Trend Spotting

Moore & Associates is a recovered paper markets consulting firm based in Atlanta with a domestic and international practice. We got our start in pricing analysis 15 years ago. We use the term actual market a lot, and it refers to the aggregate real market versus published prices. Our source for that is mill data from tens of thousands of transactions, and it differs from what is published because it includes contract prices and spot prices. It is a domestic price, though; it is not an export price. Most of our analysis always works off of annual real market averages.

There are five publications that we tend to watch in terms of recovered paper pricing—Official Board Markets (OBM), RISI’s PPW (Paper & Paper Week) or PPI (Pulp & Paper International), Secondary Fiber Pricing, an online-only pricing service, Paper Stock Report, which is one of the only publications that does loose and baled pricing, and then Recycling Markets.

We have a different way of looking at pricing than most people have. As I mentioned, it is very strategic and real-market oriented. In order to translate this data into what it means for you, we have developed long-range differentials from the U.S. or North America average pricing for OCC (old corrugated containers), with Eastern Canada being minus $6; the Northeast, minus $6; the Southeast, zero; the Midwest, minus $5; the Southwest, plus $4; the West , plus $11; and the Pacific Northwest/Western Canada, plus $8.

AN UPWARD TREND IN OCC
In the long-range history for OCC, 1995 was the Mt. Everest of pricing, featuring the highest full-year OCC pricing at $145. The spot price in May of 1995 reached a peak of $250 per ton in New York and L.A. It made last year’s numbers look small by comparison.

In late 2008, there was a serious drop-off in the price for OCC. In the previous significant drop-off in 2001, also a recessionary year, OCC pricing went down to $50 for the year, and then it was mostly uphill for seven years with a few corrections until 2008.

Looking at the pricing history in yearly halves, OCC pricing dropped steeply in the second half of 2008. OCC peaked in May of ’08 with the first half of the average at $132 per ton. It started down first among all the grades, and fairly predictably by our analysis. We had forecasted for some time that OCC prices would begin to fall in the third quarter of ’08, and indeed they did. We were doing pretty well with our forecasting through October. We saw China’s board-making overcapacity, knew there was a lot of buildup for the Olympics and we knew the bull market was long in the tooth. It was inevitable that there would be a correction. We just never figured that the second half would come in at $97 per ton, and the first half of 2009 at $45 per ton, right down there with $50 per ton in the first half of ’02, the last dramatic market bottom.

The long-term OCC statistical price trend line is still heading upward. It takes more than a couple of down halves to move the trend line.
The short-term OCC price trend line is basically flat for the first time in seven or eight years. The OCC market was incredibly stable for quite some time, about six quarters in ’07 and the first half of ’08. Prices then began to ease down, and then the bottom really fell out beginning in the fourth quarter of 2008. December 2008 through the first quarter of 2009 was really bad, but since then we’ve had a recovery.
In terms of the fundamentals, we thought China’s domestic economy would start to recover, and indeed it has. Export statistics show that China bought more U.S. OCC in the first half of 2009 than it did in the first half of 2008. Some of that was opportunistic buying, with pricing looking pretty good. But the mills also worked through a lot of their recovered fiber and product inventories, and their operating rates started to come up in the first quarter.
Compared to published prices, over time our actual pricing generally is higher. Mill pricing is a combination of contract and spot prices, with contracts being written around published pricing plus some differential. Our actual pricing typically runs 8 percent to 10 percent higher than the combined published prices.

Recovered paper grades are very volatile commodities. The times of stability are unusual. More typically, you have spikes going on all the time in OCC. Of all the commodities in the world, OCC is typically one of the most volatile.
If you look back to the early ’90s, which was the historical multi-year low when conditions were quite poor in the recovered paper business, the cost of collection exceeded the market price of the material for almost four years. With the recovery rates we have now, the cost of the material cannot stay below the recovery costs, otherwise the material disappears. Early in 2009 market prices were well below the cost of collection, and we began to see the price correction that we are now well into. The nature of the business is that the OCC market can get down to the cost of collection, and then the last incremental tons disappear.

A large percentage of the OCC market isn’t dependent on the market value, and with ONP (old newspapers), it is even more so. This is what we call involuntary generator tons—supermarkets don’t stop making OCC because the price is down. The scale trade goes away, but the scale trade is only a small part of the business now. The amount of incremental material that will disappear when the market goes down is fairly small, but it is still enough that it does self-correct.

ONP PROGRESSES UPWARD
To gauge things for your region in terms of ONP pricing, these are our long-term differentials developed during the last nine years: Northeast North America, minus $5; Southeastern U.S., minus $1; Mid-North America, minus $5; and Western North America, plus $9. In recent years, the Southern U.S. has actually dropped quite a bit. It was on the plus side of the equation for quite some time, and the last two years had enough of a change to push it to the negative side. And the Western price actually has dropped a little bit, too. If you looked at these differentials 20 years ago, the spreads would have been much wider. The West Coast was much higher than other parts of the country. Improved transportation has leveled those out. When things get really high in California, they start sourcing material out of Colorado, New Mexico and even West Texas and Kansas.

Of course the same is true in global pricing. For example, export is starting to soften a little bit in the U.S. because European prices are a lot lower, and the Asians are starting to go to Europe to avoid price increases out of North America. The globe reacts the same way the U.S. does in terms of pricing.

ONP pricing has a lot of similarities with OCC pricing generally, but the one difference is that in ’08, ONP was sharply up for the year and its pricing held up longer into the year. If you look at pricing in terms of yearly halves, ONP is quite a bit different than OCC. OCC took a deep plunge in the second half of 2008. The first half and second half of 2008 for ONP were identical at $128 per ton. The fourth quarter was down, but it wasn’t really until the first half of this year that a rapid drop-off becomes visible when looking at half-year pricing.

Long-range ONP trend line pricing is still up (from ’01 to ’09); but the short-term trend line is almost flat.
Even the fourth quarter of ’08 was hanging in there because ONP prices into September and October were still pretty strong. It wasn’t until November and December that they totally collapsed. We came off the bottom in the second quarter of this year and continue upward. This recovery has been fairly similar for both ONP and OCC.
Historically, the two published prices that we watch most closely—PPW and OBM—have been quite close. The interesting thing we’ve noticed is that since 2007, when the ONP market really started to march upward, PPW starting leading OBM in the range of $7 or $8 per ton.

ONP prices were still trending upward dramatically in the third quarter of 2008 after OCC began its retreat. There was a degree of speculation in the marketplace by people who were not really buyers or sellers. ONP pricing didn’t turn until the fourth quarter, and then we saw a dramatic fall from $162 per ton to $66 per ton into the first quarter of ’09. The published prices fell more dramatically than what the mills  actually experienced (from $139 per ton to $116 per ton). Again that has to do with contractual obligations and the difference between spot market/contract and domestic/export pricing and how they influence the market.

It was really quite a steady period for the ONP market from 2002 through 2006. During that time, when prices were trending upward, ONP had fewer spikes given the fact that a number of involuntary tons were coming out of municipal programs.

From July 2008 through January 2009, the lack of ONP volatility was absolutely unprecedented in the minus 60 percent price range. During the first half of 2009, we saw an uptick in pricing volatility. Going forward, we will be moving back to less volatile pricing.

ONP  has some similarities with OCC in terms of collection costs versus market price. ONP prices can touch and dip below collection costs, because it is involuntarily generated. Homeowners don’t care what the value of ONP is when they put their old newspapers out on the curb. There is very little scale trade anymore, so it doesn’t exhibit the correction that OCC can still exhibit because part of that market goes away when markets turn down.

IN THE MIX
Mixed paper has become a very large grade and is really the only significant under-recovered grade still out there.
Looking at the pricing history by half-year intervals, mixed paper had pretty stable markets for four years—from the second quarter of 2002 through the first quarter of 2007—and then upward movement to some stability at just above $90 in the first half of 2008 before the drop off in the second half of 2008.

The fall in mixed paper pricing was even more dramatic than in other grades. The mixed market fell apart more so than any of the other grades because it is a limited-use market and almost entirely pegged to the export market.
Looking at the pricing history for mixed paper on a quarterly basis, we see something similar to what we saw for OCC, though the downward dip was faster and deeper, from $88 per ton in the third quarter of 2008 to $15 per ton in the first quarter of 2009. The short-term trend-line price is just about flat also.

The published and the actual pricing for mixed paper was in a much closer agreement than many of the other bulk grades. One of the interesting things that we noted was that the mixed paper market turned quite early in 2008 as opposed to ONP. We saw our actual prices peak at the end of 2007 at $94 per ton, and the pricing was dropping off throughout 2008, while the published price was continuing to rise. The published pricing dropped off dramatically through the third and fourth quarter of 2008, but we saw the actual pricing not falling as quickly during that time, given some level of contractual agreements in the marketplace.

LAGGING SOP
The differentials for the North American average SOP (sorted office paper) price relative to the regional prices are: Northeastern North America, minus $1; Southern U.S., minus $2; Mid-North America, minus $2; Western North America, plus $5. These differentials are much lower than for the other major grades because SOP travels farther; it is less of a local grade. The freights are longer, and the market is pretty much East and West Coast. There is not a lot of domestic market on the West Coast.

Looking at the annualized average for a number of years, 2004 to 2005 was an interesting time for the SOP market, when document destruction material began to oversupply the market and SOP prices fell. OCC and ONP prices in that time frame were rising, and pulp prices were increasing also .(Pulp prices and SOP rarely disconnect.) But this was when the document destruction business was really ramping up, and it oversupplied the market for a time. Then, coming out of that, it moved uphill with everything else, pulp included, reaching a peak of $235 for last year, a pretty strong number.

Of course looking at the pricing history in terms of halves, the second half of the year exhibited a pretty serious drop from the first half ($234 per ton to $96 per ton), not as much as OCC, but more than ONP. Then there was continued downward movement to just above $100 per ton. SOP lost $131 per ton in the space of six months.
 When you look at it by quarters, it’s shocking. SOP had incredible upward strength from the first quarter of 2006 through the fourth quarter of 2007. We stayed up there for about three quarters, and then the bottom fell out.

As compared to OCC and ONP, the recovery of SOP has lagged, though it has started to move up since June 2009. SOP was staying down because pulp prices were down, and to some degree they are interchangeable materials. The other grades of recovered paper had already started to move up, but SOP had not on a quarterly basis, until the third quarter of 2009.
From 2000 to 2008, OBM pricing was averaging 7 percent above the PPW pricing. Prior to that, these prices were much closer together. Our actual prices are around $18 per ton above the published price, or around 10 percent.

INSIDE THE BOOK
Coated book stock (CBS) is a specialty grade that is disappearing along with the printing industry in the United States. It is related to SOP and it is used by tissue mills and other deinking operations. CBS is very much a supply-constrained grade.
Looking at the pricing history by quarters, similar to SOP, CBS rebounded through the second quarter of 2009, but has strengthened since then. A major part of the  CBS rebound is because supply and generation are so tight.
But, similar to SOP, CBS had a really long upward run from the second quarter of 2006 through the first half of 2008. All of the high-grade materials tend to track pulp as the most statistically significant variable.

MARKET FORCES
The general economy is a strong driver affecting recovered fiber markets. Disposal costs are only important in terms of long-range forecasts. Recovery costs are in the middle in terms of their statistical correlation. Mill operating rates for newsprint and linerboard have a reasonably strong connection to pricing. For high grades, pulp supply and pricing are statistically significant. Supply and demand, particularly export demand for the bulk grades—ONP, OCC and mixed paper—has been the most important driver for some time.

When we looked at OCC forecasts, $36 was a good number for the first quarter of 2009. We thought the second quarter would come in at $40, and it came in at the mid-$50s, so we lagged behind. In the third quarter, our forecasts lagged some pretty strong upward price movement. Chinese demand has been little bit stronger than we anticipated. Sharp upward spikes are certainly possible because generation is off so significantly.

Our outlook earlier this year was for ONP to have a little slower recovery. With the newsprint business flat on its back, any increased demand is not coming from North America. But the overseas boxboard and newsprint business could definitely cause a spike, especially because U.S. generation rates are off so significantly.

Mixed paper took a much heavier fall than OCC prices in late 2008/early 2009, and we think the recovery is going to be a little bit slower because it is primarily an export grade. China’s buy of mixed paper went down 34 percent during the first quarter of 2009 compared with the same period in 2008. That drove mixed paper much lower in price than OCC on a relative basis. Only one of the major mixed paper importers from the U.S., India, was up (15 percent). Everyone else’s imports were off by 30 percent or 35 percent.

SOP lagged the recovery that started first in OCC. That is because pulp prices were still coming down well into the second quarter of 2009. We hit the bottom on SOP in June of 2009 and we are going to see upward movement continue. 

The authors are with Moore & Associates, a recovered paper markets consulting firm based in Atlanta. Moore & Associates now has available “The Outlook for Global Recovered Paper Markets.” More information is available at marecycle.com.