months, summer price gains are likely to retract by the fall, and we’ll have to look for 2015 for further price improvement.
Longer term, the news is more encouraging. In the next decade, SOP will increase in value. SOP supplies will slowly shrink in North America, while developing countries will collect more fiber internally. Eventually, the likelihood is strong that demand for SOP will be higher than available supply. This will push prices higher, but it also may prompt mills to seek a different, more sustainable and predictable supply source (non-SOP). If that happens, the SOP grade may morph in to a different grade or go the way of tab cards. If you’re reading this and you don’t know what the term tab cards means, I’ve made my point.
The author is a consultant for Forest2Market’s recycled fiber practice. More information on Forest2Market is available online at www.forest2market.com.
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