Paper Markets Continue Bumpy Ride

The paper stock industry continues to operate in a boom/bust scenario. Recent trends show paper stock markets throughout North America slumping. The cause is a familiar one – too much capacity, not enough demand, slow export markets, inconsistent buying and softening prices.

While many in the industry have seen these cycles before, this recent troughing appears to be taking a larger toll on the industry. There is a growing concern that the attrition rate for paper stock operations is becoming so great that there could be a serious decline in the availability of material to feed mills once demand picks up. Although this scenario is being widely debated, the truth is that more recovered fiber is being collected than ever before.

According to the American Forest and Paper Association, Washington, domestic mills increased their consumption of recovered fiber by 9 percent last year to 34.3 million tons. The increase, according to W. Henson Moore, AFPA’s chief executive officer, "is the largest one-year jump in history." Moore adds that the increase comes while total domestic paper and paperboard increased by only 1 percent last year.

The total amount of recovered paper collected last year was 42.3 million tons, bringing the recovery rate for 1996 to 44.8 percent.

While many paper stock dealers are currently singing the blues about overall paper markets, there are regional variations. In fact, processors in some regions have fared reasonably well during the market downturn due to local dynamics. For example, East and West Coast paper recycling industries are greatly influenced by export conditions, whereas the Midwest’s dependence on regional mills has allowed this area to stay firmer.

"The Ohio Valley region has lots of good mills," says Stephen Grossman, president of the Columbus, Ohio, division of Omaha Paper Stock, Omaha, Neb.

In the Southwest, especially in the Texas area, the impact of the Mexican paper industry has allowed this region to remain in much better shape than many operations on the East Coast. Demand from this region is strongly felt with many of the office grades moving to several of the large mills in the country.

The number of large board mills in the Southeast has helped keep prices for old corrugated and other bulk grades in better shape. These new machines are running at rates much greater than many of the older mills in the Northeast.

This growth, however, is lost on many collectors of the fiber, who report lower prices for the material, as well as softening demand for a number of grades. Vic Gaylor, chairman of the AFPA’s Recycling Section, notes that one of the issues to remember when looking at the paper industry is the way the market grows. "The paper industry grows in plateaus. It goes straight up the wall and then levels off," he says.

When a new paper machine comes on line it may add more than one thousand tons of new product onto the market. It may take some time for the market to absorb this additional capacity, adds Gaylor. "It takes time for the consumption to catch up with production."

Another dampening factor for the paper recycling industry is the overall malaise afflicting the forest products industry. Financial reports from most companies in the forest products industry cite soft prices for their finished products as a key reason for a significant decline in profits. The reasons for the drop in prices are many. Some analysts point to new startups which have added significant amounts of new capacity while demand for the product has been much slower.

In the case of many paperboard products, wood pulp and newsprint, the significant amount of new product forced some mills to take extensive downtime to remove excess capacity from the market. This move, it is hoped, will bring supply and demand back into balance.

Old news markets have been treading along at a fairly low level through most of last year and through a good portion on 1997. The slack demand for the grade is reflected in the overall downturn in the North American newsprint industry since the second half of 1995 – an overcapacity of new production coming on line chasing too little demand.

The static condition of the North American newsprint industry has prompted some communities to discontinue collecting the grade. At the same time, a number of processors are buying less of the grade.

These companies range from Waste Management Inc. and Browning-Ferris Industries reducing the number of operations that collect the material, to independent paper stock dealers avoiding pursuing additional material. Further, many of the mills that have invested significant amounts of money to build up an infrastructure for collecting the material also are realizing the high cost of collecting the material themselves, compared to gathering ONP from the open market.

Despite market problems, the AFPA reports that close to 7.5 million tons of old newsprint was collected for recycling last year. Further, Marjorie Franklin, president of Franklin Associates, a consulting group located in Prairie Village, Kansas, says few cities are abandoning the collection of ONP, despite the lower prices.

Significant new capacity has come on line, notably in the Pacific Rim, over the past several years and has brought more newsprint on the market. This has given many newspaper publishers the opportunity to push down the price they pay for the finished newsprint.

Old corrugated is, more than any other grade, the harbinger of the paper stock market. The strength of the grade is driven by an overall strength in the board industry. Along with stronger export markets, a strong domestic paperboard industry dictates the operations of the various board mills throughout the United States.

According to the AFPA, 21.6 million tons of old corrugated was recovered in the United States last year, bringing the recovery rate to 73.5 percent. With this rate nearing the maximum recovery level, there is concern that once the paperboard industry works through the overcapacity, there could be some acute tightness in the market, and prices could once again soar.

At the present time prices for OCC have been trending downward. In late April OCC prices had fallen by as much as $30 a ton from prices being paid by many of these same mills as recently as late February.

Despite the drop in prices, most packers are still bullish about the long-term viability of the market. Even with such a sharp decline in price and a slow export market, movement is still strong for the grade. According to several packers who requested anonymity, a number of paperboard mills that are taking downtime continue to buy material. This strategy, vendors point out, indicates that mill buyers understand that supply availability could become an issue.

A key requirement that needs to take hold is firmer pricing for the finished product – notably for linerboard and corrugated medium, the two products that make up cardboard boxes. With excess material on the market, there is a growing need for higher prices for the raw material to allow board mills to increase their production runs.

Take a commodity that has a "can’t miss" future. Engage some of the top equipment companies in the business to build the equipment that will produce deinked pulp. Have President Clinton sign an executive order mandating that federal government agencies use recycled content printing and writing paper. Get paper stock dealers to agree to start sourcing material for this office pack.

Mix these issues together and what happens? For many paper stock dealers, generators and mill officials, it was expected to be a boon for all involved. The reality, however, was quite different.

The deinking pulp industry has practically collapsed. The problems are many, and each of the parties points an accusing finger at the others. The result is grim. With pulp on the world market continuing to flood demand, there is little incentive for some of these operations to run. The result has been a number of these operations closing, with speculation that some may be closed for good.

What happened?

According to mill officials, one problem is that the equipment designed for these new facilities were unable to handle the material it was designed to handle. A low grade office pack turned into a raw material that produced an inferior deinked pulp. Equipment companies counter this argument by saying the problems in the market pulp industry have made it difficult to run the equipment fast enough or long enough to develop a clear understanding of what the grade requires.

Paper stock dealers also are crying foul. Many have invested significant time and money into developing supply to feed mills that ran only a short time and then shut down. And some of those mills that are continuing to run have changed their requirements and are now demanding high grades of fiber.

According to a number of mill operators, the quality of the office pack has slipped, making it more difficult to produce a clean finished product. Compounding the situation, with market pulp prices so low, some deinking pulp operators are finding it impossible to produce a deinked pulp that can be sold at a profit. With this in mind, there are questions whether many of these mills will be able to operate in this environment. According to Ed Sparks, a consultant to the paper industry, many of these deinking operations will continue to exist in some fashion. Their biggest obstacle is finding ready end markets for their finished product.

Companies that have deinking systems built into an integrated operation, such as International Paper and Union Camp, have been able to consume the product internally, instead of looking to it on the open market. These projects have been able to move past startup problems and are now working on refining the deinking process and determining what types of recovered fiber they are able to use.

All hope is not lost, according to Mary Cesar, vice president of Jaakko Poyry, Tarrytown, N.Y., a pulp and paper industry consultant. Despite the problems with the deinked pulp industry, these segments will come around and there will be demand for the grade, she says.

While the deinking pulp industry holds a significant number of questions, other segments of the paper industry have helped fill the gap. The tissue industry has been playing a larger role in the consumption of many office grades. In the United States, as well as in Mexico and Canada, increased purchases have helped move material and keep prices from collapsing.

The Mexican market is buying significant amounts of office grades, which is keeping prices in the Southwest stable, according to Rusty Getter, president of Balcones Recycling, a Dallas paper stock operation.

Although typically constituting between 20 percent to 25 percent of the overall paper recycling market, the export market is a key indicator of the overall strength of the paper recycling industry. The most recent figures from the U.S. Commerce Department show exports dropped by more than 30 percent during 1996 from the previous year. So far this year exports do not appear to be showing much in the way of a turnaround.

While not the sole reason for the slide in price through most of last year, this indicates a general malaise afflicting paper markets. Part of the reason is the rapid growth of new production overseas, which has been met with slower demand.

Even more than the volume of recovered fiber purchased, for many paper stock dealers export activity helps set the table for prices, as domestic mills will adjust their own mill prices in response to overseas prices.

Franklin points out that with a world market, and such a large portion of the recovered fiber moving for export, a drop in exports has a significant impact on market conditions in the U.S.

What should be done to improve the market for recovered fiber? According to Franklin, recovered fiber is moving as any other commodity, with cycles of strength and weakness. While she expects to see the market continue to grow, the problems at the present are an inevitable condition.

The market is cyclical, Cesar agrees, warning that people in the paper recycling industry have to get away from the short sighted approach. "These cycles occur," she says. "The industry has to look at the long term."

While in the short term there are some difficult market conditions, the infrastructure is in place. New capacity, while currently flooding the market, will slowly work its way to a balance between supply and demand. Prices for a number of paper sectors are starting to improve. Even the shakeout of companies in the collection end is an inevitable trend in all industries.

While recycled paper industry is greatly influenced by the overall paper industry, another direction to work in is helping the paper industry operate in a free market environment, one unencumbered by the government, according to AFPA’s Gaylor. "We need the government out of the market," he says. "Halt flow control policies, as well as recycled-content mandates, and allow the market to play."

Predicting the market is always difficult. Gaylor feels a key will be the operating rates for domestic paper and paperboard mills. "If mills run at 90 percent of capacity, we will have a modest paper recovery."