A NOT-SO-HAPPY HOLIDAY
There is not likely to be any great cheer in the paper markets as 2009 comes to an end. Prices may have rebounded nicely from the beginning of the year; but, as 2009 comes to an end, it appears those price increases are ebbing.
Prices softened in October as Chinese interests opted to rein in their purchasing. Steady to strong buying had helped strengthen markets for a number of bulk grades during the past several months, though prices started to feel resistance in September.
October pricing started to ease back, while November prices will likely be flat at best, with a number of bulk grades showing price declines. OCC (old corrugated containers), mixed paper and ONP (old newspaper) will have some challenges going forward, as demand is expected to remain slack through the end of this year and into early 2010.
Along with reduced buying from China, cyclical issues also are coming into play. In a traditional market, orders toward the end of the year decline as end-of-year holiday purchases conclude. This results in reduced demand for raw material, such as OCC, that is needed to make packaging.
On the domestic side, International Paper, based in Memphis, Tenn., recently announced plans to close several mills, which will cut into overall demand for raw material. In addition to these closings, the company announced that it will move one of its paper machines from indefinitely idled to permanently closed. The mills International Paper has closed include its Franklin, Va., paper mill, as well as containerboard mills in Pineville, La., and Albany, Ore. The company also is removing a machine from its Valliant, Okla., board mill.
These moves are expected to remove around 2.1 million tons of capacity from the market.
The market slide comes after a fairly healthy rebound during the past several quarters. However, while paper stock markets have been fairly stable to strong through most of the summer, buying on the part of domestic mills has not been enough to sustain markets as offshore consumers take a breather.
Orders for shipments to China aren’t expected to crop up until sometime in the first quarter of 2010.
Another factor that could play a larger role in the paper market (as well as in many other exportable commodities) is the sharp weakening of the U.S. dollar. With the dollar declining against many other world currencies, there is an opportunity to take advantage of the price disparity to move more material offshore.
However, counterbalancing the weakened dollar have been increased container shipping costs. Prices for containers have shot up, making it more expensive to move material to Asia. The shortage of containers has been one reason for the price increase. And, many of the shipping lines have opted to sharply raise prices to recoup some of the high fuel costs they incurred earlier in the year that cut into their profitability.
The ONP market, which has been struggling with slow demand from the newsprint industry, is probably not going to see a turnaround any time soon. The most recent figures from the Audit Bureau of Circulations show that average daily circulation dropped 10.6 percent from April 2009 to September 2009 compared with the same six-month span in 2008. The decline was greater than the 7.1 percent drop seen from October 2008 to March 2009 and greater than the 4.6 percent decline from April 2008 to September 2008.
The accelerated drop in circulation has resulted in lower demand for finished newsprint and is one of the big reasons why North American newsprint mills continue to take significant downtime in an effort to remove capacity from the market.
A final wildcard in the overall paper market has been the residual effect of the black liquor tax. This major alternative-energy tax credit, which a number of paper companies have been able to take advantage of, has resulted in some domestic mills running machines full out, regardless of the demand for their finished products.
However, some of these mills have now built up large inventories and may be running at far lower operating rates as they look to sell off their finished products. If this turns out to be the case, domestic demand for OCC, which felt the pinch when some board mills moved away from the material to take advantage of the tax credit, may not see a big bounce.
(Additional news on paper recycling markets, including pricing information, is available at www.RecyclingToday.com.)