Paper Markets Regain Ground

While markets for most recovered paper grades were bottoming out at press time, many watchers attributed this to seasonal slowdowns and predict a quick recovery and reasonably strong markets in 1996.

"This is typically the loosest time of the year for all of the low grades, due to Christmas production," says Joel Erlichman, president of I. Erlichman, Peoria, Ill. "I think mills have taken the opportunity to push prices down to historically low levels to make up for some of the high prices they paid, and they have afforded themselves to make up some inventory."

This puts mills in a slightly stronger position entering the new year than they’ve been at this time for the past several years, he adds. However, winter weather conditions and a lack of supply going into January and February will probably tighten up the market.

The American Forest and Paper Association, Washington, predicts a 3.8 percent increase in paper production in 1996 over 1995. In addition, worldwide economies are starting to improve, so United States exports of recovered paper are likely to pick up.

"If people are right and Europe and the Pacific Rim come back, they’re going to buy on both sides," says Erlichman. "They’re going to buy bales because they need paper for their mills, and if they really need the quality finished paper, they’re going to buy ours. So they hold a very large card in terms of what we produce next year."

There is probably not going to be another spectacular rise in paper prices, at least not in the first quarter of 1996. But the perception of what is a realistic price depends on your perspective, Erlichman points out.

"A number of packers bellyache that corrugated is at $50 (a ton) now, but they would have died for $50 (a ton) in 1990," he says. "People need to think about what is a realistic price where the product will move, it will be diverted from landfill, and the mills can buy. For corrugated, that price is somewhere between $65 and $100 – that’s fair for the packers, the hauler and the mills. For newspaper, it’s somewhere between $45 and $75, depending on the grade; and for hard mix it’s between $25 and $40.

"All of these grades have a natural range," Erlichman continues. "For mills to want to push it below that, they’re asking for trouble later, and for packers to hold back and not ship when the price was $160 to try and get a $30 increase to $190 – they’re paying for it today. So, highs only produce lows and lows only produce highs, and what we need is a good median price where the stuff will be recycled and deferred from landfill and the mills will make some money."

The market may see this median price in 1996, he says. But prices at press time had not yet stabilized. In the case of corrugated, for example, says Erlichman, "we’re getting $40, $50, $55 – the prices are all over the place. It’s like throwing darts at the wall."

In addition, some mills are more active than others heading into the new year.

"I recently talked to two mills who told me that they’re sold out until October," says Erlichman. "But a couple of brokers told me yesterday that their box plants aren’t running worth a damn for business. So I think a lot of it is regional, though in November and December it’s hard for anyone to be real upbeat on the paper markets because there’s just paper everywhere. And it’s the last quarter of the year, so they want to see what happens in the first quarter."

Although the market faced end-of-the-year doldrums, Pete Grogan, manager of market development for Weyerhaeuser Co., Federal Way, Wash., is optimistic about the paper situation heading into 1996.

"I think we’ve seen the worst of the current situation – I think we’re at the bottom," he says. "And in my crystal ball, I see a fair amount of 1996 activity that I think will create a relatively healthy market early in the new year – possibly as soon as the lunar new year – and I base that on all the capacity that we’re seeing coming online."

There is new capacity for all grades in Asia, including four new newsprint machines coming online in Korea and one new newsprint machine coming online in Japan. In addition, says Grogan, there is new capacity in the U.S., especially to process office paper.

"My numbers tell me there are about 5 million new tons of capacity coming online in Asia in 1996 and another 5 million tons in Europe and the U. S.," he says. "That represents, in tons, about the equivalent of 25 percent of what is currently recovered in the U.S. In fact, in round numbers, the growth from 1996 to about 2000 looks about the same – 10 million tons of capacity coming online every year."

This will likely lead to strong supply figures for recovered office paper, he says, along with overall strong demand. "Markets are going to be relatively healthy and good, and I think 1996 may shape up to be another outstanding year," says Grogan. "I don’t mean we’ll necessarily see prices like we saw in early 1995, but we’ll see good pricing."

Between January 1995 and December 1996 there will be about 10 or 12 new mills coming online, leading to new capacity for office paper of about 2.5 million tons, he says.

"Certainly the paper is out there that could be recovered, but the infrastructure is not there for all of that recovery," says Grogan. "As a nation, we’re probably doing a pretty good job in large office complexes in recovering office paper, but we have lots of environments where we’re not effectively recovering office paper."

The ability for the U.S. market to absorb another 2 million tons of office paper is uncertain, he says. "Some of those mills are likely to go bankrupt, more due to lack of feedstock than lack of end product salability," he says.

But the potential demand for paper products in Asia is large.

"If you look at the growth figures for just how much paper per capita a citizen in China is going to use today versus two, three and five years from now, the numbers are pretty phenomenal," says Grogan.

The kraft grades have bottomed, says Tom Lyon, president of Vista Fibers, Dallas, but will probably start improving shortly. Double lined is moving well, but corrugated is not, as some mills are taking downtime. As early as February, he expects market improvements.

"It ought to be pretty well in balance again by the end of the first quarter, and then I expect to see the corrugated heat up," says Lyon.

The biggest challenge at the moment is in office paper collection programs. The price for the grade is deteriorating very fast, he says. "For the better grades of sorted office waste, at least in this part of the world, we’ve gone below the minimum price required to sustain consistent working and sorting of the programs. It will be interesting to see what happens as that market seeks a balance in supply and demand."

There is currently not a strong demand for the grade, so an oversupply situation exists. A few months down the road, more mills will want the office paper, but until then the grade is "walking a tightrope," according to Lyon.

"If the price stays at these lower levels, the supply will begin to shrink and then when the mills come back on and need it, it’s not going to be there," Lyon predicts. "It’s frustrating when you work hard to develop an office program, and then it’s not financially feasible to do it and the participants drop out. So, it will take a year or two to convince them to do it again."

The same situation is faced by corrugated, he says – right now, the pricing will not sustain the recovery of the corrugated that is needed to meet long-term demand. On the other hand, many mills say they expect corrugated to be over $100 by summer.

"The OCC price currently ranges from $60 to $70 on the West Coast, in the $45 to $50 range on the East Coast, anywhere from $45 to $60 down here, and from $35 to $50 in the Midwest. Generally, that won’t sustain the long term recovery rate needed," says Lyon.

A number of new mills are either coming online or are about to start up, providing significantly more demand for OCC and bringing the price back up. Presently, some OCC is being landfilled because it is cheaper to landfill the material than to recycle it. This is due, in part, to reduced landfill prices.

"In Texas there are a lot of landfill permits that will run out in another year or two, and they’re nowhere near filling them up, so they’re reducing their prices in an effort to get more material in," says Lyon. "We are on the verge of a crisis of not having enough recycled material to meet the need, enough trash to go in the landfills, or enough combustibles to go to burn systems. We’ve got too much use for materials."

The Pacific Northwest is a region with a large number of paper mills, according to Michael Kane, president of Pacific Coast Fibers, Kirkland, Wash. As a result, coupled with ready export access, that region enjoys reasonable markets for many paper grades most of the time. Prices also tend to be somewhat higher in the region.

"We’re starting to see some increased interest in OCC offshore, as well as strengthening and stabilizing on the domestic side," says Kane. "I expect to see some crawling up the ladder to the $100 mark in the first quarter of 1996. Old news has taken a fall similar to what OCC has done, but just a little bit later. My guess is that it will probably stabilize around the first of the year and it will more or less stay there."

ONP has been overpriced due to the tremendous demand for the grade, says Kane, but probably won’t reach the same high levels any time soon. "It will probably stabilize in the $80 or $90 range in the first quarter of next year."

There will be continued demand for various paper grades in the Pacific Northwest during the next five years, he says, as new mills continue to open and other mills move from primary to secondary feedstock.

Kane agrees that there will eventually be demand for all the finished product currently coming online, even if it is not there currently, due to the pressure from the public and from publishers of periodicals to produce recycled-content paper.

Although it won’t be as strong as 1995, most expect 1996 to be a very good year for paper. What happened in 1995 was a reaction to previously depressed prices, says Kane.

"Prior to this last year when things were out of sight, pricing was so low that it almost was depressed," he explains. "Once it got out, it overcompensated, and some of the markets got out of hand. I think we’ll see a settling in of pricing that’s more reasonable for the material."

In general, the paper industry is well-positioned for the next few years, he says. "The failures in this business are going to be down. "

The author is editor of Recycling Today.