Paper Markets Primed for Growth

The paper stock market is no stranger to volatility. From record highs in 1995, prices plummeted almost overnight. The repercussions from this most recent drop were significant. Many long-time paper stock dealers were forced to close, while others were acquired by larger operations.

The largest companies in the paper recycling industry were not immune to problem markets. Companies such as Weyerhaeuser Recycling, Federal Way, Wash.; Waste Management Inc., Oak Brook, Ill.; and Browning-Ferris Industries, Houston, have spent the past year closing, merging or selling non-productive facilities.

In addition, new paper mills that targeted the recycled fiber as a raw material were confronted with twin problems: uncertain quality specifications and declining prices for the finished product. The result was that a host of mills – notably office paper deinking facilities – had to close their doors, at least temporarily, while waiting for markets to improve. The list of companies closed includes American Power, Barracksville, W.V.; 1st Urban Fiber, Hagerstown, Md.; Northeast Recycling, Fitchburg, Mass; and, announced last month, International Paper’s Lock Haven, N.Y., deinking facility.

Consolidations and acquisitions also became a key issue. Fort Howard and James River, two large tissue makers, opted to merge, creating Fort James; and Abitibi-Price and Stone-Consolidation combined to become Abitibi-Consolidated, one of the largest newsprint producers in the world.

Other companies acquired smaller mill operations. Those on the fast track include Rock-Tenn, Caraustar Industries, and Chesapeake Paper.

Recently, markets have been improving for a number of grades. This has given hope to many in the paper recycling industry. Observers show cautious optimism that this upward swing will yield slow, steady growth rather than the euphoria seen during the last up cycle.

Old corrugated cardboard is the most widely recycled paper stock commodity. As such, it is a key driving force for many of the other paper stock grades. "OCC is the leader of the pack," says John Gold, vice president and general manager of North Shore Recycled Fibers, Salem, Mass.

The grade had seen its mill price decline from more than $200 a ton in the middle of 1995 to less than $40 a ton in some domestic locations earlier this year. But this situation appears to be turning. Prices for the grade have been moving up steadily over the past several months as domestic paperboard mills are starting to run better schedules.

According to recent figures from the American Forest and Paper Association, Washington, domestic paperboard production has been steadily climbing throughout the year. AFPA figures show paperboard production increasing by close to 8 percent this year over production figures from the same time last year.

David Null, president of Jacobs-Sirrine Consultants, Atlanta, attributes much of the recent strength in OCC to the number of new mills that have opened up over the past several years. "There is a lot more demand domestically than a few years ago," he says.

Null estimates more than a dozen new machines or minimills have opened over the past year.

The improvement is being matched by improved shipments of finished products. Box shops and converting operations have been running much better schedules. This swing is allowing for stronger prices for both the finished product and the raw material. A number of paperboard mills pushed through a $50 a metric ton price earlier this summer, and there are indications that the increase will hold.

These increases could set the table for better than expected prices for OCC. Already, there are indications that prices are starting to climb throughout the country. In the East, OCC prices have moved up above $80 a ton; on the West Coast, prices are even better, with some sources reporting mill prices above $100 a ton. Other regions, while not as strong, have been showing some improvements. There have been some increases in the Southwest due to buying patterns by large paperboard mills in the region, as well as stronger buying by Mexican mills.

Pete Grogan of Weyerhaeuser is bullish on specific grades, including OCC. The market for OCC continues to strengthen, he says, although it is unlikely prices will improve to a level seen during 1995 when OCC topped $200 a ton.

The forecast for this grade over the next several months also should be a sign of optimism for many paper stock dealers. With mills starting to run better schedules, any upswing in export activity could push the price of the grade to significantly higher levels.

Null feels one reason for the slide in exports is the low prices for the finished product, making it affordable for many Asian mills that are buying the finished product from the United States. "The container prices are so low Asians can buy it here," he says.

Downtime, while always a factor in short term paper stock markets, doesn’t appear to be having any significant impact on present markets. Although a number of paperboard mills opted to take downtime earlier this summer, there was an almost negligible impact on prices.

Looking past the near term future, the OCC market could be primed for a sustained recovery due to the success of the grade. With a recycling rate close to 70 percent, the grade is fast approaching its maximum recovery level. Accessing any additional tonnage will be expensive, and for many paper stock dealers, economically impossible. As board mills start to run better schedules, there will be increased demand while little additional material is collected.

Another promising sign for long-term market strength is that the recent improvement in OCC is coming with very little input from the overseas market. Asian buyers, traditionally a key player in the domestic paper stock market, have been fairly quiet over the past 18 months.

According to the most recent statistics from the U.S. Commerce Department, paper stock exports are off by close to 16 percent so far this year from figures during the same time last year. Compounding that, 1996’s export total was a drop of close to 33 percent from 1995’s export total.

While there have been some spikes, the overall trend for exports has been continued declines. The absence of any sustained export activity is attributed to a host of factors, including more aggressive domestic collection of material in many Asian countries; increased buying of OCC and other paper stock grades from Europe; and an oversupply of finished products on hand. These factors, as well as others, are reducing the reliance on the U.S. for paper stock.

Old newsprint continues to lag behind other grades on the market, due to a number of factors, such as concern about the state of the North American newsprint industry. Although newsprint producers have been able to push through price increases, North American demand has been flat, preventing any sizable production increases.

There have been a number of newsprint mills proposed in North America. These include possible sites in New York City, Connecticut, Massachusetts and Mexicali, Mexico. Although one of these newsprint mills may be built, the long-term future for the North American newsprint industry looks somewhat flat. Despite this, the present market for newsprint is fairly strong.

Weyerhaeusers’s Grogan is not optimistic about old news. Acknowledging the more than one million tons of newsprint capacity in Korea that recently came on line, he feels it will take time for this new tonnage to find a home. Further, there is a concern with displacing newsprint already being produced in Canada.

Other paper stock dealers agree that the old news market continues to languish, with very little sign of any significant improvement over the duration of the year. While recent figures show about twice as much OCC being exported as old news, the ONP market continues to be the tough grade to move. While the OCC market is enjoying some strength due to the improved domestic paperboard industry, the ONP market is more closely aligned to the export market. And, even with the slump in prices over the past year, there are more than 10,000 municipalities collecting news, according to Grogan, which will continue to bring more material onto the market.

A sign of hope could be the use of old news as an extender for paperboard mills using mixed paper. Bill Moore, head of Moore & Associates, Atlanta, feels that while there is some possibility of more ONP going into board production, the best chance of an improvement in the ONP market remains with the overseas market.

Mixed paper is typically one of the hardest grades to move. The inconsistent nature of the grade, the low value of the material, and the end markets all work to keep prices for the grade toward the bottom of the paper stock hierarchy. Additionally, mixed paper is a widely exported grade. With overseas buyers somewhat quiet at the present time, the grade had been suffering from an oversupply. However, as the spring came to an end and the "summer doldrums" were expected to depress prices, the grade has shown some modest improvements. On the top end of the mixed paper area is the relatively clean sorted office mixed grade.

Although many of the office paper deinking facilities that were geared to handle the grade have been idled, there is some strengthening demand for the grade from the mills still running. International Paper, Union Camp, and Ponderosa have been active throughout the East; in the Midwest, Great Lakes Pulp and Fiber and Fox River Fiber are both buying ample amounts of office grades. On the West Coast, the soon-to-start Ponderosa Fibers mill in Wallula, Wash., is expected to play a role in the market for the grade by this fall.

While the deinking pulp industry has captured a lot of press for the grade, office mixed paper has a host of other end uses, including tissue manufacturing. Consumers include the largest tissue producers in the world, such as Kimberly-Clark and James River. Several of the newer operations have geared their raw material intake to use more of the sorted office paper.

Jerry Goodman, Ponderosa Fibres, Baltimore, Md., sees an uncertain future for many of the stand-alone deinking facilities. Ponderosa opened an office paper deinking facility in North Hampton, Pa., earlier this year, and is expected to open up a similar operation in Wallula, Wash., later this year. Despite the recent price increase for pulp pushed through earlier this summer, Goodman says he is already seeing some price erosion. Added to the continued difficulties in maintaining any price strength for pulp, several of the newer deinking facilities are having a difficult time justifying operating when their break-even price is several hundred dollars more than the present price for pulp.

"Most of these guys have tremendous debt," Goodman notes. "And with prices so volatile, they have nothing to fall back on when the price of the material drops."

But despite these problems, Goodman still holds out optimism that prices will start to climb.

Presently, OCC is moving for between $70 and $100 a ton. With export playing only a minor role, many ask what will happen if and when overseas buyers come back into the market. Pure speculation is that prices could climb to as high as $150 a ton by the end of the year.

Old news markets will likely see only modest improvements, as little new capacity is expected, and prices are only moving at between $20 and $40 a ton.

Office grades are in a more uncertain market situation. Sorted white ledger, sorted office grades and even mixed paper have shown some signs of improvement.

For paper stock dealers, indications that mills are running better schedules, in North America and throughout the world, should be the impetus to push for higher raw material prices.