Recovered Fibre, Netherlands/Europe

Indian mills are taking annual maintenance shutdowns as are the Chinese as of early February. Besides that, the annual Chinese New Year has dampened buying temporarily. Mills worldwide are facing historic high fiber costs, and unless capacity is forced out of the system over the next three to four years, there is no way for recycled fiber mills to sustain reasonable profit levels over the long-term. Post-crisis, fiber collections are just not able to keep pace with new recycled fiber based capacities coming up and generally lower levels of economic activity in the West. Paper/Packaging demand growth in China and India is positive; but pulp users/processors will benefit from this growth in the long run as opposed to recycled fiber mills.

Prices have not settled down in India, but they were between US$280 (select) and US$290 (double sort) in late January. Mills in India are changing from writing/printing grades to packaging grades given the enormous pain in the former over the prior four or five years. Poor recycling technology, lack of financing, dumping from overseas and political apathy have made newsprint manufacturing unviable in India. Indian mills will continue buying OCC from the U.S., but it seems that they are choosing between two evils: stop running the pulper due to inability to recoup input cost increases over on the output side or to pay more for fiber and keep the mill running. Temporarily, they choose a bit of both since they are unable to pass on higher input costs over to the customer for the past two-to-three months.

In China, you have another extreme, i.e increasing capacity in the packaging grades, which totally defies logic given the current circumstances. I assume these capacity increases were planned in the boom years of 2005-2007 and are now coming on-line. Lee & Man as well as ACN are strong in the market here in Europe as a build-up to new lines for start-up in the spring of 2011. On the other hand there are also maintenance downtimes in China. So, the signals are unclear and conflicting. In China we see the opposite of India, namely a huge overcapacity of packaging grades (and hence rebuilds to make writing/printing grades) coupled with maintenance shutdowns.

All-in-all, recycled fiber prices will remain strong with lots of volatility given the sway three or four enormous players have in the market. Eventually, capacity will be wrought out of the system over three to five years globally so that demand and supply reach some sort of equilibrium. There are no easy answers. A sudden slowdown in China could make all commodity (including OCC) prices register a sharp fall in the coming months as Chinese authorities try to cool down their own construction bubble by increasing interest rates.

Amit Patel can be contacted at amitpatel@hns-int.nl.