Inside the Box

International Paper manages more than 6.5 million tons of recovered paper in North America. Four million of those [tons] go into our paper processing, so it is a very important part of the business from a supply chain perspective as a fiber resource. More importantly, the recycling business adds a different dimension to our businesses in helping us close the life-cycle loop. It helps us meet with customers to look at the whole life cycle of paper products and of recovered fiber and to be able to bring solutions to them. It puts us at the table with some significant customers, such as Walmart, Staples and others.

It goes without saying, recovered paper is very important to the industry. If you look at industrial packaging, or corrugated, as well as at boxboard, 43 percent of what is recovered in North America goes into domestic production of packaging.

NORTH AMERICA CONTAINERBOARD STRUCTURE

In North America, we have about 35 million tons of capacity. Most of that—90 percent of it—feeds domestic box plants and the corrugated industry. Ten percent of that capacity is exported and, of that exported material, about 100 percent is virgin kraft liner.

There are really two fiber sources: virgin kraft, or wood-based, and OCC (old corrugated containers), or the recovered fiber based. In North America, about 60 percent of the fiber that feeds our corrugated mills comes from the virgin kraft process. The rest comes from recovered fiber. This is significantly different than anywhere else in the industry, and that draws different economics for the producers. The capital cost for a new virgin kraft paper mill is about double what it costs to build a recycling mill on a per-ton basis. On the manufacturing cost perspective, in the recycled mills, all paper manufacturing is very energy intensive. The kraft process allows us to produce about 70 percent of our energy needs from the byproducts of the kraft process, whereas in the recycled mill, you have to purchase almost 100 percent of your energy, unless you have other sources. So from a recycled mill prospective, the fiber costs and energy costs can be 50 to 60 percent of the cash cost to manufacture containerboard. On a kraft process, it can be about half of that, so that does drive different economics for the industry.

CAPACITY REDUCTIONS

Since 2000, almost 5.5 million tons of containerboard capacity have been shut down. Now, there has been some capacity—about 1.5 million tons—added. Some of that was the result of conversions—paper machines that have been converted to containerboard, similar to what International Paper did to our Pensacola, Fla., mill. We took it from a white to a lightweight linerboard mill. Other capacity additions have been the recycled mill.

During this time frame, we had the recession that started in 2000, so that caused demand to drop. But, really, the key driver was China. This is when China broke through the scene as an industrial powerhouse in exporting industrial goods, both durable and non-durable. A lot of durable and non-durable manufacturing shifted from the United States. It had shifted and was shifting to Mexico, but to a great extent it moved over to China. The U.S. dollar was very strong. The question is, will this continue?

Another trend was lightweighting in terms of basis weights and also in terms of reducing [the weight of] the packaging. This is a trend that caused containerboard demand to decrease over time and capacities to come out. From a recovered fiber perspective, demand has actually increased because virgin kraft mills have been shut down. Almost 5 million tons of the capacity shut down were virgin kraft. The mills that were added were recycled-content mills, so from a recovery perspective, OCC demand has increased in North America.

BOX DEMAND

You can’t talk about containerboard demand unless you talk about boxes. Box demand did peak in 1990 and has declined because of the recession and other aforementioned factors. [Demand] did start to increase until about 2007. That was the most recent peak, and then during the “Great Recession” of 2008, we saw a decline. The demand dropped in 2009 to almost 1992 levels. That is how significant it was. Box demand is rebounding. It is 4.5 percent year-to-date. That will grow; but, even at that rate, you will not see 2010 approach the level it was at in 2008.

We think that coming out of the recession, as disposable income increases, spending increases. As unemployment drops, we are going to see increasing box demand as it goes back up to those levels of 2007/2008.

Is there a structural decline? Will non-durable production continue to migrate overseas? We think that will lessen because inflationary pressures in China will probably cause the yuan to strengthen against the U.S. dollar. Ocean freight rates will increase. Interest rates will have to increase in the United States, [and] that will cause capital carrying costs to increase for customers, so they will be less inclined to haul large inventories overseas. We believe that demand will increase.

What drives box demand is non-durable demand in the United States. If you look at that period between 2000, where box demand was declining, non-durable consumption in the United States continued to increase. It is just that it was being fed by production from China. Thirteen percent of the economy was driving 85 percent of the containerboard demand, hence the recovered fiber demand for containerboard in North America. As the economy recovers, non-durable demand should increase, and that means that demand for recovered fiber will increase.

GLOBAL PERSPECTIVE

One of the fastest-growing areas in paper is in the packaging area. What is driving this is GDP. As GDP increases, more people move to the middle class, disposable incomes increase, demand for non-durables increases, so box demand increases. There really isn’t a good substitute yet for boxes and the purpose they provide. But, as I mentioned, the dynamics in the United States in terms of fiber supply are a lot different than what you see around the globe.

Where is the fiber going to come from to meet the demand for the containerboard? It is all primarily OCC and a little bit of mixed fiber. United States virgin kraft fiber provides 60 percent of the fiber needs for containerboard. Globally, it only provides 24 percent, so 75 percent of the fiber that’s needed for containerboard growth is provided by OCC and mixed fiber. What drives that is the economics. Right now, most of the growth is in China. The country doesn’t have access to low-cost fiber in terms of soft wood. The other thing is the capital cost, and we don’t see that changing. The capacity that is going to be built will probably be OCC—manufactured or recycled containerboard.

Containerboard demand is going to increase by about almost 100 million tons by 2030, and that is all going to be fed by OCC. That means the global recovery rates are going to have to increase to be able to meet that need.

SUSTAINABILITY TRENDS

It is an evolution. It really started back in the 1980s and 1990s, and it started really with recycling. We saw it from a paper perspective during the “Barge Crisis.” In the 1990s there was a New York barge of trash that wasn’t allowed to land anywhere. And at that point, the U.S. public believed we were running out of landfill capacity. As a result of that, we saw a tremendous push for recycled content in all of our paper products.

Sometimes there are watershed events that really drive the “green” movement. Another one that occurred in the 1990s was the sustainability movement. This movement was really driven by the Forest Stewardship Council (FSC), as the group was moving to get companies certified that their forests were sustainable as were the products they were providing, whether they were wood products or paper products. As a result of that, other sustainability programs evolved, and it became very important to have chain-of-custody from the woods all the way up to the end product. Where did your fiber source come from, and was it from a sustainable resource?

Material reduction is part of the trend we are starting to see. And you see life cycle analysis and scorecards. What we are seeing is true partnerships from this whole supply chain with customers, with NGOs (non-governmental organizations) and sometimes with the government. It is where you really start to see some very powerful changes in the whole process of how you manage the sustainability issue.

FUTURE CHALLENGES

I don’t think we face any more challenges or any different challenges than [other] industrial producers or any business in the United States.

One of the key things is [that] we are [a] very energy-intensive [industry], so competitive, clean, green sources of energy are going to be very important for us. But it is also important that, as we tackle the greenhouse gas issues within the United States, we are looking at and making sure that the unintended consequences [of our remedies] don’t cause us to be disadvantaged on a global basis.

Equitable trade agreements are also needed. Free and open trade is important to the paper industry.

A skilled workforce may be a challenge in the future. Education is key. The days of employees being able to check their brains at the door have long passed. Information technology permeates everything we do today. If you go into a paper mill and go into the control rooms, it would look like the Star Wars movies from the controls perspective, so organizations are flatter. We need employees who can critically think, especially as we drive for continuous improvement in all our operations. It is important that we have a skilled workforce.

Health care continues to be one of the fastest rising costs that manufacturers have, and being able to deal with that in the future is difficult.

The federal and state governments are going to be struggling with the effects of the recent recession to the extent that taxes take away from money that could be used for investments. This is going to stymie growth. The fact that taxes take away money from disposable income would also mean stymied growth. Taxes could be a huge issue in terms of the growth and the ability to grow coming out of this recession.

Sustainability also seems to be an issue that we face. I think it is really an issue of perception for the paper industry. How it is that a product that comes from a renewable resource that is the most recycled, recovered [material] in the world is still perceived to be less sustainable than other materials is baffling. It is a message that the paper industry needs to continue to put resources into, making sure that the right messages are getting out to the public.

The author is vice president of strategic planning at International Paper. He is based in Memphis, Tenn., and can be reached at john.sims@ipaper.com. 

OCC AT A GLANCE