Up & Away

After fits and starts, the paper stock industry is primed to strengthen this year. A
confluence of better export orders and stronger prices for some grades of finished paper and pulp could drive markets and prices this year.

The volatile roller coaster nature of pricing could continue this year, as some forecasters expect to see pricing improvements in many grades. Grades could see spikes in price and demand during the first half of this year, according to these forecasts.

The factors for the possible price spike are fairly easy to recognize: Generation of supply has declined, with only a modest supply of many grades available after the holiday season. At the same time, many domestic mills are carrying less inventory. This could create some sharp price spikes as some mills may look to buy more material on the open market.

Another positive sign has been the steadily improving offshore market. Demand for a number of grades to Asia, especially China, continues to swell. This trend has resulted in widening price spreads between offshore and domestic buyers.

Also, a number of forest products companies are pushing through price increases, which could result in better prices for a number of paper stock grades.

HOT BOX. While the overall trend appears to be pointing upward, the various paper stock grades are also experiencing some market conditions that could affect individual grades.

A snapshot of the grade at the present time seems to indicate that markets are primed to show sharp upward improvements.

While this trend is not a foregone conclusion, many vendors feel that the emerging role of the export market is putting more pressure on domestic mills to raise prices. According to a number of paper stock dealers, the spread in prices being paid for OCC is as much as $30 per ton between overseas buyers and domestic buyers.

One paper stock dealer in the Southeast notes that while the price difference is tempting for him, the economics are still not enough to warrant his company switching more tonnage to the overseas market.

Despite this, he notes that the price difference is such that many packers who have the means should shuttle more material to ports for exports.

What is driving the OCC push? Increased orders from Chinese sources appear to be the key reason for the spread between offshore and domestic orders. While the country continues to grow in stature in the world market, its demand for raw material continues to swell. (For metals as well as paper. See "The Hunger," Jan. 2003 Recycling Today Ferrous Scrap Supplement.) And, as China continues to swell, Nine Dragons, one of the largest paper companies in the world, is adding capacity that will require even greater amounts of OCC.

At the same time, there are reports that inventory levels in China, as well as other Asian mills, have been depleted. Most likely this will mean a steady buying pace for material.

With the increase in offshore orders, as of February there wasn’t any similar jump in prices from domestic sources. In fact, according to several paper stock dealers, a price increase for OCC, which was expected in February, didn’t take place. Instead, prices were pushed down slightly in many regions.

While the domestic side has been loath to hike prices for OCC, inventory levels at mills have dissipated, with some sources noting that inventory levels have declined noticeably moving into the spring.

Inventory levels at many packing plants have also declined, even though there has been a fair amount of downtime being taken at many paperboard mills throughout North America.

One reason for the reluctance of many mills to hike prices has been the expectation that generation would be significant in the winter. This is typical with high generation of OCC after the holidays. However, with the holiday season having been unremarkable in terms of retail sales, the generation of new OCC has not met expectations. More packers are reporting that they have less material on hand. With less material being processed by paper stock dealers, several packers feel it won’t take much to boost prices, some feeling prices will climb in $20-a-ton increments.

The strength in offshore orders also can be partly attributed to the labor strife at West Coast ports that was resolved earlier this year. During the brief time ports from California through Washington were only operating at a minimal pace. Orders that needed to be filled and shipped sat waiting on the dock.

Only now, one larger West Coast exporter notes, has the inventory of back orders for recovered fiber been cleaned up.

Pricing for mixed paper has benefited from the situation. Although the value of this catchall grade is less than for OCC, its ability to be used in a wide range of applications has allowed the grade to remain stable to strong over the past month. Further, with better OCC prices expected by this spring and onward, orders for mixed paper could heat up even more.

The old newspaper (ONP) market has been one of the most conflicted grades over the past several months. The much-publicized problems in the newsprint industry have been widely reported. Bowater Inc., Greenville, S.C., and Abitibi-Consolidated, Montreal, two of the largest newsprint producers in the world, have had a difficult time raising prices for finished newsprint.

The extended slump in markets for these grades has resulted in less demand for new material. The closing of a host of mills also has created havoc for many vendors. The decision by Abitibi-Consolidated to close its Sheldon, Texas, de-inked newsprint operation added to the overall depression in the industry. The mill was one of the largest end users of recovered fiber from the Southwestern United States

Even with all these liabilities in place, ONP has held up surprisingly well.

Several sources note that ONP is benefiting from better shipments offshore. The swing toward larger blocks of supply moving to Asia has allowed prices for the material on the domestic side to remain somewhat stable.

While traditionally South Korea has been a major player in the ONP market, China has been active in buying more of the grade. Although there was a lull in late January and early February (partly due to the Chinese New Year), ONP movement is expected to pick up again in the spring.

Although it is unlikely prices will skyrocket, there are pockets of strength in the grade. This could be a precursor for improved markets moving into the spring.

Inclement weather throughout the eastern half of the U.S. also has cut into the generation of ONP. Heavy snowstorms, colder weather than the last several years, and generally harsh conditions are resulting in a decline in ONP collection levels.

Despite some thinking that finished newsprint prices can’t drop much further, there continues to be a significant pessimism on the part of newsprint producers. Bowater has been slashing capacity over the past several months as it attempts to balance supply and demand. The company reported that total newsprint production curtailments last year were about 400,000 metric tons, added to another 345,000 metric tons downsizing in 2001.

Adding to the drive by newsprint producers to bring supply and demand back into balance, Bowater recently announced it would be permanently eliminating around 240,000 metric tons of newsprint capacity as it converts a newsprint machine to coated groundwood paper at a mill in South Carolina and closes down a machine in Quebec.

Negativity notwithstanding, a host of paper stock dealers who handle the grade say that despite the softness in the newsprint and ONP markets, there has been enough demand outside the U.S. to keep prices from sliding down even further.

Another positive for the newsprint industry could be the attempt by Abitibi-Consolidated to raise newsprint prices. In late January Abitibi-Consolidated, the largest newsprint producer in the world, announced it is looking to raise newsprint prices by $50 per metric ton March 1. The move by the Canadian newsprint giant could be indicative that a two-year slide in newsprint consumption could be coming to an end.

Pulp prices, which greatly influence pulp substitutes, have been moving up over the past several months. Many pulp producers are looking to push through aggressive price increases. Although consumers will look to keep prices in check, there has been a strengthening of prices for pulp substitutes and, to a lesser degree, de-inking grades.

Tembec, Weyerhaeuser, Canfor, Fraser and Pope & Talbot are among a number of pulp producers who have announced plans to raise prices for various grades of pulp. Along with price increases, there has been a noticeable improvement in demand for pulp substitutes.

The swing has helped offset a pulp sub market that had been fairly sluggish last year. There is growing hope that the price increases that are being pushed for will help continue to firm up pulp substitute prices through the first half of this year.

As for the de-inking grades, tissue markets have been improving modestly. This has led to better conditions for sorted white ledger, office pack and other office-generated grades.

The Mexican forest products industry, for the most part, has been paralleling the U.S. forest products industry. Paper mills in the country have also been operating at reduced capacity. One of the largest paper mill conglomerates in the country, Grupo Durango, is undergoing significant financial pressure as it attempts to work itself out of a sizeable debt load.

Despite this, there are pockets of strength, principally the tissue and paper towel industry, which are helping firm up pulp substitutes and de-inking grades, according to one broker in the Southwest.

While questions abound, the attention getter for more people now is the strong buying by Chinese interests. Over the past several years the country has sharply moved to become a dominant player in the paper business. With the start of several new machines in China later this year, the country is quickly becoming the most important factor not only in the Asian market, but the market in general.

While Chinese mills continue to increase their intake of recovered fiber, the geographic range in which the country pulls fiber continues to grow. After initially purchasing from coastal regions, buyers for Chinese mills are moving further inland, with steady orders coming out of Texas and the Chicago region.

So, while China may be thousands of miles away, even paper stock dealers operating in the middle of the country are more directly being affected by what mills in this dynamic region are doing.

There are already reports of container shortages. At the same time, freight rates have climbed, making it more expensive for shippers to move the low-priced recovered fiber to end markets.

The Middle East situation has put a major chill on the U.S. economy in general. While economic forecasts point to a much-improved economy by the second half of this year, there are quite a few uncertainties that could change the overall dynamics of the paper industry.

The paper stock market this year will be affected by a host of factors, both market related and outside the realm of the forest products industry.

Statistical information from a variety of industry-related associations shows that inventory levels still remain stubbornly high, despite modest decreases at some facilities. If the forest products industry is able to reduce inventory levels for some grades, especially linerboard, there is potentially a much steadier move toward higher pricing.

In the meantime, with overseas buyers willing to pay more while domestic mills look to push the price down, paper stock dealers have a decision to make. Paper stock dealers will have to decide whether they should throw their hats in with offshore buyers to receive more money per ton or maintain their relationship with domestic mills and wait to ride out the downturn.