The future looks good for the recycled paper market. While prices may be down from earlier this year, prices are still higher than last year. Plus, exports remain strong.
“Every year China and India want more and more of our waste paper,” said Chip Dillon, an analyst at Citi Investment Research in New York. He said exports are driving prices.
Dillon said export demand for recycled paper is growing by around 10 percent a year. “We certainly aren’t consuming 10 percent more paper a year,” Dillon said. Demand for recycled paper in the United States is only growing around 1 or 2 percent a year at the most, he said.
“We’re collecting what we practically can,” Dillon said.
“The only way you’re going to induce more collection is for prices to go up.”
Old newspaper (ONP) prices were $107 a metric ton in May, compared to $71.50 a metric ton in May of last year. ONP reached $125 in March. It’s a similar story with old corrugated container (OCC) prices, which hit $108.50 a metric ton in May, compared to $76 during May 2006. OCC prices reached $144 in March, according to research by Citi.
Out of all the paper and paperboard made in the United States last year, 54 percent was from trees, or virgin fiber, Dillon said. Forty six percent was made from recycled paper.
North America has the world’s largest supply of both tree-based and recyclable softwood fibers, according to research by Citi. But fiber-deficient areas like China are where new paper producing capacity is being built. The topography of the land in Asia does not lend itself to substantial softwood timber growth, which is necessary for virgin containerboard production.
Citi reports that Chinese containerboard producers have plans to build 5.5 million tons of new capacity in 2007 and 2008, which combined with 2.4 million tons that have already started in 2006, amounts to nearly 8 million tons of new paper capacity.
“The strength in price is not so much from the strength in domestic demand. But it is due to the strong increase in demand for export of our waste paper,” said Tom Runiewicz, an economist at Global Insight Inc. in Philadelphia. He said most of the demand is from Asia.
Out of all the grades of recovered paper exports, everything from newsprint to soft-mix paper to corrugated boxes, roughly 60 percent goes to China, Runiewicz said. Exports are up about 25 percent from a year ago. “We export a tremendous amount of waste paper,” he said.
“That has helped out the paper recycling industry. It has helped quite a bit.”
Runiewicz said the freight cost for sending waste paper to China is very low. He said he has heard from people in the transportation industry that the largest export to China is air. For every three containers that come to the United States, only one container returns full of materials.
Runiewicz said that China has expanded its capacity for boxes and containers. He describes the process as cyclical. “What you end up having is a cycle where our waste paper ends up coming back in the form of a box with a manufactured product in it,” Runiewicz said.
Even though demand for recycled paper is expanding, Weyerhaueser Co. said it is considering a broad range of “strategic alternatives” for its containerboard, packaging and recycling business. The alternatives, according to a press release, range from continuing to hold and operate the assets to a possible sale or some sort of combination of the two options.
“We do not know what the outcome of the strategic review will be. It is premature to discuss what could happen to our containerboard, packaging or recycling business at this time,” said Frank Mendizabal, director of media relations at the forest products company.
“Weyerhaeuser will not speculate on the outcome of the review.”
The rating agency Standard & Poor’s said it might cut the corporate credit rating on Federal Way, Washington-based Weyehaeuser if it sells the paper-recycling business.
“Diversity, which has played a key role in our assessment of the company’s business risk profile, will suffer if this segment is divested or spun off,” S&P said in a statement.
Stephen Atkinson, analyst at BMO Capital Markets in Toronto, said a sale would not have a major impact on the paper-recycling industry. He said the most likely buyer of the containerboard, packaging and recycling business would be another paper company.
Atkins said that in the near term, higher prices would compress margins at companies that use recycled paper due to the higher prices. In the long term, he expects producers to raise prices. He said the biggest issue currently facing the paper recycling industry is offshore demand.
“There will be competition from China for recycled fibers,” Atkins said.
Packaging Corporation of America, the sixth largest producer of containerboard and corrugated packaging products in the United States, is one of the companies facing higher prices.
“We were able to achieve record earnings despite cost pressures from much higher recycled fiber prices and the limited availability of residual wood chips from sawmills,” Paul Steckco, chairman and chief executive officer, told investors after the release of the company’s first quarter results. PCS operates four paper mills and 68 corrugated product plants.