Paper

A lagging domestic economy, escalating transportation costs and less aggressive demand from overseas buyers all have contributed to the sluggish, but steady, conditions in the recovered paper market.

Prices remained flat, and even fell back somewhat for bulk grades in some regions in early September, at least in part because of an increase in supply created by the continuing trend of shrinking domestic capacity. Mill closures continue across the country, including Memphis-based International Paper’s announcement that it will shut down its No. 3 paper machine at the Valliant mill in Oklahoma indefinitely as of Nov. 1. The machine produces about 430,000 tons of containerboard per year.

Such mill closures and partial shutdowns lead to oversupply of recovered fiber, which can have a dampening effect on prices, according to a recycler based in the Southwest. "What happens is the tons that were going to that mill need to go somewhere else. That increases supply, so mills can take advantage of that," he says. "Mills realize there are extra tons, so they can be more selective in shopping when you dump that much material into the market."

According to a recent report from the American Forest & Paper Association (AF&PA), Washington, domestic consumption of recycled paper in July 2008 decreased 4.7 percent compared to July 2007. Year-to-date, total consumption has declined 1.2 percent compared to the same period last year.

General economic conditions are at least partly to blame, according to one California recycler. "A lot of manufacturing has left the country, so the packaging need isn’t there," he says.

Export demand has been strong enough to keep prices steady, but the formerly voracious appetite from China—one of the world’s biggest importers of recovered paper—has been tempered lately, sources say. "There hasn’t been much notable activity from China," says the Southwestern recycler. "People were expecting the floodgates to open after the Olympics, and it just hasn’t happened. There’s still demand coming from there, it’s just not as aggressive."

Consolidation is a continuing trend as well. In September, Sun Capital Partners, Boca Raton, Fla., announced that one of its affiliates has acquired two coated recycled board mills from Graphic Packaging, Marietta, Ga. The two mills will form a newly formed company called Paperworks Industries Inc.

The acquired mills are in Philadelphia and Wabash, Ind. The two mills produce approximately 300,000 tons of recycled paperboard per year. Combined, the new operations will control approximately 11 percent of the U.S. coated recycled paperboard market.

Mexico is still a strong destination for North American’s recycled paper, though the Southwestern recycler reports that even that country has seem several mill closures and lagging demand. "Many of the mills are full, so they have slowed down their buying and are working off their inventory," he reports.

Recyclers on the West Coast are able to take better advantage of what demand there is from overseas buyers. However, escalating freight costs are making export transactions increasingly costly. "Steamship lines are raising rates aggressively," reports a California recycler. "We’ve had some rates that eight to 10 months ago ranged from $440 to maybe $500, and they are now asking for $2,200. That’s a big change."

Generation has been low, which is typical in the summer months. However, the industry can usually expect a sizable increase in the fall gearing up for the winter holiday season. Sources report some concern about how the sluggish U.S. economy will affect one of the market’s busiest times. "As the industry gears up for the holidays, traditionally you’ll see the market picking up," says one recycler. "The dynamics are different this year, and we won’t know how it will go until we’re through it. Retail could be down—but things can change quickly."