Paper Markets See the Light of Day

Paper recycling markets have been edging up over the first quarter of this year. Factors including an overall improvement in paper markets, declining generation of new material, and the re-entrance of the export market are helping prop up markets. Whether the situation will continue, resulting in stronger markets through the rest of the year, or be a short-term trend which will be corrected very quickly is still uncertain.

Johnny Gold, vice president of Recycled Fibers, a division of The Newark Group, an integrated paper company, calls the export markets “The X factor.” If exports continue to improve, Gold adds, “Markets will go big. If exports soften, markets will cool.”

According to a number of handlers of various types of recovered fiber, there are too many factors that are affecting markets to allow for a more concise analysis of market conditions for much longer than several months. The U.S. and world economy, export patterns, more mergers in the paper and paperboard producing industry, the possibility of price increases in finished product, and even weather conditions can and will have a bearing on paper stock markets moving into the first quarter.

MERGERMANIA

Some of the key trends presently taking place include the merger of companies in the paper industry. Jefferson Smurfit and Stone Container have combined their operations, making the combined company the largest paper stock-consuming mill in the world. While merging, the company announced plans to eliminate as much as one million tons of finished product from the market. How, where and when the combined Smurfit-Stone (now based in St. Louis) makes adjustments could have a significant impact on markets in that particular region.

“We worked aggressively to reduce inventories taking significant downtime throughout the mill system, in addition to closing four containerboard mills and a market pulp facility,” said president and CEO Roger Stone. Stone cited the overcapacity situation as a key reason the company lost money in 1998.

Union Camp Corp., Wayne, N.J., was another company that took strides to bring production and demand back into balance.

“We took record levels of downtime to address the weak market environment for our major product lines,” W. Craig McClelland, chairman and CEO, said.

“At Union Camp, domestic demand for both products has been stable and our linerboard exports in the fourth quarter rose to slightly higher levels than in the third quarter,” McClelland said.

What makes the moves by Union Camp more intriguing is that the company has recently been acquired by International Paper, Purchase, N.Y.,the world’s largest paper company. Further downtime, as well as permanent closures, could take place as International Paper attempts to better control inventory levels.

IS THERE AN UPWARD TREND?

The question being considered is whether markets are at the beginning of an overall upward trend or if this is just a short blip on the paper stock market radar – adding to the overall trend of flattened market pricing.

In addition to the continuing mergers in the paper producing and collecting side, there are other uncertainties that will likely be driving forces in the market. One of the biggest areas is the export market, especially the Pacific Rim. Although Asian countries have been shifting more of their buying to European source, Korea, Indonesia, Taiwan and Japan—among others—will likely play a key role in the status of the North American paper stock market.

With economic problems flaring up throughout Asia (and recently in South America with Brazil), the question is when and if Asian mills will be able to get their financial houses in order and start to play a more active role in the U.S. market.

Another factor, which will have the greatest impact on paper stock markets, will be the general state of the economy. Many marketplace bears feel a general slowdown at the least, or possibly a recession is fast nearing. If a recession hits, what will be the impact of it on paper stock markets? Unfortunately, according to a number of processors, the impact could be significant and could result in more than a handful of mills closing due to sluggish market conditions.

While expectations that offshore orders are improving, the start of Chinese New Year in February could put a temporary roadblock for some offshore exporters.

OCC – A REBOUND AFOOT?

Old corrugated has been showing some significant improvements over the past several months. While prices have been slow to reflect the changes, early in the year movement has been fairly strong, with a sense that prices may start to climb this month.

What is the driving force? A decline in generation is one of the biggest reasons for the improvement. A combination of declining generation caused by inclement weather and surprising orders from several Asian buyers have helped propel the grade upward.

Earlier this year heavy rain in parts of California, heavy snow and ice in the Midwest and similar weather problems on the East Coast cut into the supply of OCC. At the same time, reports have come in that most of the downtime was over with, which resulted in steady to strong movement of the grade across the country.

Late last year there was concern that prices were tumbling with the expectation that more mill closings would cut off demand.

Frank Crowley, vice president of K-C International, a paper stock brokerage company, and a division of KTI Inc., Guttenberg, New Jersey, sees the drop in OCC prices last year as redirecting some tonnage away from recyclers and to landfills. Even a 3% to 5% swing in generation could be the difference between a shortage and an oversupply, Crowley notes.

Now, it appears there is much better movement of the grade. Prices have solidified as the new supply of OCC is barely keeping pace with the swelling demand by more of the board mills.

Jay Butler, president of Butler Paper Recycling, Suffolk, Va., feels that prices are starting to move up, led by offshore orders. The strength, however, is not without some concerns. As Asian buyers push prices up, will more domestic mills look to follow suit with higher prices, or will they hold their prices at their present levels? If this happens and tonnage frees up, it is unlikely that offshore prices will continue to move up for OCC.

And, with board mills looking to push through a price increase for their finished product this quarter, some vendors feel markets are starting to show some positive signs.

Smurfit-Stone’s Roger Stone notes, however, that as a result of declining inventories, combined with healthy domestic demand, the company has advised its customers that it will be raising prices for linerboard and medium, effective Feb. 1.

Other paper companies looking to push through price increases for paper and board include Union Camp and Georgia-Pacific Corp.

One positive sign is the continuing strength in the double-lined kraft cutting market. Prices have moved up earlier this year, and there are expectations that prices could continue to strengthen over the next several months.

The improvement could be indications of further improvements in the paperboard industry. Several board producers are looking to push through price increases. The old news market is following a similar trajectory. The grade had been struggling through a good portion of last year is now starting to show signs of life.

OFFICE GRADES POISED TO GROW

The office paper market has been seeing some fairly positive news as of late. Office pack has been strengthening. Leading the way has been Fort James Corp., Richmond, Va., which has been playing a more active role in purchasing the grade. Prices have firmed, while movement continues to improve.

Office pack, an inconsistent grade over the past several years, has benefited over the past several months from Fort James purchasing larger amounts of the grade. At the same time, the move by the large tissue maker is forcing other consumers of the grade to meet or beat their prices. The swing has affected mills such as Fox River, a Wisconsin paper mill; Cascades mills in Canada; and Union Camp’s Franklin, Va., mill.

The grade has flourished, especially with more paper mills increasing their position with the grade. From tissue producers such as Fort James and Kimberly-Clark to deinking pulp operations such as Great Lakes Pulp & Fiber, demand is expected to stay steady, which should work to keep prices at a decent clip.

Contrarians, however, abound with the grade. Several vendors note that problems with many of the newer deinking facilities have yet to be resolved. The continued price slide in market pulp continues to make it difficult for deinking facilities to push through better prices for their finished product.

Adding to the strength in office pack, sorted white ledger has been strengthening since late last year and early this year. South Korea, especially the Yuhan Kimberly mill, is a key area for the sorted white ledger (SWL) and office pack market. With a significant number of tissue mills purchasing SWL and office pack from the U.S., the recent improvement in SWL has helped firm up prices, especially with domestic mills having to raise their price to compete with offshore orders.

Pulp substitutes show less certainty. Grades such as hard white envelope cuttings and shavings are very dependent on conditions for market pulp. Without any strength in pulp markets, it is unlikely there will be any significant improvements in pulp substitutes. One of the biggest impediments has been the lingering problem in Asia, as well as conditions in South America. There are a number of low-cost pulp producers who continue to produce significant amounts of product, depressing prices. Until there is stronger buying and better pricing, there will be some difficulties in pushing through increases.

Although there are some mixed signals about short-term paper stock markets, a growing number of paper stock dealers feel markets have turned, with movement picking up steam. Whether or not prices skyrocket, it does seem that prices should strengthen through the short term. Whether the increases can build upon themselves, however, is still uncertain.

The author is senior editor of Recycling Today and the editor of Fibre Market News.