Primed for growth

The corrugated market may be the ultimate harbinger to the relative health of the U.S. economy. Prices for old corrugated containers (OCC) can be volatile in the short term; but, over a longer period, the grade tends to move along with the general economy.

Recent figures from the American Forest & Paper Association (AF&PA), Washington, D.C., show that containerboard production was essentially flat when comparing figures for December 2011 with those from December 2010. Containerboard production gained less than 0.8 percent in December 2011 compared with December 2010.

The AF&PA also notes that production in December 2011 increased only 0.2 percent from the prior month.

Despite the steep decline in OCC prices seen toward the close of 2011, there seems to be modest upward pressure on OCC currently. The general improvement in the overall U.S. economy is driving this trend.

However, OCC will likely show only modest improvement during the first half of 2012, according to sources.
 

Regaining Its Footings
The OCC market displayed some sharp price swings during the second half of 2011. After seeing a significant run-up in prices through the summer of 2011, driven partly by new capacity coming online in China, OCC prices took a tumble and, in some cases, the fall was significant.

According to a recent report by the research firm Equity Research Associates (ERA), based in British Columbia, Canada, recovered paper prices fell precipitously at the close of 2011, with prices for OCC dropping by nearly $50 per ton. In a report, the ERA points to decisions by Asian board mills, particularly Nine Dragons and Lee & Man, to sharply reduce their orders for recovered paper, mainly OCC.
 

*U.S. average prices are volume weight averages of the previous month’s transactions; baled, full truck loads only; Source: Market2Mill, a product of Forest2Market, www.forest2market.com

Following this move, many U.S. mills also opted to curtail purchasing new furnish, with some mills accepting only contracted tonnage, in an effort to drive pricing down further, sources say.

While the severity of this decline took many recyclers by surprise, it appears stability is coming back into the market as of the first quarter of 2012.

Recently, as bleak news negatively affects markets for various paper stock grades, OCC appears to be holding up fairly well. The key reason is the improvement in the global economy. The ERA report states, “export prices tend to lead domestic prices out of the trough, and the ERA expects domestic prices to follow export prices upward over the first quarter of 2012.

“However,” ERA continues, “both the Chinese and U.S. board markets have softened since last summer, making the rise in domestic recovered paper prices for February and March perhaps a bit softer than price gains to Asia.”

A new study published by RISI, a Boston research group serving the global forest products industry, supports the moderately positive outlook for corrugated production and OCC consumption. According to this study, food industry shipments will continue to increase at an average annual rate of 2.4 percent during the next four years.

The report, U.S. Corrugated Box End-Use Markets: Analysis and Forecast through 2016, provides forecasts through 2016 for consumer spending, trade, production and corrugated box shipments for 21 specific end-use industries in the food and beverage, nondurable (nonfood), durable goods and nonmanufacturing sectors.

According to RISI, opportunities for corrugated in the food and beverage segment will grow as Walmart and other large retailers remain committed to increasing stocking efficiency and to the use of sustainable packaging materials, such as corrugated.

Corrugated also is cost-effective for transporting and stocking produce, meat and other food products, RISI says.

However, the moderate outlook for OCC is being weighed down by the lack of clarity in the overall economy.

On the domestic side, steady economic improvement in the United States has helped to prop up markets. Bill Moore, the principal of Moore & Associates, an Atlanta-based consulting firm for the paper recycling industry, says that after the sharp drop in price and demand for OCC late last year, markets have steadied. However Moore doesn’t expect to see a significant increase in price. “I expect to see a linear improvement due to U.S. [economic] growth,” he says. “The corrugated market is progressing ahead at a tempered speed.”

As for the sharp drop in late 2011, Moore says the market got ahead of itself and a correction was expected.

He adds that he does not foresee the sharp spikes in pricing for OCC during 2012 that were seen in the previous year.
 

Feeding New Capacity
Johnny Newsome, manager of mill supply for Sonoco, based in Hartsville, S.C., also says he sees a steadier market for OCC, particularly through the first half of this year. A key to this, he says, will be China. Currently, he notes, one out of four bales of OCC is being exported to that country.

“New capacity added about 25 percent in demand,” largely from China, he says of 2011.

Approximately 3.6 million tons of production are slated to come online during the next two years in China, Newsome says. While this is less than the capacity that came online in 2011, it is still a “nice ramp-up,” he adds.

Steve Spence with Oakland, Calif.-based Green Planet 21, a recycling operation with facilities throughout the Western United States, says, “In general, OCC demand is incredible. China is able to cohesively purchase material. I expect to see OCC pricing creeping up.”

Despite this, he predicts that while buyers for Chinese mills will likely show steady to strong buying in 2012, that market overall will not be as strong as it was in 2011.

Newsome says buyers for Chinese mills have become more astute in recent years, as well, and are avoiding jumping in and out of the market.

Mike Oswald, senior vice president and general manager of RockTenn, a Norcross, Ga.-based paper company, also says global demand will contribute to the strengthening of the OCC market in the year ahead.

“The OCC market is truly global in nature of supply and demand,” he says. “The global economy, particularly in Europe, the United States and China, will drive OCC prices, depending on how quickly these economies continue to improve,” Oswald adds.

Graham Shepherd, an analyst with ERA, says the corrugated market is one of the few segments of the U.S. paper industry that shows signs of moderate growth, though it will likely amount to less than 2 percent in 2012.

Quality Concerns
Quality issues are playing a role in OCC markets, though they are not nearly as great of a concern as with other paper stock grades. RockTenn’s Oswald says materials such as plastic, glass and other nonpaper items are increasing the cost of raw materials and can have a negative effect on equipment, which could require additional maintenance.

More traditional contaminants also are an issue. “OCC that is contaminated with heavy wax or other paper contaminants can have a negative impact on the product not meeting mill specifications,” he adds.

Sonoco’s Newsome echoes these statements, adding that another aspect of OCC’s quality problem is the difference between OCC produced in China, which more likely contains materials like straw, and U.S. OCC, which traditionally has stronger fibers.

Perhaps of more concern to sources than raw material quality is that OCC is nearing maximum recovery. With the U.S. recovery rate for the material nearly 85 percent, recovering additional tonnage will be more difficult, as well as more costly.

The U.S. could benefit from studying Japan, which has reached a recovery rate of nearly 90 percent. Oswald says, “As capacity increases, the United States will need to move toward Japan’s level of recovery for supply to meet additional demands. We will need to move further into the waste stream and add additional sorting capabilities to recover the incremental raw materials required to meet demand,” he adds.

Mills are looking to supplement their OCC use with other recovered fiber grades to meet demand. Oswald says blending of different recovered paper grades occurs today and depends on a number of factors. “Blending opportunities depend on the existing cleaning equipment at individual mills and specific mill products that are manufactured,” he says.

At the same time, Oswald says, “There can be a trade-off of material cost versus quality when the prohibitive cost of clean, high-quality material leads consuming mills to buy lower quality grades of material. In order to consume lower-grade materials, mills must invest in additional cleaning and strengthening components to meet their quality specifications.”

For Newsome, the longer-term prospect for OCC is continued growth in capacity in China as well as in other Asian countries. He says, “We forecast a lot of demand in China as it improves its infrastructure.”

The author is senior and Internet editor of Recycling Today and can be contacted at dsandoval@gie.net.