Choppier Waters

Bill Moore

AFTER ALMOST THREE YEARS of strong and stable pricing, the recovered paper markets slipped substantially in the second half of 2005 and the start of 2006. However, even with today's somewhat weaker market, prices for most grades are at or slightly above the long-range price trend lines, which have been up for almost five years now.

Although old corrugated cardboard (OCC) prices have weakened the most in the last six months, the downward trend for OCC appears to be near its end. Many expected that the significant new paper machine capacity installed in China over the last few years would raise OCC prices. But much of this new capacity is underutilized, and the U.S. recycled fiber-based containerboard industry — the largest user of OCC — had a fairly sluggish year in 2005. However, exports of OCC to China continue to rise and, at some point, will push prices back up. Collection rates of OCC in the United States exceed 70 percent. At that level, any strong uptick in demand will drive prices.

Mixed paper (MP), a “sister grade” to OCC, has shown strong pricing for quite some time. For the last five years, this commodity, which in the early 1990s had almost no value, has sold for more than 50 percent of the price of OCC. While the price has retreated a bit since peaking at 70 percent, MP should hold its value going forward.

Old newspaper (ONP) has shown phenomenal market strength for more than three years, with its average price above that of OCC, marking the first time this has happened for any length of time during the last 30 years. Despite the recent price downturn of larger grade OCC, the softening ONP market still outpaces OCC. The primary driver for ONP has been a lack of supply rather than strong demand, especially in North America.

The U.S. and Canadian newsprint market is very weak, with mill shutdowns and curtailments becoming the norm. This is a result of the loss of readership that has plagued the newsprint industry for almost a decade with no signs of letting up. Less newspapers going into the “system” keeps ONP prices high. With less newspapers to collect, very little new activity in the residential collection arena and the deterioration of current programs, the ONP market is characterized by short supply rather than significant demand. However, as with OCC, offshore exports of ONP have been responsible for the grade's steady demand. Expect a rebound in ONP prices, but on a percentage basis, one that is less than the one OCC will see.

For almost two years, sorted office papers (SOP) have declined in price. The soft market is the result of two factors, the most important being an increase in the supply of shredded office papers stemming from the implementation of privacy and confidentiality laws at the state and federal levels. The dynamic is coupled with major expansions of virgin pulp capacity in offshore areas such as Brazil, Chile and Indonesia. Of the three grades discussed in this article, SOP will continue to be the weakest. However, the bottom of the trough for this grade has probably been reached already.
— Bill Moore
President, Moore & Associates
Atlanta