Paper Stock Markets: The Beat Goes On

Record high prices one month with shortages cropping up.

A few months later, a steep oversupply of raw material drives prices down. Exports up for paper stock grades in a large way, and then, as if a faucet was turned off, an absence of overseas orders. This is the idiosyncratic nature typically seen in the paper recycling industry.

Figuring out where markets were headed used to be a fairly straightforward process. Domestic mills established their buying levels to coincide with production schedules. Prices moved in modest increments. The overseas market routinely purchased around 20 percent of the recovered fiber from the United States. This traditional market allowed prices to fluctuate in smaller increments.

NEW FACTORS CAUSE NEW HEADACHES

More recent markets, while following the overall health of the U.S. economy, are seeing other dynamics. Finished product prices have stagnated over the past several quarters, and expectations are that finished paper markets will see only modest improvements through the first part of this year. Market pulp prices, which had been climbing steadily through last year, could possibly be heading downward. The fluctuation of market pulp prices has a direct correlation to pulp substitutes, as well as, to a lesser degree, to deinking grades.

The American Forest and Paper Association, Washington, noted that U.S. capacity growth for pulp, paper and paperboard should drop below historic norms over the next three years. Growth in mill consumption of recovered paper is expected to moderate, but still expand almost one percent faster than wood pulp consumption.

However, the AFPA points out, recovered paper consumption by U.S. mills grew sharply during the last two years: 8.1 percent in 1996 and 7.2 percent this past year.

Newsprint may see some price increases, but downtime is a growing possibility throughout North America. The heavily publicized problems with the South Korean economy could have an impact on world newsprint prices. With a number of fairly new newsprint machines just opening up in Korea, some could opt to produce finished newsprint and flood available markets. While this is a possibility, the drop in production schedules has curtailed the offshore movement of the grade. What direction the Korean newsprint industry will take will have a major impact on U.S. markets.

Joe Gorman, head of paper stock procurements for Southeast Paper, Dublin, Ga., feels that overall export markets will be one of the biggest keys for the newsprint industry this year. He points out that exports will be most pivotal during the first half of the year. Gorman points out, “it will never be back to normal.”

According to the American Forest and Paper Association, domestic consumption of old news is expected to rise at an average annual rate of just 1.2 percent during the next three years. The AFPA attributes the slow growth to “virtually no additional newsprint capacity and slow growth in recycled paperboard capacity, the two largest domestic end uses for recovered newspapers.”

The growth, if anywhere, will come from the overseas market, especially South Korea. And, with the problems in the Korean economy, it may be some time before the Korean newsprint industry kicks in to the level that will spur an improved market for ONP in the United States, one East Coast exporter notes.

A hopeful sign is the recent word that Bowater, the largest newsprint producer in the United States, is looking at buying a significant share of one of Korea’s newest newsprint mills from the Halla Group, one of the most adversely affected Korean conglomerates. While this is a promising development, it will be several more months before this move will have any impact on U.S. ONP markets.

While the problems with the Asian market will likely keep exports from being too strong this year, after that there could be some real concerns about the supply of ONP. “Assuming they (South Korea) get their act together, a problem could be a swing in exports,” Gorman adds.

While many people have learned their lesson about putting all their business on the export side, “There will always be those who chase the dollar,” Gorman says. Along with some vendors moving material to offshore orders when prices are favorable, Gorman points out one strategy would be to “reward people who deliver good quality. Better quality will equal better pay.”

OFFICE GRADES COME INTO FOCUS

One of the rockiest roads traveled has been the office grade market. This market, along with a host of deinking grades such as sorted white ledger, has seen movement up and down as the industry tried to determine the viability of the grade.

Lately, while many other grades are showing uncertain market conditions, office pack has been one of the few grades to be looked at favorably. Richard Venditti, director of secondary fiber purchasing for Union Camp, Wayne, N.J., sees steady domestic demand over the next several quarters.

One of the most successful of the operations is the Union Camp mill in Franklin, Va. The mill is not limited to only producing deinked market pulp. Instead, the mill moves through the full cycle and produces a finished printing and writing paper. Union Camp’s Venditti, who works out of the firm’s Atlanta office, feels that over the first half of this year the industry will see steady markets.

While office grades should show some strength during the year, a host of issues are cropping up. “Cleanliness and functionality will be a key in the marketplace,” Venditti points out. “With office pack carrying a different meaning for different mills, this is a lot harder than it would seem at the surface.”

Mike Finn, vice president of Recycling Services, a Chicago-based paper stock operation, feels that a good portion of the improvement in the office pack market has been the drop in generation of the material. “People aren’t collecting the material. The supply has dropped.”

When asked what could help boost markets for office pack, Finn feels mills need to set up long-term deals with collectors that would give floors and ceilings. This would allow processors to go out into the market and source more material, Finn points out. Presently, there is too much volatility in the market. This volatility scares many collectors from actively pursuing more of the grade.

While the problems with deinking pulp mills have been well documented, there are some positives being seen with mill operations. Several newer operations closed last year, but other deinking mills continue to operate. Other mills are nearing start up, while several other operations have been slowly improving their running schedules. These include two Ponderosa Fibre mills—one in Pennsylvania, the other in Washington. The deinking mill near Fairmont, W.V., also could be restarting during the first half of this year. According to several sources the mill may be sitting on a significant amount of tonnage. However, once the mill starts to run through its inventory there could be some additional demands from the mill.

Rusty Getter, with Balcones Recycling, Dallas, sees great promise for office grades. He points out that Fort Howard will be opening an additional machine in Savannah, Ga., this month, which will require several thousand tons of office grades a month.

Following on the heels of this opening, Getter points out, a Mexican company, Grupo Copamex, will be starting up an office deinking facility in March. The Mexican market already has been one of the strongest avenues for office grades. One of the biggest buyers of the grade, Kimberly-Clark Corp., has been moving hundreds of cars a month to its facilities in the country.

These new buyers will add to the existing demand, which should help to further strengthen the office grade market, Getter stresses.

Additionally, International Paper’s Selma, Ala., paper mill “has been on a sabbatical from super sorted,” Getter says. The mill will likely come back into the market fairly heavily later this spring, which, for those suppliers able to ship to the mill, will be an added bonus.

Old corrugated container, while called the bellwether grade for the overall industry, is showing some uncertainty. While prices dipped late last year, lately there is optimism being expressed for the grade. Even with the slowdown in production, OCC movement remains steady to strong. This, despite only limited export activity.

THE DRIVING FORCE

Paper stock markets are expected to show some modest improvements through the first half of this year, according to a number of handlers. “Similar to last year,” was one of the most often heard phrases.” Far from a cop-out, this conclusion is based on a number of factors that will keep markets from climbing too high or falling too low.

Despite limited export activities at the present, a key will be the operating rate at North American and Mexican mills. Lately there has been some modest strengthening of the grade. Mexican mills have been buying steady-to-large amounts of OCC. Several domestic mills, especially in the Southeast, have been coming into the market and paying slightly more for the grade.

These trends are a source of encouragement for many vendors. Prices are still modest for most dealers, although many concede if the present market is the bottom of a cycle, markets should be in decent shape moving into the later part of this year.

Despite limited export activity, there have been some overseas mills looking to buy more material, although as of yet prices still are fairly low.

In the case of ONP, most vendors feel the worst is past. The problems in Korea, and to a lesser extent Indonesia, the Philippines and Thailand, have already occurred. Prices have already fallen due to currency problems. Now, the most optimistic exporters feel that despite all the problems taking place overseas, some of these mills will have to re-enter the market to re-build inventories. This, it is hoped, will help turn the tide for ONP.

EXPORTS – A CLEARER PICTURE

The export market is displaying significant volatility. The repercussions of the economic woes in many Pacific Rim countries are having an impact on U.S. markets. Following on the heels of currency devaluations throughout several Asian countries, a number of large conglomerates are teetering on the edge of collapse. Already Halla, one of the largest conglomerates in Korea, closed down due to high debt.

What does this have to do with U.S. paper stock markets? The situation is resulting in increased dumping of finished product, principally finished newsprint, back into the United States. This is working to reduce the demand for recovered fiber from the U.S. to feed these domestic mills.

Reasons for the slowdown have less to do with the disinterest in paper recycling, but rather the success the paper recycling industry has had in aligning itself with the overall paper industry.

Added to the concerns about slowdowns in production domestically, many countries are sharply increasing their capacity growth, which will likely make it more difficult to move material.

This situation leaves the paper stock market in a state of flux. Market conditions this year hold great promise, according to a number of vendors. With supply of material nearing their maximum recovery level for some grades, notably old corrugated, continuation of the strength in the paperboard industry will likely help to push prices for OCC upward.

While there are some positives to be seen with the grade, lingering problems with the Asian market will likely cast a pall over any advancement in the grade. Korea continues to struggle with monetary problems, resulting in a decline in the overall demand for a number of grades, especially old news and old corrugated. While at the same time domestic mills have been able to keep their flow of material steady; the overall situation is steady.

Domestically, there is expected to be some stability to markets. There does seem to be steady movement on the domestic side for higher grades, notably pulp substitutes. Despite the upswing, continued concern over the dearth of export activity will likely keep prices from climbing too high over the first half of this year.

Why is the export market so important for the domestic paper recycling industry? For one, it is the end market for between 20 to 25 percent of the recovered fiber collected from the United States.

When Asian mills are buying aggressively, domestic buying intensifies, and prices start to climb. Conversely, when export markets decline, many domestic mills adjust their intake with the expectation that material will be plentiful. This trend is likely to reverberate over the next several quarters as many Asian economies, especially South Korea, attempt to correct their fiscal problems.

Forecasting the future is always a tricky endeavor. But, not every trend is so directly linked to such tough-to-read avenues as export markets, domestic demand, and weather conditions. Ed Hurley, director of legislative affairs for Jefferson Smurfit Corp., Clayton, Mo., feels a trend taking hold in California that is having a major impact on paper stock markets is the use of a single stream for recyclables. This move, according to Hurley, will degrade paper stock markets, and lessen the value of the material. While limited to a few areas, many California cities are using this approach to meet state-mandated source reduction goals in a less costly fashion.

While saving upfront money, this trend delivers a lesser quality material. The result: a less valuable commodity for the mills.

The author is editor of Fibre Market News, a bi-weekly newsletter covering the paper recycling industry.