By the middle of 2010, prices for all of the major grades of recovered paper had rebounded to the highs they reached in 2008, shortly before the Great Recession. In the first quarter of 2011, old corrugated containers (OCC), the bellwether grade that makes up almost half of the paper recycling business, had an average U.S. price of $167 per ton. Compare that to the bottom of the market, $41 per ton in the first quarter of 2009. The other major paper grades — mixed paper (MP), old newsprint (ONP) and sorted office papers (SOP) — have experienced similar price trends during the last two years.
A variety of factors contributed to the rising market price:
- The generation and supply of recovered paper has been down due to weak economic conditions and, more recently, curtailed collection in the eastern United States due to severe winter weather.
- The U.S. box manufacturing industry has made a fairly strong comeback over the last year creating significant domestic demand for OCC.
- China’s economy moved at a good pace during the last six months.
- ONP prices, which had lagged behind OCC in 2010, surged upward in the first quarter of 2011, playing catch up as the gap between the two grades became too wide.
But there are other factors that will change the recovered paper markets going forward:
- The strengthening economy will boost OCC and mixed paper supplies. However, ONP and SOP supplies remain tight due to the continued moribund state of the newspaper business and the long-term decline in the use of printing/writing papers due to the shift to electronic communications.
- China will commence another wave of mill construction projects beginning in mid-2011 and continuing through 2012, producing yet another wave of unprecedented new demand for OCC and SOP. Some of these are projects that were put on hold during the Great Recession.
- The price of OCC delivered to China is at a level where paperboard/box producers there are having difficulty with profit margins. Coupled with this, China’s inflationary environment is weighing on its economic growth.
- The low quality of U.S. ONP and mixed paper due to contaminant levels will make these grades more vulnerable to price drops.
The following is the outlook for the major grades of recovered paper during the next year:
OCC – Expect a basically flat market for the next two quarters, with prices at or near the highs of first quarter 2010. After that, new Chinese demand should push prices even higher.
MP – This grade has a similar prognosis as OCC. When OCC prices rise rapidly, mixed paper usually enjoys an even greater jump.
ONP – With world newsprint markets soft, expect ONP to be flat for the next year. Use of ONP in Asian boxboard/cartonboard grades is the only new demand, and only curtailed supply will hold the price steady.
SOP – Expect SOP to enjoy the largest price increases in the next year based on the continued decline in printing/writing paper used in commerce (the primary supply for recovery as SOP), relatively strong tissue consumption, and two new major recycled printing/writing paper machine projects in China.
The one thing we do not foresee is a major fall in recovered paper markets. Moore & Associates believes that the only way this could occur would be a major downturn in the U.S. and world economies, which are demonstrating good growth that is expected to continue going forward. Political unrest in the Middle East, oil price shocks and major world events (such as the earthquake/tsunami/nuclear crisis in Japan) all are factors that could derail the world’s economies. However, at the time of this writing, the outlook, while guarded, does not seem to be one of doom and gloom.
Bill Moore is president of Moore & Associates in Atlanta.