The Path for Paper Remains Uncertain

Paper stock dealers are accustomed to significant changes in market conditions. However, the market has been particularly volatile during the past 12 months. In that period, prices for a number of paper grades soared to levels never previously reached. After briefly flirting with these high prices, most paper stock grades came crashing down to more mundane prices. Although not as low as prices seen earlier in the decade, the suddenness of the swing took many vendors off guard, and has made it hard for many companies to operate.

A number of factors could influence paper stock markets, including the overall health of the world economy; the strength or lack of strength in the paper markets; changes in mill furnish demands; new paper recycling start-ups and their ability to consume recovered fiber; and the uncertain export market. There are also other factors specific to the various paper grades.

For pulp substitutes, one of the key driving forces has been the world pulp market. Last year, demand for pulp helped to push the price up. As pulp prices began climbing, many consumers looked to pulp substitutes such as hard white envelopes and cuttings. This allowed prices for most pulp substitutes to climb. Added to that, the prices of many deinking grades such as computer paper and manifold and sorted white ledger began to pick up.

Reflecting this improvement, the prices for ledger grades and pulp substitutes shot up – in some cases by more than 100 percent from the first of the year. This strength, however, was short-lived. After seeing steady price increases throughout last year, consumers stiffened resistance, and prices began backing off. At the same time, new producers began selling significant amounts of pulp, adding to the oversupply of material.

This combination of factors helped to turn the grade from a hot commodity to one with eroding prices. Making matters worse, during the first half of 1995 new office paper deinking facilities created a huge new demand for many office paper fibers, and kept markets tight for a while. However, after the honeymoon, the reality of the market took affect. Mills realized there were problems using the grade, and prices quickly backed down. There are concerns now whether these new plants will be able to handle the grade of office paper they initially planned on using.

During the first part of this decade, as many of the new office paper deinking facilities were being designed, office paper was often referred to as the "grade of the future." As markets slump and the movement of this grade slows dramatically, many dealers are expressing serious reservations about whether or not the grade will survive.

But Edward Sparks, a paper industry consultant based in Glen Mills, Pa., still feels the grade has a rosy future. "The grade’s time has not yet come," he says. "Office pack is the future."

Sparks points out a number of circumstances causing problems for the grade, including difficult market conditions that have made it unprofitable for many of the new deinking facilities to run at a higher capacity. However, he admits that mills "need to improve their technology to handle the paper." One step toward this may be for mills to set up their own in-house sourcing facilities. He points out that American Fiber, Bala Cynwyd, Pa., is considering this step for its new Perth Amboy, N.J., deinking facility.

Office paper grades also suffer from the lack of a standardized definition, according to Randy Wolf of the Joint Purchasing Association, King of Prussia, Pa. Paper dealers may pack the grade differently, without sufficient regard to the needs of different mills. Although office pack, sorted office paper, and the various other related grades all aim to pull a similar type of fiber from the office setting, each one contains some minor variations. Still, "if you make a good pack that is well sorted, you will move it," says Wolf.

Overall, Sparks feels that office grades will rebound, and that residential mixed paper will become a more important grade in the future.

At the Wastepaper VII conference in Chicago last month, the mills’ problems with office grades was the hot topic. Despite more than a half dozen office paper deinking facilities opening up over the past year in the United States alone, the grade continues to languish, with little sign of a turnaround. Further, there are a number of additional office paper deinking facilities slated to open in the next 18 months.

According to a number of sources, of the new mills now on line, several are running at only a minimal level, while others have moved up the grade of furnish they are using to a more uniform white ledger grade.

These new deinking facilities claim they are working out the technical and engineering difficulties in using office grades, which could alleviate the problem over the long term. Other short term difficulties, including oversupply of pulp on the market, could dissipate in the future. However, for many paper stock dealers who invested heavily into handling office paper, the situation is dire.

High inventories are one issue. With low prices being fetched for most office grades at the present time, there has been some inventorying of material. This strategy could help markets in the short term. But, further down the road this inability to move the grade could prove costly, as demand over the next six months is expected to grow slowly.

Of the various grades handled, the one most immediately affected by the overall economy is the old corrugated container market. When new purchases increase, demand for boxes climbs, too. Because this trend is not limited to North American, paper stock dealers can leverage between domestic and foreign end markets.

This scenario came to fruition last year. Demand grew sharply in North America, partly fueled by new capacity which added to the existing infrastructure. This new production was assisted by strong demand for the finished product, that resulted in higher finished product prices. After seeing prices climb to more than $200 a ton by the middle of 1995, mills built up inventory and began buying less.

Asian mills, which helped push demand up, stopped buying material as their inventories also climbed. This move resulted in a decline in prices for both the finished product and the raw material. Also, mills throughout the U.S. have been taking downtime to eliminate excess capacity from the market. This move has reduced OCC demand in many parts of the country.

But while the market has softened, there have been some modest signs of promise. For one, the export market has started to heat up. Some exporters speculate that the recent improvement in OCC prices is due to the perception that prices have hit rockbottom.

There has been strong buying of OCC from a number of Asian sources. Prices, which had dropped to around $20 a ton at the mill early this year, have climbed as high as $100 a ton for some overseas orders, as strong exports are moving inventoried material.

Despite this positive news, few domestic mills are competing for tonnage because they still have significant inventory on hand.

Currently, the flow of OCC remains steady. New capacity is coming on line, and these facilities are not having a hard time using the material on hand.

The old newsprint market last year benefited greatly from the strength in the OCC market. Paperboard machines which could handle a wider range of grades began using more ONP as a substitute when OCC prices crept up past record highs. However, as the adage says, what goes up must come down. And for ONP, the fall has been dramatic. The amount of OCC on the market when the market crashed allowed more mills to use OCC at discounted prices. Even with the recent overseas improvement in OCC, ONP – with the exception of some export orders – remains flat at best. Adding to the situation is a deep-seated problem within the newsprint industry.

Over the past two years, the newsprint industry had shown signs of recovery from the devastating fall in markets seen during the first part of the decade. Price increases were passed on and finished product demand remained high. North American newsprint machines were at capacity.

But after running full out for most of last year, newsprint mills have seen a sharp drop in demand. Newspaper publishers resisted further price increases, and mills were forced to discount newsprint prices. By the end of 1995, orders began to soften, and through the first half of this year, many newsprint mills took downtime to remove excess market capacity.

For paper stock dealers, this is a tough blow. Unlike many other paper stock commodities, it is difficult to shut off the flow of ONP. With many mills reducing their intake of ONP, paper stock dealers are warehousing greater amounts of ONP until markets improve.

The only positive sign to be seen at the present time is the number of new newsprint machines coming onto the market which could result in stronger overseas demand for the material. Korean, Thai and Indonesian companies are slated to open new newsprint machines, which will require sizable amounts of ONP as a raw material. While this could prove to be a positive for the industry, these new machines also will work to keep prices for the finished product low.

There also is talk about new newsprint mills being built in the U. S., but these projects would not be finished for several years, if they ever are built.

The new capacity that is expected to come on line could be met with an even greater ONP supply from municipalities. Ambitious collection programs have brought the recovery level to more than 45 percent, and the figure is expected to go higher.

As bad as the current conditions are for many paper grades, the mixed paper market seems to be experiencing the most distress at the present. Although prices typically are the lowest for this grade, the lack of demand at mills seems to be overwhelming, as more are not handling the grade.

But there has been a growing interest by the residential side in collecting the material. Mixed paper, a high-volume commodity, brings many municipalities closer to their recycling goals. So, while the supply of residential mixed paper has been growing, demand for the material has not.

Residential mixed paper is a catchall grade. The grade typically contains a fair amount of corrugated and groundwood paper, as well as specialty grades, ledger and copier paper and boxboard paper. Because of the wide range of material collected, William Moore, president of Moore & Associates, Atlanta, feels it unlikely that many of the newer office paper deinking facilities will be able to handle the grade. End markets will probably be limited, for the most part, to building products companies, chipboard and boxboard plants and some tissue mills.

Because of this range, mixed paper offers less flexibility than other grades. While it has been used successfully in the manufacture of recycled boxboard (e.g. cereal boxes), chipboard and insulation plants, when markets turn down many consumers preferable to use much cleaner, more consistent blends of fiber such as ONP and OCC. With price and demand now slumping, movement of this grade is becoming even more difficult.

To push this grade forward, a combination of strong overseas orders and domestic paper stock prices would be needed. "Overseas buyers, especially Pacific Rim countries, will be buying greater amounts of the material," Moore says. A key reason is that the cost of labor in many countries is low enough to allow for sorting the material to pull out contaminants.

While it may be difficult to justify using residential mixed paper when other substitute grades are so inexpensive, Ken Enderle, regional manager-fiber procurement and development recycling operations for Georgia-Pacific, Toledo, Ore., notes that "the cost savings can be considerable for a mill using 100 tons per day."

Other benefits include mixed paper availability due to curbside collection, which is even more lucrative when OCC is in short supply. Also, the material is valuable when used to run medium and lightweight liner.

In addition, Steven Becker, vice president of The Newark Group’s Midwest Region, Milwaukee, notes that Newark’s mills in the Midwest are able to take in loose residential mixed paper. This benefits both the dealer and the mill, as the dealer can spend the time and money baling more valuable paper stock commodities, while the mill can pay less for the material.

But there are a number of drawbacks of using mixed paper, including significant loss of fiber due to shrinkage; the high level of contaminants; and the higher number of reject removals.

What the next six months will hold for the paper recycling industry is still unclear. But despite the less-than-rosy near-term outlook, most paper stock dealers, mills and consultants feel that prices will climb. The question everyone seems to be asking is "When?"