Staying Afloat

Strong offshore orders are helping boost paper stock markets. How long can the conditions hold up?

Never again. Pure speculation. Never again in my lifetime. If you were in the paper recycling market in the mid-1990s you might have heard these phrases or similar ones to describe the soaring paper stock markets. Old corrugated (OCC) and old news (ONP) were both moving for more than $200 per ton. A host of paper stock dealers were frantically looking to lock in tonnage as demand surged.

Domestic mills, finding themselves short of supply, got into a bidding war for tonnage, driving up prices to historic highs. Offshore markets, afraid of being left out of the market, also hiked their purchase prices, further propelling markets.

At the same time, some paper stock dealers who sensed strong markets began speculating, with some warehousing material in anticipation of even higher prices. The absence of large blocks of material exacerbated the situation.

After a strong run-up, the inevitable crash came. Some recyclers who speculated that the market would keep climbing ended up out of business. Others who were enjoying huge profits saw those profits fritter away.

Price and demand declined. Some mills, sensing that they were taken advantage of, "began repaying the favor." The deceleration left markets for some grades in the doldrums.

A NEW RUN-UP. After several years of desultory movement, price and demand bounced along. During the past year some of these very same comments have resurfaced. Prices have been climbing, demand remains strong, and a number of vendors see the makings of another run on the markets.

Whether prices will reach the levels that they attained in the mid-1990s has yet to be seen. However, more than a few paper stock dealers say that conditions are ripe for a prolonged surge in markets.

The driving force for this optimism? None other than China. During the past several years, Chinese buying has moved from steady to spectacular. In conversations with a host of paper recycling executives, the sense is that new capacity continues to come on stream throughout Asia, especially China. These new orders have filtered through the market as many of these mills look to lock in tonnages to guarantee that they have an adequate supply of material to run their machines.

In the very short term there appears to be a lull with some grades. However, most paper stock dealers contacted express the opinion that markets should remain fairly strong for most grades, with mixed paper and old corrugated containers leading the way.

A source from one large West Coast brokerage firm puts it more succinctly: "It is going to be a good year, although there will be some bumps in the road."

At one time mixed paper was the orphan grade. In light of its inconsistent nature, mixed paper routinely went for such a low price (if not a charge) that many processors only handled the grade as an offshoot of another grade that they collected.

However, mixed paper markets have gone full circle. Partly because of the perception that limited markets for mixed paper existed, many generators stopped collecting the material; processors stopped processing it and now there seems to be a shortage of material on the market.

NO MIXED OPINIONS. The reasons for the strength in mixed paper can be attributed to the buying strength from China. As Chinese paper makers continue to add capacity, the demand for mixed paper has jumped. Whether the mixed paper is a soft mix or hard mix, there doesn’t seem to be much that is slowing the grade down.

The grade also is more closely mirroring old corrugated containers. With the supply of OCC starting to reach its maximum recoverable level, more consuming mills are seeking out mixed paper as a substitute grade.

"Mixed paper is hot, hot, hot," says Bill Moore, principal of Moore & Associates, an Atlanta-based paper industry consulting firm. "It is taking on a life of its own," he adds.

"There is so much capacity coming on line in China. It is staggering," says Moore. And, with more capacity coming on line, mills in China continue to scramble to try to lock in tonnage to feed their machines.

While the much ballyhooed new capacity coming on line is stirring much of the push to China, the West Coast exporter notes that a significant amount of old capacity, both in North America as well as overseas, is closing. However, he adds that much of the older capacity coming off line in China is more of the "Mom and Pop" variety.

While the talk always seems to lock on China as the market, domestic paper mills have also been buying large blocks of OCC and other bulk grades as of late.

During the winter months, a number of mills, especially in the Eastern half of the U.S., let inventories diminish. This has forced some of these same mills to now come in much stronger to purchase larger blocks of paper stock, especially OCC.

The strong buying in February and March offset some pullback by Asian mills and has allowed markets to remain from stable to strong.

One paper stock dealer on the East Coast notes that more mills are willing to pay higher prices to guarantee they receive enough material through their doors. While a number of mills are paying premiums of as much as $15 or more, some paper stock dealers feel that Asian buyers, who have been the main driver for the stronger market during the past several quarters, will also have to re-enter the market to ensure that they are receiving enough supply to feed their machines.

STATIC STATE. While the domestic market has helped buoy paper stock markets in the short term, the reality is that the North American paper business is likely to have a difficult time competing with Asian mills.

According to the Annual Capacity Survey by the American Forest & Paper Association, Washington, U.S. capacity "points to a continued absence of growth." Specifically, it indicates that U.S. paper and paperboard capacity declined 0.4 percent in 2003, following reductions of 1.9 percent in 2001 and 1.3 percent in 2002. It further suggests that capacity will remain approximately unchanged during the 2004-06 projection period.

The recent declines and the lack of growth during the projection period constitute a marked change from the past. In the 1980s and 1990s, for instance, U.S. paper and paperboard capacity rose at respective average annual rates of 2.1 percent and 2.2 percent.

Heightened foreign competition, the maturing of domestic markets and competition for forest products from plastics on the packaging side and electronic media on the print side are some of the factors that may have contributed to the absence of capacity growth.

Office and high grades are showing some mixed signals as of late. Several vendors feel that pulp prices are set to show some upward price strength. This should help out a number of the pulp substitute and de-inking grades.

One East Coast paper stock dealer notes that SBS (bleached sulfate) is in strong demand. While there is greater demand for pulp, there is a shortage of pulp substitutes, leading to better-than-expected pricing.

"There are positive signs in the higher grades," he remarks. "Pulp (prices) have bottomed out. There is better demand this year."

Further supporting this argument, he notes that some fine paper producers are seeing better demand for their finished product. And, because this segment of the paper business is a larger consumer of many of the higher grades, better demand from this area will likely help the movement of pulp subs and de-inking grades, although at a less consistent pace than many of the bulk grades.

The future of office pack grades, however, is more uncertain. More material is coming into the recycling stream through increased document destruction efforts. This is ensuring there is a large supply of available material. The result has been prices that, while not declining in any large way, haven’t shown the upward strength that a number of the bulk grades have shown.

Old news is one of the hardest grades to predict. While North American newsprint producers continue to attempt to rationalize capacity by shutting down machines or even entire mills, the steady decline in newsprint demand in North America is putting downward pressure on the grades.

In its Annual Capacity Survey, the AFPA notes that newsprint capacity fell by 1.3 percent last year to 6.9 million tons. At the same time, capacity in 2003 measured 2.4 percent, or almost 165,000 tons, higher than was projected in last year’s survey. The higher capacity level reflects mainly the restart of an idled mill that formerly produced uncoated groundwood.

Newsprint capacity is scheduled to decline another 2.8 percent, down to 6.75 million tons, this year. At that point, it will have fallen by almost 10 percent from its peak level in 1997 and will be at its lowest level since 1989. After 2004, capacity is scheduled to remain relatively unchanged.

Adding to the uncertainty surrounding ONP is the growth in single-stream recycling strategies. As more municipalities switch from a dual-stream or source-separated collection method to single-stream collection, the quality of the ONP remains uncertain. Also, with more shredding taking place for security reasons, Moore notes, more ONP is being shredded with office paper, removing even more ONP from the recycling stream.

A key will be the Asian market, where much of the growth in newsprint will come from. Whether Asian mills, especially those in Korea and China, can help mitigate any potential declines in North American demand has yet to be seen.

However, the West Coast broker says that through the next several months there will be a slow climb. By this summer, he feels that there will be a leveling off of markets.

Anticipated holiday retail sales could set the table for the second half of the year. If the sense is that the economy is improving, strong orders will boost markets earlier in the year. If, however, there appears to be a less robust economy, a pickup in demand for Christmas orders will be lower, narrowing the time frame for orders.

The author is senior editor and Internet editor of Recycling Today. He can be contacted via e-mail at dsandoval@ RecyclingToday.com.