Handlers of old corrugated containers (OCC) are enjoying the market these days. Higher prices, strong demand and limited inventory are creating an enviable situation for many vendors. Reflecting this promising environment, prices for the grade have been strengthening through the second half of the spring, and are expected to continue to show positive signs deep into the summer.
The question being debated is whether this improvement will move through the rest of the year, or is it more likely that prices are rapidly nearing their plateau?
During the past several months there has been some fairly upbeat news on the recycling front, but none more upbeat than the upswing in OCC movement. But—and this is the most important issue—can the upswing in price and demand walk the fine line between an extended long-term market upswing and a grade that overheats?
AN ANALYSIS OF THE GRADE
OCC is the most widely recycled of the paper grades. Due to the nature of the grade, it dictates the movement of other low grades, including old news, mixed paper, double-lined kraft cuttings and box cuttings, among others.
The most obvious influence on OCC pricing has been the strengthening markets for linerboard and corrugated medium. Both of these grades, components of cardboard boxes, have seen some recent price increases pushed through. This is the first indication that demand for the grade has been strong enough to warrant stronger prices. Two large paperboard producers, Georgia-Pacific Corp., Atlanta, and Smurfit-Stone Container, Chicago, each announced plans to push through a $40-per-ton price increase for both linerboard and corrugated medium the first of July.
A price increase is usually warranted when demand for the finished product improves. This may be the case, as new capacity has been coming on line, which indicates that orders are strong for the material. Other mills, whether raising prices or not, have much better running schedules.
Several equipment rebuilds, new capacity and re-opening of idled machines are helping tighten the supply of OCC. A new machine at Solvay Paperboard’s mill in Solvay, N.Y., will spur further demand for OCC once it is able to work off its inventory. The situation could help create more promising price news through the fall.
Weyerhaeuser also recently re-opened one of its idled machines at its Springfield, Ore., paperboard mill. The re-opening will also increase the amount of recovered fiber the mill takes in.
PRICE LEVELS
Depending on who you talk to, markets have either finally rebounded to a workable number or are approaching inflationary levels. A number of paper stock dealers say prices for OCC, which were moving to domestic mills at levels as low as $35-per-ton early this spring, are now moving for as much as $80+ moving into July. Looking further into the summer, the situation could improve even more sharply as the available supply continues to be limited.
Adding to the great upside potential is the specter of the offshore market intensifying competition with domestic mills.
Already there have been some surges and ebbs for OCC offshore, especially to Korean and Taiwanese mills. Economic reports that point to a gradually improving Asian economy has led to some better movement to these sources, although there hasn’t been enough movement to signal a clear trend. But should that trend emerge, it could help draw some increased competition between domestic and offshore buyers, who may end up battling for a limited amount of tonnage.
A REGIONAL OUTLOOK
The overall improvement in OCC markets is apparent. However, there are a variety of regional trends allowing for better markets in different regions to take place. The Southwest has been one of the biggest beneficiaries of better than expected Mexican buying
With the Mexican economy improving, the situation could help improve the flow of OCC through the next several months. Adding to better Mexican orders, there are many large OCC consumers that pull from throughout the Southwest. International Paper’s Mansfield, La., recycled board mill is one of the largest consumers of OCC generated in the Southwest. Despite some recent increases in supply, the mill is playing a growing role in the market for OCC. As for packers in the Texas area, the mill has helped keep the market for OCC flowing at a fairly strong clip. Can it reach the $200-per-ton level that was reached several years ago? Possibly, says Al Alvarez, with Waste Management Inc., Irving, Tex., although he feels more likely that OCC will move at slightly lower levels. “Markets for OCC are tight and getting tighter.”
Along with the IP mill, Willamette Industries’ Campti, La., mill completed the installation of a hydra-pulper that should boost its OCC requirements. Another Southwest paper stock dealer notes that a strong buying from mills in both the Southwestern U.S. and Mexico have kept the movement of OCC strong.
Pete Grogan, market development manager for Weyerhaueser, Federal Way, Wash., says the trend by mills toward just-in-time inventory is requiring more mills to buy OCC on a regular basis. When markets tighten up, as they are now, the buying can become very competitive.
The Southeast is the home of many of the largest OCC consuming mills in the country. Over the past several months demand from many mills in this area has intensified. Several packers in the Southeast note that most of the larger mills in the region have become very aggressive with their buying. Concerns continue to grow that the available supply of OCC is limited, which could create a fiber crunch within the next several months.
A key factor for the development of the OCC market is the number of large consumers in the southeast that are reportedly running with only minimal inventories. This situation, along with the overall tightness in the U.S. market has, according to a Southeast paper stock dealer, “Forced all the major players to run around with their checkbooks out.”
In the Southeast, this scenario has been painted to include the possibility of some mills running totally out of fiber, a disastrous situation, all concede. With this fear, and the trend toward shrinking raw material inventory levels, board mills throughout the Southeast have been looking to lock up tonnage from vendors in the area.
A key will be Fourth of July weekend. Typically, generation is down during that time. And, with linerboard prices moving up, it is expected that most paperboard mills will be looking to run through the weekend. After that, depending on the availability of OCC, the situation could ease back. However, a packer on the East Coast notes, the situation is somewhat touch-and-go, with markets tight and prices continuing to firm.
Some vendors feel OCC prices could move up another $20-per-ton in July, which could bring OCC prices to around the $100-per-ton level.
While OCC markets are definitely stronger than they have been in the past, not everyone feels OCC is heading toward the $200-per-ton level. Tom Lyon, president of Vista Fibers, a Texas-based operation, feels that while demand for OCC is good, “cooler heads will prevail.”
Several years ago when OCC was moving for $200-per-ton, some finished product prices were moving for around $700-per-ton, he notes. Presently, if a July price increase holds, the price of linerboard and medium will be closer to $400-per-ton. This makes it very difficult for mills to justify paying such a large portion of the cost for the raw material.
Other regions of the country are expressing similar optimism about OCC markets, with other factors in place that should help keep prices at a fairly strong clip. Prices for the fiber have been moving up between $10 to $15-per-ton, partly due to offshore orders. However, there are enough domestic buyers playing a more active role in the markets to keep a balance between offshore and domestic mills.
The strength in OCC has been enough to pull up other grades, including mixed paper and double-lined kraft cuttings.
Other areas of the country have been seeing a similar scenario. Prices have been moving up sharply. Coastal regions have been enjoying steady to strong offshore orders. The European market had been a release valve for many Asian mills. The European arena has become a more active participant in the Asian paper stock market. For many Asian mill buyers, the ability to play European paper stock dealers against U.S. exports has allowed for more competitively priced fiber grades.
One New York City-based paper stock dealer feels that a key driver for the paper stock market on the East Coast has been the aggressive buying by many Asian mills.
While giving many vendors a short-term boost to business, this exporter feels that once containers free up in Europe, more material will flow from the European continent to Asia.
EXPORTS A BOON
While the overall trend appears to be a steady upswing, several players in the market have been having a larger impact on the business. On the overseas market, a new paperboard mill slated to open this year in China, America Chung Nam, has been buying sizable loads of OCC to build up its inventory in anticipation of the mill’s startup. Grogan says America Chung Nam “is very interested in OCC” from the U.S.
The strength in domestic markets has been a driving force for OCC. The Asian market has also been playing a larger factor on movement from coastal regions. A New York City-based paper stock dealer notes that strong buying by Taiwanese mills has added to the overall upbeat tone of the OCC market. Demand has noticeably picked up, with higher prices for offshore orders forcing more domestic buyers to raise their price.
The strength in the Asian market is also being attributed to the lack of tonnage flowing from Europe to the Pacific Rim. Over the past several months many European paper stock operations were sending more of their material to destinations within Europe.
One East Coast source notes that the war in Serbia choked off a good number of containers, leaving fewer available for shipping commercial goods from Europe to Asia.
FALL A LONG WAY OFF
Most vendors feel OCC markets will continue to show good strength through the summer. While generation is not down, there appears to be more opinion that collection is nearing its maximum recovery level.
Moving into fall, the generation of new material should pick up. Some paper stock dealers feel this could soften OCC markets moving in late fall.
This opinion is widely debated. Some vendors expect prices to continue to improve through the rest of the year, while many paper stock dealers feel demand is steady with stronger orders to follow later in the year.
The strength in OCC markets is, to a degree, eerily similar to the mania that engulfed the OCC market in 1994-1995. While during that time OCC prices crested above the $200-per-ton level before crashing, this scenario, some vendors point out, is much different. Paperboard mills, despite passing one price increase, are not reaching 1995 price levels. Because of this, it is likely that prices, while improving, will see a ceiling far lower than the $200 standard. However, as more than a few paper stock dealers note, no one really knows where the market is headed. All they can do is go along for the ride.
The author is editor of Fibre Market News, a bi-weekly newsletter covering the paper recycling industry.