May/June 2012
With China receiving the lion’s share of U.S. recovered fiber exports, processors and traders worry whether Chinese mill expansions are outpacing demand.
By Ken McEntee
Picture three trucks collecting scrap paper in the United States. One of them heads west and drives across the Pacific Ocean to China. Now picture three export containers of paper at a U.S. port. Two of those three export containers get loaded on a ship that also heads to China. As the destination for 30 percent of all U.S. recovered fiber and 68 percent of U.S. recovered fiber exports, China looms large in the fortunes of this country’s scrap paper recyclers and traders. It’s fortunate, then, that most market watchers remain positive about the Chinese market despite some concerns. Even though the still-struggling global economy has affected China’s manufacturing sector, containerboard mills have less-than-ideal operating rates, and the Chinese paper industry is loaded with debt, exporters and industry observers expect China’s mills to grow even hungrier for recovered paper—and the United States is likely to remain the country’s largest supplier.
A Look at the Data
Before 2001, Canada was consistently the largest export market for U.S. scrap paper. In 2000, for example, the United States recovered 47.3 million tons, according to the American Forest & Paper Association (Washington, D.C.), and it exported 11 million tons, according to the U.S. Census Bureau (Suitland, Md.). About 2.5 million tons of that material headed north of the border, and just 2 million tons went to China.
But in the mid-1990s, China began to increase its paper and paperboard production capacity in response to its growth as a manufacturing base for much of the developed world. Demand for product packaging drove Chinese containerboard production into an even higher gear in the 2000s, and that growth has continued ever since. Whereas in 2000 the United States produced more than twice as much paper and paperboard as China, in 2010 China produced 105.6 million tons compared with the United States’ 89.1 million tons, according to the United Nations Food and Agriculture Organization (Rome).
U.S. recovered paper exports have followed this growth in demand. In 2001, China first surpassed Canada as the top destination for U.S. recovered fiber, taking in 3.3 million tons to Canada’s 2 million tons. The export gap between China and the rest of the world has only widened from there. Fast forward to 2011, when the United States collected 52.8 million tons and exported more than 23 million tons, a record. About 15.8 million tons went to China—that’s about 23 percent more than in 2010—and 7.9 million tons went to the rest of the world, a drop of 6 percent year to year.
Driving last year’s record export volume were old corrugated containers. OCC exports to China were up a whopping 44 percent, to 8 million tons, in 2011—that’s more than 77 percent of all U.S. OCC shipments. India, the next-largest importer of this grade, took in only 650,000 tons last year in comparison. China also dominated the market for old newspaper. Of the 2.4 million tons of ONP the United States exported in 2011, China received 1.5 million tons, up 16 percent from 2010. Its imports of other U.S. groundwood papers also were up 16 percent, to 2.5 million tons out of the 3 million tons exported. Of the 2.2 million tons of pulp substitute grades exported, about half went to China.
All told, China was the dominant market last year for all recovered fiber grade categories other than the chemical deinking grades, such as sorted office paper and ledger grades. The top market for those last year was India, which took in 151,000 tons. China was only the fourth-largest market, importing 83,000 tons.
The Mixed-Paper Picture
China also dominated the market for U.S. mixed-paper exports in 2011, but shipments were down 10 percent from the previous year, from 2.8 million tons to 2.5 million tons. That’s a reversal of the trend that grade has seen since the beginning of the century. Mixed paper was at the heart of China’s skyrocketing demand for recovered fiber in the 2000s. That grade topped the list from 2000 to 2009 in terms of volume exported to China. In 2009, for example, 40 percent of all U.S. recovered fiber exports to China was mixed paper, whereas 33 percent was OCC. In 2010, however, OCC constituted 43 percent of U.S. exports, and mixed paper dropped to 22 percent. Their paths diverged further in 2011, when mixed paper fell to 16 percent of the total and OCC hit 51 percent.
Some sources attribute the trend, in part, to a growing dissatisfaction with the quality of U.S. mixed paper. As single-stream residential collection has spread across the United States, both U.S. and Chinese mills have complained about higher contamination levels in mixed paper and ONP. Others disagree that contamination is reducing demand. The mills have learned to deal with the lower quality of paper coming from single-stream collection, says Jimmy Yang of Newport CH International (Orange, Calif.), one of the largest recovered paper exporters in the United States. “The Chinese mills complain a lot about it, and I think the quality has deteriorated over the years,” he says. “But these days, the mills need the fiber, so they are learning to deal with the inferior quality. And the new paper mills have invested in such state-of-the-art facilities, I feel like I could throw my desk in there, and they’d make paper out of it.” Industry consultant Bill Moore, principal of Moore & Associates (Atlanta), instead points to China’s rising labor costs, which have made it less economical to sort mixed paper into other grades. Another broker agrees that quality has little to do with the drop in mixed paper buying. Further, he says, Chinese mills’ demand for this material will most likely rise again. “In the first six months of [2012] there are going to be 2.2 million tons of new boxboard capacity, and [those mills] are going to need more mixed paper.”
Capacity Growth
That broker points to the most notable trend in the Chinese paper industry in recent years: production capacity that is growing rapidly, with no end in sight. Nine Dragons Paper (Dongguan, China), the country’s largest containerboard manufacturer, started six new paper machines and upgraded three others in the past year, bringing the company’s total annual production capacity to 11.5 million tons, most of which is linerboard and corrugating medium. Six more machines are on the way.
Nine Dragons says it expects to have about 14 million tons of annual capacity on 36 machines by the end of 2013.
At the same time, Lee & Man Paper Manufacturing (Dongguan, China), China’s second largest producer, has started two new paper machines, which it expects to boost its annual containerboard production capacity to 6.6 million tons by June. The Shanghai Taison Pulp & Paper Group (Shanghai), another leading containerboard maker, also has an aggressive expansion plan, says Dino Chiu, general manager of Cycle Link USA (Diamond Bar, Calif.), the group’s U.S. recovered paper supply division. “We’re adding three more lines this year. We are also going to develop two other mill sites, but that won’t be until 2015. We want to pace our growth alongside the global economic recovery.”
Those companies are only the top producers in a country with thousands of mills of all sizes that use a wide variety of feedstocks to make paper. “There are areas that have hundreds of paper mills,” says a U.S. broker who visits China frequently. “When you go down the road, every driveway is another paper mill, one right after the other—some large and some small.” Altogether, Yang says, “over the next two years, China is going to have [about] 5.3 million tons of new board production capacity coming online. Most of it will be based on recycled fiber; a lot of it is in containerboard.”
Though the Chinese mills seem confident in their expansion plans, others worry about excess capacity, especially with a still-sluggish world economy resulting in lackluster demand. Official Board Markets, a leading industry index, recently reported that “sales and prices of finished products have not been good, and the Chinese mills have been operating only at cost,” Chiu notes. Further, mills are taking on significant debt to finance construction. In a 2011/2012 interim report released in February, Nine Dragons announced a debt-to-equity ratio of 115 percent, up from 73.9 percent in the 2010 fiscal year. Chairwoman Cheung Yan said she expects that ratio to increase even further this year before starting to recede in 2013.
With the industry working on already-slim margins, unable to raise containerboard prices, and looking at a likely future of higher costs along with millions of tons of new capacity, how does a debt-laden company expect to survive? Economic growth is the key, Chiu says. Leading Chinese mills are looking forward to a healthy global economy—as well as a healthy Chinese economy—to support their expansion. Yang is more wary, however. “What worries me is seeing so much new capacity coming online [while] mills are complaining it’s difficult to sell their finished products, and the prices are dropping,” he says. “Yet everybody is buying new machines and increasing capacity. I think it can [result in an] overcapacity situation.” Further, “I think the entire Chinese economy could be in a similar situation,” he says. The country is “constantly building infrastructure and increasing capacity across various industries. Hopefully, the economy [will grow] fast enough to sustain the increase in capacity.”
Consolidation
Offsetting some of this growth are steps the Chinese government has taken to close some lines and mills in an effort to modernize the country’s paper industry. Last year it announced the elimination of more than 8 million tons of old and outdated production capacity by closing about 600 mills. Among the closings were recycled fiber-based pulp lines that produced less than 11,000 short tons a year. From 2005 to 2010, similar closures reduced capacity by nearly 7 million tons. At least one mill believes such closures are supporting prices. In a May 2011 first-quarter financial report, Zhenyong Liu, chairman and CEO of Orient Paper (Baoding, China), attributed that quarter’s increase in the average selling price for corrugating medium—up nearly 27 percent over the first quarter of 2010—to “increasing customer demand and regional shortages in the supply of paper products caused by government-mandated closures of other, smaller paper manufacturers.”
Most traders interviewed for this article believe the Chinese government is shutting down the smaller mills to consolidate the paper industry and reduce competition for the larger mills—actions that have been observed in other industries as well. “I am certain that there are big guys being favored over small guys,” says one U.S. exporter. “It’s all about who you know … like anywhere else.” But he and other traders note that the stated goals of modernization—to eliminate mills that pollute or are inefficient in their energy use—are legitimate, too. As that trader puts it, “some of this old capacity needs to be eliminated because it isn’t doing the environment any good.” Moore explains that “most of the mills being shut down are based on agricultural residues and bamboo pulping systems that produce a lot of biochemical-oxygen-demand pollutants.” It’s possible to pulp bamboo and agricultural residues in an environmentally sound manner, he says, “but these mills didn’t have the systems that come anywhere close to today’s environmental standards.” Chiu adds that smaller mills that pollute more due to outdated machines and technologies also have higher production costs, thus local
competition also will drive them out
of business.
That said, political issues almost certainly come into play, Moore says. “The big paper producers have been pushing the government” to close these mills, though the action “has been much slower than they thought it would be.” At the same time, “the central government did have some trouble shutting down some of those mills because local governments often have some ownership in the operations, and there are always jobs at stake.”
Future Demand—and Supply
With China’s nonstop expansion, most traders and industry observers believe the United States will be sending more recovered paper to China in the years to come. “Without question, there is definitely going to be increased demand over there,” Yang says. “Chinese mills will be extremely hungry, and they are going to need fiber.” Many believe the United States is approaching the practical limit of OCC recovery, which raises the question of whether it—or any other country or region—will be able to supply enough fiber to satisfy China’s appetite. “I think the future is going to bring a very tight supply of recovered paper,” Yang says.
According to the most recent data from the United Nations, the United States supplied 42 percent of the total recovered paper China imported in 2010 and about 40 percent of its imported OCC. Another 33 percent of the total recovered fiber and 39 percent of its imported OCC comes from Europe. Moore says the United States will continue to be China’s go-to source for recovered paper, even as the supply gets tighter. “They won’t be able to get much more from Europe,” he says, because that continent is “in the same situation we are, with reduced availability. I think China will start to look at new sources, like the Middle East or Russia.” At the fall 2011 Bureau of International Recycling meeting, Paper Division President Ranjit Baxi of J&H Sales International (London) pointed out that Japan has surpassed Europe as the second-largest supplier of paper to China. Japan sent 3.5 million mt of scrap paper to China in 2010, Nobutaka Okubo of the Japan Recovered Paper Association (Tokyo) reported at that meeting.
The Chinese government is working to increase its scrap paper collection, sources say, though most doubt the country will ever be able to meet all of its recovered fiber needs. “China is already recovering 44 percent of its paper stream, and the world average is around 56 percent, so there is some [room for] growth for its domestic collection,” Yang says. The country doesn’t have “a sophisticated single-stream residential system like we do, but [it has] a lot of scavengers out there collecting paper from wherever they can find it. It is an industry over there. But they are going to still need to bring in additional tons from all over the world.” Shanghai Taison’s experience might be typical: Its feedstock has shifted from 70 percent imported to 60 percent imported recovered fiber, Chiu says. “The ratio will continue to increase more toward domestic, but we are going to continue to need additional OCC from the U.S.”
As for other grades, a significant portion of China’s new and planned production capacity is in sectors other than the almost exclusively OCC-dependent containerboard, Moore says. Mills “are bringing on a lot of capacity for things like cartonboard/boxboard, which use a mix of OCC, ONP, and, frequently, mixed paper. Tissue capacity also is increasing rapidly, but that is going to be mostly virgin pulp based,” he says. Along the same lines, most traders say they expect ONP to disappear as a grade due to less production in North America and quality issues related to contaminated collections. The result, Chiu says, is that “eventually, newsprint mills here and in China may have to go back to using virgin fiber again.”
Ken McEntee is editor and publisher of The Paper Stock Report and Paper Recycling Online
(www.recycle.cc).
With China receiving the lion’s share of U.S. recovered fiber exports, processors and traders worry whether Chinese mill expansions are outpacing demand.