Guessing Game

The cyclical nature of the paper recycling industry should be clear-cut to all involved. Driven by the paper industry, demand should benefit from an improving economy. With that in mind, the flurry of economic reports is casting doubt on a turnaround in the paper recycling industry anytime during the first half of this year.

As for the second half, there are too many uncertainties to make paper stock dealers, brokers and mill officials feel there is any significant hope for a better business environment.

Over the past several weeks most of the North American paper companies have been reporting their financial numbers. While there have been a mix of positive and less upbeat numbers, most of the paper companies reporting are indicating that market conditions, at least over the next several quarters, will be challenging.

A slowing economy appears to be one of the biggest concerns. As consumer demand for finished products wane, so will the demand for paper and paperboard products that are used as packaging.

Cutting Back And Consolidating

An often-cited trend in the paper industry has been toward consolidation. Over the past several years, a number of companies have embarked on plans to merge or acquire smaller companies.

Due to this and an uncertain economic environment, the paper stock industry has been seeing steady erosion of end markets for its material. From high-end pulp substitutes to bulk grades such as old corrugated containers (OCC), price, demand and supply have been moving down because of negative sentiments.

One of the biggest problems for the paper stock industry continues to be a move by mills throughout North America to rein in production schedules.

Along with inventory adjustment downtime, a host of paper and paperboard companies are opting to permanently close older, less efficient mills. This move, which appears to be increasing quite significantly as of late, is shrinking end markets. The result has been prices for most grades of recovered fiber dipping sharply over the past several months.

The Midwest has been seeing some of the most recent announced closings, with Caraustar’s Chicago Paperboard mill one of the latest. The decision follows the closing of several other board and paper mills in the Michigan area, including Georgia-Pacific’s decision to close its Kalamazoo, Mich., board mill.

The oversupply of many grades continues to weigh on the market, with demand only showing modest signs of an improvement. The OCC market, although somewhat soft right now, is showing some indications that a modest bounce may take place, perhaps this spring.

There are reports of increased inquiries cropping up. While sales haven’t turned around the slumbering market, there are some signs that orders from a number of offshore buyers are firming up.

Most paper stock dealers feel that prices will remain flat for March. However, there are some vendors who see signs of a turnaround soon. There are a number of paper stock dealers who seem to be seeing some good news on the horizon.

One factor is that the first two months of the year are typically the slowest times of the year for many manufacturing operations. While a slowdown does take its toll, there also are some declines in generation as many mills curtail their new purchases.

OCC - Looking For A Break

Old corrugated is considered the key grade in the paper stock market. The material is the most widely recycled, has the biggest influence, and is most closely connected to the overall economy. Thus, as the economy strengthens so to will the corrugated industry.

If this philosophy is followed through, it appears the U.S. is falling into a manufacturing slump. Prices have been declining over the last four to five months and still don’t appear to be showing any upward trend.

The most recent figures from the American Forest and Paper Association (AF&PA), Washington, confirm that inventory levels are climbing while production and shipment totals decline. Figures from the AF&PA show inventory of recovered fiber climbed close to 5% in December 2000 from figures the same time in 1999. The total for the month also is an increase from the previous month. The jump highlights what the overall economy is experiencing: a need to work off high OCC inventories by curtailing purchases of the secondary commodity.

Prices in some pockets of the country are perking up, although other regions are showing further erosion.

Several sources on the West Coast note that OCC has picked up slightly in Northern California. This is one of the few areas for optimism. As vendors start to see strengthening orders from the West Coast, more orders could filter to the rest of the country. Domestic mills might then have to pay more for their OCC orders to procure material away from the offshore buyers.

Adding to the overall problem with the paperboard industry are indications that linerboard prices (one of the best indicators of the paperboard industry’s strength) are going to see some price reductions, perhaps in March. The lack of demand can be seen throughout the U.S. economy, as durable goods orders continue to decline, downtime crops up throughout North America, and collections dip.

Old News Sliding

The old newspaper (ONP) market seemed to escape many of the problems seen with OCC during the second half of last year. However, the strong market for both de-inked news and regular news seems to have dissipated. The reason for much of the strength last year was the ability of newsprint producers to keep their supplies in line with orders.

Significant downtime early last year by both Abitibi-Consolidated and Bowater helped keep an oversupply from cropping up. With a better balance, newsprint producers were able to push through a number of price increases for their finished product.

At the same time, the offshore market began buying steadier blocks of tonnage as new machines came online and traditional buyers ramped up their purchases as demand climbed.

Reflecting the improvement, newsprint prices continued to climb through last year as a tight supply/demand scenario helped newsprint mills run much better schedules. In fact, total newsprint production ended the year up 1.1% from production in 1999.

So, while OCC and containerboard prices remained fairly sluggish through the second half of last year, newsprint, and, as a raw material, ONP, saw much firmer prices.

This upward move has slipped back down. A number of newsprint producers are looking to push through a price increase for finished the first half of this year. However, it looks as if there is a decline in the production and demand for newsprint. This could indicate that the strong run for newsprint may have peaked, at least for the first half of this year. The economic slowdown is starting to have a negative impact on newsprint producers.

Lately, several of the larger newsprint producers are once again looking to ratchet down their production figures. This move, it is hoped, will allow for a return to stronger newsprint prices, and indirectly, better prices for ONP.

While the newsprint industry is one of the biggest drivers for the grade, a significant amount of ONP moves into the paperboard industry, as well as into the building products industry.

The building products industry, while purchasing much smaller amounts of ONP than the paper and paperboard industry, has been a steady consumer of the grade. Lately, with the economy cooling, some of these consumers are slowing their intake.

The confluence of a slowdown throughout all consuming sectors on the domestic side has worked to cut ONP prices.

If anecdotal information is not enough, figures from AF&PA also show the sharp decline in production. At the end of the year, paper and paperboard production both dropped off fairly sharply.

While total paper and board production fell, the recycled paperboard segment fell even sharper.

De-inking Grades Mixed

Those involved in de-inking grades seem to be showing a wide range of opinion on where the grade is going in the near future. It seems that most paperstock dealers who have been expecting the export market to drive new demand for the various de-inking grades have been disappointed.

Demand is slowing in most parts of the country, with orders for offshore movement flat. There have been some signs that an improvement will come, although the combination of slow domestic demand and offshore orders hasn’t helped spruce up demand throughout the U.S.

Office Grades Look to Break Out

The various grades that make up office grades continue to move sideways, with some modest downward pressure pushing the grade down.

Sorted white ledger and sorted colored ledger are being hit by the slide in pulp and pulp substitute prices. A number of vendors who export large blocks of the grade are waiting for signals from the offshore market that there will be stronger orders this spring.

There doesn’t appear to be much in the way of consensus about the grades. Sorted office paper also has been moving slightly downward. While a $5 per ton decline is not generating a tremendous amount of concern, there has been some backing up of supply throughout the country. If this trend continues there could be sharper price declines in the near future.

On the domestic side there also continues to be only a lackluster order schedule. Despite stronger run schedules by tissue mills throughout the U.S., there hasn’t been any strengthening in the grade. Part of the problem has been the lack of strength in the de-inking grade market. This sector of the paper industry had been one of the growing areas for the office paper market. Lately, with the problems with an oversupply of pulp on the market, some of these de-inking facilities are scaling back their operating schedules.

This inevitable move is lessening demand for the raw material used at these facilities. Several sources report that Great Lakes Fiber, American Fiber Resources, Ponderosa Fibres and several other de-inking facilities are scaling back their operations during the first few months of 2001. With little indication that pulp prices will bounce back over the next several months, stand-alone de-inking operations will likely also sit on the sideline until there are better signs of strengthening.

A Comeback for the Export Market?

Could the saving grace for the paper stock industry be a stronger export market? While constituting around 20% of the total market, there seems to be a growing sense that the domestic market is using a slowing offshore market to keep prices low.

Markets during the first two months of the year are typically slow, with reduced generation, slow run times and inclement weather among the factors keeping markets from overheating.

For the Asian market there seems to be an even sharper decline in total shipments. The Chinese market, which has been growing in importance, had pulled back from the market at the end of last year and early this year. However, it is anticipated that orders of many bulk grades into China could help drive the market for ONP, OCC and, to a lesser degree, mixed paper.

While this has created some concern on the part of paperstock dealers, especially larger exporters, there have been some signs of an improvement. During the first few months of the year, more than a few exporters reported getting more inquiries. Although these increased inquiries have not translated into a significant jump in orders, many vendors feel that prices could start to firm as these inquiries are converted into actual orders.

Adding to the overall uncertainty of the export market has been the uncertainty of the Mexican market. While overall demand for recovered fiber, especially low grades, has been strong to Mexico, there are concerns over payment. With one of the largest OCC consumers in Mexico extending its payment period for recovered fiber, some exporters are becoming skittish about committing significant tonnage when payment is in doubt.

The Canadian market, the largest end market destination for recovered fiber leaving the U.S., continues to grow. However, the problems with the Canadian forest products industry are similar to those in the U.S. An overcapacity of many finished product grades continues to create uncertainty over steady movement through the first half of this year. Without any clear-cut upward trend in the forest products industry expected over this year it would be likely that while total supplies may increase, pricing will likely be under pressure.

The short-term scenario for paper stock markets seems to be somewhat downbeat. But despite the negative sentiment being expressed by many recyclers and mill officials, there is a sense that some of the short-term problems that hammered many paper stock grades late last year and early this year are starting to slacken. If the inventory problems can be cleared up and the offshore market starts to shift from inquiries to actual sales, price and demand could start to pick up. And if that happens, markets could turn quite quickly. RT

The author is a senior editor and is Internet editor for the Recycling Today Media Group.