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June 2006

Recovered paper prices on the rise

Recovered paper prices are increasing, but prices are often volatile.

“We have noticed increases over the past several months,” said Steve Grossman, president of The Grossman Group Inc. The Westerville, Ohio-based broker of waste paper also operates a fiber separation recycling facility in Columbus, Ohio.

Grossman said he expects scrap paper prices to increase further. “When pricing is very low, as many of us have seen over the years, there really isn’t enough of a spread to make even a decent profit, cover collection cost, mar- ket properly, etc.,” Grossman said.

“Pricing does not have to skyrocket in order for everyone to make a profit.”

Scrap paper prices are on the rise, but not by the same magnitude as other scrap materials, said Tom Runiewicz, an economist for Global Insight in Philadelphia.

Scrap steel is about twice the value of scrap paper, Runiewicz said. “Metals, because of high value per ton, have always been a lot more attractive to recycle.”

The price for old newsprint was approximately $80 a ton in 2002, Runiewicz said. Last year the price increased to about $110 a ton. This year the price is slightly below $100 a ton. The price for old corrugated containers was $88 a ton in 2002 and increased to a peak of $115 a ton a year ago. This year the price is back below $95 a ton.

“While both domestic and export demand for scrap have grown tremendously, the supply chain and collection facilities have also improved quite a bit,” Runiewicz said.

“Previous supply constraints with scrap paper have not been due to the lack of availability of scrap paper and boxes. The United States is a tremendous producer of waste.”   

Most new paper production facilities in the United States are using waste paper as a material source, which helps increase demand, Runiewicz said. Export tonnage to Asia has grown four fold since 2002, which also helps to increase demand for scrap paper.

Total United States paper and paperboard recovery reached a record 51.3 million tons in 2005, resulting in a recovery rate 51.5 percent, according to the American Forest & Paper Association. The recovery rate is up from 49.5 percent in 2004 and 46 percent in 2000.

Stan Lancey, an economist with the Washington D.C.-based trade group, said he expects demand to continue. He said recyclers must compete for supplies in a globalized market. “Demand is rising rapidly, especially export demand from China,” Lancey said.

In addition to China, demand is also increasing in India and Eastern Europe, said Leone Young, an analyst in New York for Citigroup, in a recent research report. Young said this presents good growth opportunities for the United States paper recycling industry

“This, of course, is only if the United States can boost its recovery rates,” Young said. While the recovery rate has increased from 27 percent in 1990 to over 50 percent, the number of residential recycling programs has not increased since 1992, Young said.

“In addition, 51 percent of the office paper is not recovered, which could be a big area of improvement,” Young said. “Bottom line, if the United States wants to remain a leader in paper recycling, it will need to boost recovery rates to meet offshore demand.”

China has also started to source some of its paper supplies from Europe over the last couple of years, said Bill Moore, president of Moore & Associates, a paper recycling consulting firm in Atlanta. Moore said that while China has increased its buying from the United States, it is also buying more from Europe. “It kind of held a lid on pricing,” Moore said.

“The United States domestic demand has been real sluggish and the Chinese buying over the last six-month period has eased off a bit. There is a major over-capacity situation in recovered paper and paper production in China right now,” Moore said.

“Supply is pretty tight. Supply generation has been flat for five years.”

Recovered paper prices continue to increase on a long-term basis, however, Moore said. But in the short-term, there has been some downward pressure. Moore said as China’s capacity gets more utilized, the internal demand will increase and the appetite for recovered paper will also increase, pushing up prices for scrap paper.

“Paper recyclers are in a good, modest growth business and look forward to increased demand and probably increasing prices,” Moore said.

The recovered paper market has not seen as much price volatility this year as in years past, said David Clapp, an economist at the Boston-based research firm RISI.

The current environment for recovered paper prices is due to capacity withdraws and a downward slope of consumption, Clapp said. Europe is also adding capacity.

“But recovered prices have been relatively stable,” Clapp said.

Clapp said he expects improvements in recovered paper pricing over the next six months. The pricing in the future, however, will depend largely on China’s inventory position. Clapp said China is starting to use its paper inventory to its advantage.

“They’re sourcing fiber worldwide. They’ve expanded their supply source to Western Europe and Japan, in addition to the United States,” Clapp said. “This has allowed buyers from China to bridge between major suppliers,” helping to keep prices down.

Producers in China are focused on market share instead of on the bottom line, Clapp said. “They are expanding their supply sources, by utilizing their inventory to their advantage, really undercutting suppliers in the United States and Western Europe.” Clapp said producers are not as concerned about return for shareholders, quarter after quarter.

“They are much more willing to sacrifice margins for the sake of preserving market share. Clapp said.

“They’re very reluctant about paying more for recovered paper. They are much more willing to sacrifice their margins. This really inhibits their ability to raise prices.“

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