May/June 2001
Papermaking and paper recycling have deep roots in Canada. But dependence on foreign recovered fiber and export markets can toss the country’s paper industry around like a maple leaf in the wind.
By Aaron Illig
Aaron Illig is a writer based in New York City.
Think of Canada and it’s easy to think of trees, vast virgin forests that cover nearly half the nation. Even the maple leaf on the country’s flag reminds you of trees. So it’s no surprise that the $50-billion Canadian forest industry is one of the nation’s largest industrial employers, directly and indirectly supporting roughly 1 million people out of a total population of just 30 million.
To help preserve its great green resource—only half of which is available for commercial use—Canada has a nearly 200-year-old tradition of paper recycling. The country’s first paper mill, which opened in 1804 in Saint-André-Est, Quebec, relied on old rags and linen to make newsprint and wrapping papers.
The tradition continued, with Canadian kraft mills using recycled feedstock since the early 1900s, while an Ontario newsprint mill experimented with runs of 15-percent deinked pulp as far back as World War II.
In the last decade alone, Canada has enjoyed tremendous recycling growth, with a doubling of its recycling capacity and new investments in recovered paper technology that exceeded $2 billion. Just last year, for instance, Canada recycled a record 5 million mt of recovered paper, notes the Forest Products Association of Canada (FPAC) (Montreal), the industry trade group previously known as the Canadian Pulp and Paper Association.
Recovery and Recycling
The year 2000 also saw Canada collect a record 2.8 million mt of that 5 million mt total through its domestic curbside, office, and industrial recycling programs. The rest, some 2.2 million mt, was imported, almost exclusively from the United States, explains David Church, director of transportation, recycling, and purchasing for FPAC’s pulp and paper products recycling division.
Overall, recovered paper represents 25 percent of Canada’s fiber supply for new paper. OCC and ONP account for about 60 percent of the country’s scrap paper consumption in roughly even amounts, Church notes, with the remaining 40 percent divided among other grades, especially sorted office and high-grade deinked papers. Within its own borders, Canada collects about twice as much OCC as it does ONP but then reverses that mix when it reaches south, importing roughly twice as much ONP as it does OCC, says Church.
Paper recovery in Canada seems to follow many of the same patterns as in the United States, with municipalities either collecting material curbside themselves or contracting with haulers. Canada’s well-known “Blue Box” program—which covers multiple recyclables—can be found in most major cities and, in some cases, is experimenting with separate bins strictly for paper, Church says. Office and industrial or retail scrap paper is often collected by private scrap processors, though some of the mills have their own programs to recover this material directly.
The Canadian scrap paper processing industry remains fragmented and does not even have a national trade association to represent its interests. (CARI—the Canadian Association of Recycling Industries—focuses on metal recycling, one paper processor explains, while FPAC is heavily pulp-oriented.) But some consolidation is under way among processors as well as different segments of the overall paper industry.
For instance, Metro Waste Paper Recovery Inc. (Toronto), a major processor in Ontario, formed a partnership a few years ago with Cascades Inc., a large Canadian paper mill company based in Kingsey Falls, Quebec. An “unwritten rule” promises roughly a third of Metro Waste’s scrap paper to Cascades, explains Al Metauro, president of Metro Waste. But the paper processor is also free to sell to any mill that offers a better price. Metauro believes that such processor-mill partnerships will become more common in the future.
Metro Waste is predominantly a paper recycler, but other firms such as Turtle Island Recycling—considered by an industry publication as “one of the thriving independents” in the Toronto region—and ETL Recycling Services Inc. in British Columbia handle multiple scrap streams. Turtle Island even offers waste disposal services. Adding to the highly competitive recycling market are large waste haulers such as Canadian Waste Services Inc. (which is part of U.S.-based Waste Management) that also collect recovered fiber through municipal and commercial contracts.
Though Canada has less than one-ninth the population of the United States, it does manage to often equal or best its larger neighbor in paper recovery rates. In 1997, for instance, Canada’s 45 percent recovery rate exceeded the 44 percent U.S. rate, according to FPAC data. And for a country whose citizens are spread out over such vast distances, even Canada’s current 43-percent rate compares favorably to rates achieved in more densely populated countries of Europe, FPAC notes.
Producing Paper
Canada’s papermaking industry has come a long way since the debut of its first paper mill in 1804. Today, the country has 145 pulp, paper, and paperboard mills, which recently shipped a record 31.5 million mt of product, with newsprint “by far the strongest of all grades,” reports FPAC.
Of these 145 mills, some 65 use recycled paper to manufacture boxboard, containerboard, kraft papers, communication papers, and newsprint, FPAC notes. Newsprint again leads the field, especially in capacity growth. Back in 1989, for instance, only one Canadian company could make recycled-content newsprint, whereas today more than 25 mills fill that niche.
Canada’s paper recycling mills are concentrated in two regions—lower Ontario, bordering Lake Ontario and Lake Erie, and lower Quebec along the St. Lawrence River.
Abitibi-Consolidated Inc. (Montreal) is Canada’s largest newsprint producer and recycler, with nearly 30 mills on three continents and approximately 18,000 employees. Other major mill companies, all headquartered either in Montreal itself or Quebec in general, include Cascades, Domtar Inc., Bowater Pulp and Paper Canada Inc., Tembec Inc.,and Norampac Inc. Canada’s mills are hungry for fiber. Last year, consumption of Canadian-sourced ONP reportedly grew 7.8 percent to 848,000 mt, while consumption of domestic OCC was up 2.3 percent to 1.77 million mt.
On the import side, Canada buys virtually all of its imported scrap paper from the United States for three reasons: proximity, quantity, and quality. As one of the United States’ two closest neighbors, Canada is in a perfect geographical position to source scrap paper from its neighbor to the south. As added benefits, the United States happens to have the greatest supply and highest quality of secondary fiber in the world.
Since 1990, Canada’s imports of U.S. recovered fiber have grown 252 percent from 653,200 tons to 2.3 million tons in 1999, according to figures from the U.S. Department of Commerce, Bureau of the Census. In addition, its share of total U.S. scrap paper exports has increased from 10 percent in 1990 to 28 percent in 1999.
By grade, Canada imported 1.12 million mt of U.S. ONP in 2000, almost 2 percent lower than in 1999, which is good news for the Canadian paper industry, says Church. “The more fiber Canadian producers can get from domestic sources, the better it is for us because it lowers costs,” he notes. To be sure, Canada is striving to reduce its dependence on imported recovered paper, stepping up efforts to boost its domestic recovery. Even so, he adds, the industry is “always going to have to import from the United States.”
Canadian imports of OCC from U.S. sources rose to 491,000 mt in 2000 from 465,000 mt in 1999, but domestic collections of OCC also edged up slightly to 1.28 million mt in 2000 from 1.26 million mt the previous year.
Canada’s paper and paperboard industry survives on exports, shipping more than 80 percent of its products to other countries, primarily the United States.
On the scrap side, Canada is roughly the sixth-largest exporter of recovered fiber in the world, shipping around 500,000 to 600,000 mt a year.
Today’s Tough Times
Times are tough now for the Canadian paper recycling industry. Though U.S. paper consumption—long the principal driver of demand in the Canadian sector—is still high by historical standards, it is nevertheless down for the first time since the early 1990s. Prices have fallen precipitously, and Canadian mills have been feeling the pressure, responding with slowdowns, layoffs, and capacity curtailments.
“Almost half of all the recycled paper consumed in Canada is imported from the United States, so prices naturally are going to be largely driven by what happens there,” notes Romaine Jacques, an economist with the Canadian Forest Service (Ottawa).
The consensus, though, is that the current downturn will not be as long-lived or devastating to Canadian paper recyclers as past low-price cycles. Prices are deemed by many to be at or near bottom—if only because they are near the cost of collection for some grades. If prices go lower, recovered paper will begin to be landfilled rather than recycled.
Canada’s paper recycling industry is more mature now and can handle cyclical downturns more deftly than in the past, says Church.
“Prices are weak and demand is soft. Some of the mills have taken downtime, but I don’t think the slowdown is going to be as pronounced this time,” he says. “In previous periods of slow demand for packaging and newsprint, there was a greater impact on the recycling industry than now. I don’t think it’s going to be as bad as it was in the early ’90s, which wasn’t as bad as the downturn in the ’80s.”
Two related trends have emerged in paper recycling in recent years that may soften the impact of the current downturn in demand and pricing.
First, consolidation has swept the industry, significantly reducing the number of paper companies in Canada, Church notes. Abitibi-Consolidated and its mill in Thorold, Ontario, symbolize the consolidation wave that’s rapidly reshaping the sector. Thorold has gone through three different owners over the years, while Abitibi-Consolidated was five separate producers as recently as the mid-1980s. Some experts predict further consolidation is in store for the industry.
Second, demand for both paper products and recycled grades has, until now, risen steadily worldwide to record levels in the past decade, and further increases are expected once the current downturn ends.
Abitibi-Consolidated, for instance, is boosting the feedstock at the Thorold mill to 100-percent secondary fiber, up from 80 percent. The company plans to spend $50 million (Canadian) to build a new deinking plant at Thorold, with startup slated for mid-2002. The Thorold mill’s capacity, at approximately 400,000 mt annually, will be more than twice that of Atlantic Packaging’s operation in Whitby, Ontario, which a decade ago became the first Canadian mill to use 100-percent recycled material as feedstock.
By making a product from 100-percent recycled newsprint, a producer can simplify the pulping process and gain a competitive advantage in markets where stringent recycled-content laws apply.
“When a mill makes that decision, it needs the fiber,” Church notes. “Regardless of what the markets are like, it’s going to be buying.”
New recycled-paper capacity is also being added in the United States, Asia, and Europe, which could threaten Canada’s access to U.S. scrap paper supplies. Chinese mills alone are expected to add as much as 3 million mt of capacity by 2005, and they will need high-quality U.S. fiber to feed these facilities.
U.S. mills, too, are competing more strongly for domestic scrap paper, consuming 2.3 percent more in 2000 than in 1999 despite a 2.8-percent decline in paper and paperboard output. This rising U.S. consumption should lead to steadily increasing pressure on available supplies and could translate to higher scrap paper costs for Canadian mills.
Making the Grade?
Given Canada’s focus on the newsprint market, Canadian processors and papermakers are particularly interested in the fate of ONP.
ONP prices have slid from the peaks in July last year. A lot of the gains seen then were due to increased newspaper advertising expenditures. But since then, ad expenditures have declined, with the average size of newspapers shrinking 10 to 20 percent last year. Naturally, the recycling industry is feeling the effects.
Currently, ONP prices are uncharacteristically high compared with prices for OCC.
“ONP is the grade Canadian producers use most, but the market for this has been slipping since the beginning of the fourth quarter last year,” says William Moore, president of Moore & Associates (Atlanta). “ONP normally sells for less than OCC, but it’s been the opposite since early last summer. By October and November, the price differential was very out of whack.” By the end of March, he says, the price gap between the two grades was narrowing, with expectations that it will continue to close.
ONP prices, on the decline since the second half of 2000, recently appeared to bottom out, stabilize, and even improve a little on the export side, according to David Clapp of Resource Information Systems Inc., a research and consulting firm in Bedford, Mass. No. 8 news was around $58 a ton at the end of the first quarter—still $10 to $15 above prices for No. 11 OCC, though the gap was slowly narrowing, reportedly due to the erosion in newspaper advertising volumes rather than any increase in OCC demand. For comparison, in May 2000, No. 8 news was selling as high as $106 a ton and No. 11 OCC was fetching $128—roughly three times more than recent OCC prices.
Why so much trouble for OCC? As Moore explains, “There’s no good news in the corrugated box business right now. World GDP is slowing and so is box demand—it’s all connected. We’ve been at the bottom of the cycle now since around the end of 2000. Some people think prices will go even lower, but if they do, we’ll lose substantial supplies.”
Mixed paper, the lowest grade of recovered fiber, has seen prices recently fall as low as $10 to $20 a ton from a peak last year of $50 to $60. Mixed grades, which can serve as transition grades between OCC and ONP, are considered by some to be overpriced now.
In the high grades, such as sorted office paper and assorted white ledger, prices are reportedly close to bottom, which could slow collection activities soon.
Though paper demand is down “across the board, given the U.S. economy, there’s always going to be demand for recycled paper,” says Church. “We still see long-term growth in demand for ONP and OCC. We’re also seeing OCC consumption go up year after year, and even though we’re in a slump now, I don’t anticipate any reduction in consumption.”
In short, the future looks bright for Canada’s paper recovery sector. In the interim, whether it be two quarters or two years, the idea is cut costs and grab market share where possible in order to survive. •
Papermaking and paper recycling have deep roots in Canada. But dependence on foreign recovered fiber and export markets can toss the country’s paper industry around like a maple leaf in the wind.