Paper Supplement -- Paper Recycling's Changing Face

The metaphor most commonly used to describe the paper stock market is a roller coaster ride. The most often discussed grade, sorted and unsorted office paper, is only now being developed. New deinking mills, that captured the interest of many paper stock dealers, financial institutions and legislators several years ago, are now coming under closer scrutiny.

With many of the new generation of recycling facilities now coming on line, markets have been disappointing at best. Finished product prices haven’t been high enough to meet the needs of producers, who face fixed costs and bond money needed to pay off construction expenses.

On the collection end, the surge in activity that drove many waste haulers and paper stock operations to build their collection infrastructure, also has cooled. WMX Technologies, Oak Brook, Ill., which recently acquired both CRInc. and RRT Empire, has slowed its acquisitions in the recycling segment and closed a number of unprofitable operations.

A number of other recycling-based companies also scaled back their aggressive growth patterns as price and demand for the collected material plummetted.

Prices for the recovered fiber haven’t helped much, either. After surging to record highs early last year, prices for most grades of recovered fiber collected in office environments slipped late that same year. Through most of this year prices have been depressed. And office pack grades were not the only paper stock grades to see slippage – old news, old corrugated, and pulp substitute grades saw serious price erosions.

Producers of recycled paperboard also saw the rapid rise in finished product prices translate into a quick decline in demand and price. Newsprint producers witnessed an even more dramatic drop in price. After benefiting from the combination of new capacity and a long-awaited price increase after the depressed markets in 1991 and 1992, demand and prices began soaring. But after many newspaper publishers were able to build inventories, they began buying less newsprint, and the price plummeted.

With this mix of factors in place, the question many ask is where paper stock markets will head over the next six to 12 months. According to several paper stock dealers, the market will likely show intermittent improvements for some grades, especially sorted office paper and old corrugated. A number of the other office-related grades, notably sorted white ledger, also should benefit from a recent improvement in pulp prices.

While these grades could benefit, others – such as old news and mixed paper – are expected to face a more difficult market over the next year. For No. 6 news, any improvement is predicated on continued strengthening of the OCC market, which could in turn create some modest improvements in demand and price for old news. But while this scenario could help the market, there are some other factors which are working to suppress overall strength in this grade.

As for mixed paper, the road looks more difficult. The market could depend on an improvement in the board industry which could make mixed paper a more sought-after substitute. Despite some cities opting to postpone the introduction of mixed paper into curbside programs, enough new programs are being rolled out to make mixed paper a high volume/low market item. The influx of mixed paper from many of these newer sources is likely to continue the saturation of the market for the next several quarters.

A final factor is the role the economy plays in the strength or weakness of paper stock markets. If the world economy grows at a modest clip, demand for the finished product will increase. This should allow for better production schedules at the mills, which would create greater demand for the raw material, including recovered fiber. However, if the economy slows, demand will decline, causing higher inventories and reduced demand.

Office grades are the most talked about grade, and the one grade proving to be the most perplexing to predict. In the past, the grades falling under this fairly broad category also were aligned with the pulp substitute market. Although there have been some printing and writing mills which have used a portion of these grades, over the last several years have there has been an explosion in the number of office paper deinking facilities. This new generation of pulping facilities was created specifically to target the low end of the office paper stream. As part of this goal, many of these new mills introduced standards and definitions for the grade of fiber they could accept. From sorted office pack and mixed office fiber to office mixed, and a variety of other more specialized grades, these grades were expected to be the biggest player over the next several years.

Many industry watchers expected severe shortages to spring up, causing prices to spiral out of control. With most large generators of these grades already staked out, many paper stock dealers, waste haulers and other companies sought out smaller companies for the offfice fiber. Everyone anticipated that demand would be tremendous.

A number of vendors felt the grade’s popularity would allow for higher tolerance levels, resulting in a "supergrade" that would replace many more segregated grades such as sorted white ledger, sorted colored ledger, and file stock.

But after a jump in the price due to an overall improvement in the paper market last year, the sorted office pack market has fallen on hard times. Despite a recent improvement in overall markets for the grade, there is a changing philosophy about the sorted office pack. Many handlers of the grade now feel that its full recovery is dependent on more than just the opening of new deinking pulp facilities. Many of the projects that recently opened have been struggling with operating schedules and selling the finished product, as well as being able to use much of the raw material they originally were expected to take in.

A number of vendors question the viability of many of the new projects. Demand for the finished product, in lieu of the federal government backing off its original recovered content levels, have not been as strong as expected. Some producers, in fact, feel that the best case scenario for deinking pulp producers is finding strong niche markets for the material, as opposed to competing directly with market pulp producers.

Despite the recent problems with office pack, Randy Wolf, president of the Joint Purchasing Association, King of Prussia, Pa., still feels the grade holds promise. "The office pack will strengthen," he says.

Another factor that could help the market is the improvement in the world pulp market. While Wolf is convinced the office pack is a good grade, "it has to command a high enough price to make it worthwhile to collect." He points out it is more expensive to collect than some other grades, and requires more training. Further, the inconsistent nature of the grade is a challenge, especially when different mills may have different tolerances. "It is not a homogeneous material," he explains

Robert Strasburg, executive vice president of 1st Urban Fiber, a deinking facility in Hagerstown, Md., notes that the rapid explosion in these new deinking facilities boosted capacity from 700,000 tons a year in 1995 to 1 million tons at the present. He adds that by the end of 1997 an additional 300,000 tons will be on the market.

Will all of these new facilities continue to operate? Strasburg feels it is unlikely. Some may be acquired by integrated paper companies, both in the printing and writing sector, as well as the tissue industry. Still others, he expects, will cease to exist, being unable to compete with the world pulp market.

Several large handlers of the grade feel that it will be difficult, if not impossible, to aggressively search out new office paper accounts without a floor price of at least $120 a ton at the mill. Several recyclers point to high labor and collection costs. Once the commodity is delivered to the recycling center, there is the matter of sorting out the material to make sure the grade meets standards dictated by the mills. With these fixed costs in place, mills paying less than $80 a ton make it next to impossible to collect more of the material.

On the other side of the coin, there is a finite ability on the part of recyclers to charge generators for the material. Without any economic incentive, many vendors feel building management will either abandon a building-wide recycling program, or refuse to be charged, lowering the quality of the grade at the start.

Strasburg notes that although low prices for the office pack are preventing many processors from going after the more marginal accounts, there are enough collectors that the mills will not run out of material. "Enough people are collecting the material," he says. "The supply will be sufficient to supply mills’ requirements."

While many vendors would like to see a higher prices, David Clapp, analyst for Resource Information Systems Inc., Bedford, Mass., says that from the mills’ perspective, the level should be between $30 to $50 a ton, far less than what many processors feel is the successful price range. "At that price deinked pulp can be competitive with virgin pulp," he says.

OCC is the bellwether grade for paper stock. As demand for finished products grows, so will the demand for the raw material, including OCC and, to a lesser degree, old news and mixed paper. New capacity will be one factor in the improvement. However, as more than one person has pointed out, the strength in the grade is not so much a factor of new capacity, but demand for finished product. A frequently mentioned statement still applies – you can build all the capacity you want, but if no one buys the product, markets won’t improve.

And building new capacity appears to be a big growth area. Over the past year, several new projects have come on line, each expected to pull greater amounts of OCC from the market. These new projects have made slight modifications in the type of raw material used. Initially, many board mills that used recovered fiber used a mix of old corrugated and much cleaner double-lined kraft cuttings. However, these new mills are looking the other way. For example, the Cedar River board mill in Cedar Rapids, Iowa, has been designed and built to handle both OCC and mixed paper. The use of mixed paper will allow many of these newer mills to keep raw material costs under control.

Clapp sees steady improvement in both the U.S. and Asia through 1997, including stronger operating rates, increased demand and sizable new projects coming on line. The strength will be helped by a host of new projects coming on line in both the U.S. and Asia. One of the strongest areas for growth will be in the containerboard segment. In the U.S., there are expected to be four new projects being completed either by the end of this year or early next year. They are Pratt’s Staten Island recycled board mill; Mead’s mill in Stevenson, Ala.; Stone Container’s mill in Snowflake, Ariz., and two Georgia-Pacific projects – one in Toledo, Ore., the other in Big Island, Va.

While these new projects should help the domestic market, an avenue that will play a bigger role is the start of a host of new projects in Asia, according to Clapp. Although a number of these countries presently have aggressive domestic collection programs, the size and scope of their new operations will dictate greater attention to the U.S. and European marketplace. In the Pacific Rim, Clapp says, there will be an additional 1.6 million metric tons of new capacity coming on line that will require recovered fiber. Further, there will be another 1.1 million metric tons coming on line by 1998.

Along with increased recycled paperboard production, there is slated to be an additional 3.3 million metric tons of recycled boxboard coming on line in Asia. This will add to the overall demand for old news and even mixed paper.

The most visible grade to the public is and has always been old newspaper. As a result of this visibility, ONP has been more aggressively collected than any other grade. The push to increase the supply of ONP damaged the paper stock market late in the 1980s as well as early in this decade.

There was an expectation that once many newspaper deinking facilities came on line, prices would rebound and supply and demand would balance. This happened last year. However, the long-awaited balance soon became an imbalance as prices for the grade soared. Part of the reason was the strong demand for finished product, which allowed newsprint producers to push through multiple price increases.

After a period of continuously increasing prices, new price increases began to meet resistance. Since then, ONP and its newsprint finished product have been trending downward. At the present time, deinking news has fallen from more than $200 a metric ton at domestic mills to less than $100. More troublesome, according to many paper stock dealers, is the dim near-term future for the grade.

New capacity, especially in the Pacific Rim, was expected to be a big reason for the turnaround in paper stock grades in 1996. However, high inventories of finished product and limited demand have kept prices low.

The strong move by Asian countries to boost their own internal recovery figures also has muted the need to go as strongly outside the country for raw material. For mixed paper and ONP, the positive news is that a number of newsprint mills are opening up in Asia. However, due to aggressive collection of material generated in Asian countries, initial demand has been muted. But there is expected to be some return to overseas mills buying.

At the same time, Asian mills are finding the opportunities ripe for trading off between European and U.S. markets. And, according to Clapp, because European paper companies are the last to see the improvement in the paper markets, the material will probably remain fairly low for the next several months.

Domestically and in Canada, the impact of a softening in demand resulted in large-scale downtime across North America as many mills looked to adjust their inventory levels to reflect new demands. Even with ample downtime removing capacity, there still continues to be only modest demands for news. The expectations are that prices will struggle for the next six months at least.

As for the less clean No. 6 news, the outlook is even less promising. As a substitute for OCC, this grade still has very little in the way of demand. Box plants and other end users, including insulators, also have been buying only limited amounts.

At the same time, it is more difficult to adjust the flow of ONP into many recycling centers. Many communities spending significant amount of money rolling out collection programs, are now loathe to scale back these ambitious projects. Processors who have had a difficult time marketing finished product are having to inventory more of the material, with little prospect of any short-term new markets opening up.

If old news markets are in a bad situation, mixed paper is even worse off. Prices have continually fallen, with some processors reporting that during the middle of this year they had to pay to have the material taken off their hands. The situation could worsen. As a substitute grade, there is very little incentive for many consumers to take in the material when the price of other grades are not much higher. The export market, a sizable home for many bulk grades, also has been less than bullish on the grade recently.

Next year, there may be some improvements in the market for mixed paper. However, several sources are quick to point out, a number of things will have to come into play.

First, an improved economy is needed to allow for more building products production. Second, export markets will have to improve. Third, there must be a cleaner grade of mixed paper to make the grade more valuable.

This last requirement may be more difficult, especially with more communities looking to introduce residential mixed paper to their waste stream.

The JPA’s Wolf feels communities never should have encouraged the collection of residential mixed paper without establishing an end market for the material. But the promising news is that more mills are looking to take advantage of this grade, especially at the current low prices.

The author is editor of Fibre Market News.