Riding the Roller Coaster

William P. Moore

There is no doubt that recovered paper market prices are volatile. A quarterly published price index of recovered paper grades from 1994 through the end of first quarter 2000 shows several price index items worthy of discussion.

In 1995, there was a Mount Everest recovered paper market, with prices reaching almost $228 per ton. By contrast, the first half of 1999 had the lowest prices since the end of 1993. And in the second half of 1999, prices were the highest since mid-1995. We continue to ride up the roller coaster as we head into this year's second quarter.

In Wall Street terms, the word "beta" is used to express stocks' volatility. A beta of "one" means that a stock's price movement is equal to movements in the market. The beta for recovered paper would be much higher than finished paper pricing.

The recovered paper market is a classic example of capitalism at its best - it is governed by the law of supply and demand. Current recovered paper demand by the U.S. recycle paper mills is good. Asia's export market is strong as well. These two factors, coupled with a slowing increase of supply, have fueled the higher market prices experienced during the past year.

It surprises those in the paper recycling industry that, at a time when the world's paper producers continue to use more recovered fiber, the public's interest in expanding paper recycling is waning.

Recently, this was evident when a national network reported a short recycling segment on television. Those who expected an upbeat story covering new technologies and growth in the industry were surprised that the segment was anti-recycling. The piece covered the uneconomical aspects of various types of recycling, including paper recycling.

Hence, it's no shock that even with current excellent recovered paper markets, further new recovery programs are not on people's minds. Stemming from this, new collection initiatives may be lost. Recovered paper prices will remain high and be unable to compete with virgin fiber.

With OCC prices above $125 per ton, the material becomes an uneconomical fiber source for containerboard, which is used to produce corrugated boxes. If prices remain high, buyers will swing toward virgin fiber. In the future, paper mills may be flexible enough to use either virgin or recycled fiber.

As well, recycle containerboard mini-mills, which produced large, new recovered paper demand in the 1990s, only use recovered paper. While the capital investments for recycle mini-mills is less than virgin fiber, when costs reach their current levels, these mills are economically disadvantaged.

How will all this shake out? Like all things, it's a balance. The recovered paper market will roller coaster, and in the future, we will experience the downhill side.

Many structural occurrences in the industry, including contractual relationships, the use of derivatives, and E-commerce trade may help to reduce the market's price volatility. Needless to say, suppliers and users would openly welcome this.

Paper Trail editor, Bill Moore welcomes questions and comments from readers. Phone the author at (770) 518-1890 or via e-mail at [email protected]