Cold Comfort

September/October 2012

The U.S. market for recovered paper is shrinking but still sizable. Tissue products are one bright spot on the horizon for recyclers seeking domestic consumers.

By Ken McEntee

Quick, what country is the top consumer of U.S. recovered fiber? If you said China, you’re wrong. Despite the strong and growing demand in that country, a majority of U.S. recovered fiber still gets consumed right here at home. Just ask National Fiber Supply Co. (Chicago), which sells 80 to 85 percent of its recovered paper to U.S. mill consumers. The domestic market has become increasingly challenging, says National Fiber broker Tom Wood, but it remains important. “Because the U.S. paper industry has been shrinking for the last 10 years, people seem to discount it,” he says, but “it puts bread on my table.”

The first of the domestic challenges, recyclers say, is the market’s consolidation through mergers, acquisitions, and bankruptcies. “With all the acquisitions, it’s getting harder to navigate the domestic market,” Wood says. “With the [International Paper] acquisition of Temple-Inland and RockTenn’s acquisition of Smurfit Stone Container Corp. [in 2011], the playing field is getting narrower.” He calls the trend “discouraging for private companies like ours because you’re dealing with fewer and fewer people. IP and Temple were both among our biggest customers, and now they’re shutting down mills and changing their production patterns. The bigger a company gets, the more purchasing power it has, and the more power it has to dictate the market.”

Also, though U.S. buyers still purchase more material, China has seen the greatest increase in demand. Thus, Chinese buyers are setting the price. These days, “I think the domestic price is just a default of what the pier price would be,” says Steve Wilson, western region marketing director for Waste Management Recycle America (Houston). “You take the export price at the pier, deduct the freight [cost] to get the material there, and that’s generally what the domestics will pay.” And the domestic market is not uniformly strong across all geographic regions and paper grades. In Southern California, for example, there are virtually no domestic consumers of old newspaper, mixed paper, and other grades. That said, U.S. mills’ consumption of about 90 million short tons of domestic recovered fiber in 2011 is nothing to sneeze at—unless you’re producing tissue, of course. That range of products is one of the brighter spots for the U.S. industry as it looks ahead.

A Shrinking Market

There’s no denying that U.S. paper and paperboard manufacturing capacity is on the decline. U.S. production capacity peaked at nearly 104 million short tons in 2000, falling to 89.7 million tons in 2011, a 1.4-percent decline from 2010, according to the American Forest & Paper Association (Washington, D.C.). It expects paper and paperboard production capacity to decline another 1 percent this year before growing 0.6 percent and 0.5 percent in 2013 and 2014, respectively. New mill and machine announcements came frequently a decade ago; now AF&PA can point only to the start or planned start of “several” new tissue-paper machines in the 2011-2014 period and a single new recycled linerboard mill that it expects to come online in mid-2013. The latter project—the first greenfield containerboard startup in years—is the 540,000 ton-per-year Greenpac recycled linerboard mill that

Cascades (Kingsey Falls, Québec) is constructing in Niagara Falls, N.Y.

Domestic consumption of recovered paper dropped last year as well, AF&PA reports, falling 3.2 percent, from about 31.5 million tons in 2010 to about 30.4 million tons in 2011. U.S. consumption was lower both in absolute terms and as a proportion of all consumption, as more U.S. recovered fiber was exported. About 57 percent of U.S. paper recovered in 2011 was consumed domestically, down from 60 percent in 2010 and 64.2 percent in 2007. Total consumption of U.S. recovered paper was up about 3 percent, or 1.5 million tons, in 2011, to 53.6 million tons, according to calculations by The Paper Stock Report (Strongsville, Ohio) based on AF&PA domestic mill consumption data and export data from the U.S. Department of Commerce (Washington, D.C.). Here’s what those data have to say about domestic recovered fiber consumption by grade. (Note that exports include shipments to Canadian mills.)

Old corrugated containers. A majority of U.S. OCC is consumed domestically, though the proportion fell from 70.4 percent in 2010 to 65.2 percent in 2011. That’s despite a slight increase in the domestic volume consumed, to 19.3 million tons. In 2007, the earliest year for which data are readily available, 78 percent of all U.S. OCC was consumed domestically.

Mixed paper. U.S. mills consumed a little less than half of U.S. mixed paper collected in recent years: 46.5 percent in 2011, down from 47.1 percent in 2010. Domestic consumption is up from 2007, however, when only 38.5 percent went to U.S. mills. Overall, 8.5 million tons of mixed paper was consumed in 2011, down 10 percent from the 9.3 million tons consumed in 2010.

Groundwood. Groundwood grades, including old newspaper, also are more often going overseas. Domestic consumption was 38.5 percent of the total in 2011, down from 43.5 percent in 2010 and 55 percent in 2007. U.S. consumption of groundwood grades declined 13 percent in 2011, to 3.4 million tons, compared with 2010.

Chemical deinking grades. These grades, which include sorted office paper and sorted ledgers, seem to be the domestic darlings, with a far higher proportion of them remaining in the United States than other grades, though the proportion of exports is growing. In 2011, U.S. mills consumed almost 80 percent of the deinking grades generated, down from 82 percent in 2010. Overall, 3.2 million tons of deinking grades was recovered in 2011, down 0.5 percent from 2010, with 2.6 million tons used domestically and about 660,000 tons exported.

Pulp substitutes. In contrast with the deinking grades, pulp subs are generally an export grade. In 2011, U.S. mills consumed 35.7 percent of all pulp subs collected, down from 38.5 percent in 2010. Almost 3.4 million tons of pulp subs were collected in the United States in 2011, up 1.2 percent from 2010, but domestic consumption dropped 6 percent, to 1.2 million tons.

No News Is Bad News

In both supply and demand terms, no other recovered paper grade is as vulnerable as old newspaper. “The declining consumption of paper is a challenge to the industry, but newsprint has been a horrible story in terms of shrinking demand,” says Wilson of Waste Management Recycle America. The increasing use of the Internet has led to the decline of newspapers, and with them, newsprint manufacturing. Just compare the size of your Sunday newspaper now—if you still get one—to the newspaper of five to 10 years ago to get an indication of the industry’s woes. Ken Rasmussen, market development manager for Cascades Recovery (Vancouver, British Columbia), says the big plummet in the newsprint market came after the Beijing Olympic Games in 2008. “The global demand for news was dropping, but because of the Olympics there was a heightened demand in China,” Rasmussen recalls. “They were buying a lot of roll stock as furnish. But once the Olympics were over, [demand] just died overnight.” RISI (Bedford, Mass.) expects North American newsprint demand to contract by 11 percent from 2011 to 2013, according to a presentation by Ken Waghorne, vice president of the firm’s global packaging practice, at the 2012 ReMA convention.

A Nova Scotia newsprint mill that Resolute Forest Products (Montréal) shuttered in June was a recent casualty of this trend. Resolute, the new name of the company formed from the merger of newsprint giants Bowater and Abitibi-Consolidated, emerged from bankruptcy in December 2010. Two months later the company closed its recycled newsprint operation in Coosa Pines, Ala. Resolute isn’t the only newsprint producer in trouble, either. “It seems that every company that has been making newsprint has gone bankrupt,” Wood says. “It’s rough to sell to those mills because of their financial situations.” These bankruptcies have included Blue Heron Paper (Oregon City, Ore.), Bear Island Paper (Ashland, Va.), and its parent, White Birch Newsprint (Greenwich, Conn.), all of which have shut down their operations. (In mid-July, White Birch announced its Stadacona newsprint mill in Québec City would reopen in August.) SP Newsprint, another White Birch subsidiary, has kept its mills in Dublin, Ga., and Newberg, Ore., open while reorganizing. Catalyst Paper (Richmond, British Columbia) emerged from bankruptcy in June, but it no longer produces recycled newsprint at its British Columbia mills; in August it announced it’s shutting down its recycled newsprint mill in Snowflake, Ariz., at the end of September.

The reduction in newsprint production has led to a decline in old newspapers available for recycling, and those that are available more often are collected via single-stream recycling, which increases their contamination levels and decreases the material’s desirability to consumers. “The biggest problem with commingled collection [such as single-stream] is that the more materials we mix together, the more difficult it is to take them back apart,” explains John Lucini, Pacific region vice president for SP Recycling (Clackamas, Ore.). “We have seen an increase in our feedstock of other kinds of recyclables that aren’t compatible with our newsprint process. It affects the yield of the material we buy, and it increases our cost; plus, we have higher disposal costs to get rid of the unwanted materials.”

SP’s Newberg, Ore., operation has the option of switching its feedstock to wood fiber when the price of ONP gets too high—or when the quality gets too low. “We have the capability to run thermomechanical pulp lines that make pulp from residual wood chips,” Lucini says. “Over the last year or so, we have increased our use of wood fiber as opposed to recovered fiber because there is a lot better yield on the wood side. We tend to look at the cost of our fiber at the headbox.”

Some recovery facilities are finding it more economical to leave ONP in with mixed paper rather than incur the added costs of sorting it out into a separate grade. The result could be the eventual death of ONP as a major grade. Lucini doesn’t think the grade will completely go away, but he is concerned about the loss of ONP fiber that happens when newspaper is baled with mixed paper. “Mixed paper is primarily an export grade,” he says. “Once it is shipped overseas, you’re not going to get it back in the form of newsprint.”

The declining quality of ONP from single-stream residential collections reduces its value not only to newsprint mills but also to other users, such as cellulose insulation producers. The contaminants are even more detrimental for cellulose plants than paper mills, Rasmussen says. “At the pulper [at a paper mill], they can take out the glass and the other materials, but if you run that stuff through a mulcher [at an insulation plant] you’ll destroy the equipment.” Besides, he says, the low price of natural gas is making fiberglass insulation cheaper to produce than cellulose insulation.

Despite the pessimism in the newsprint market, one big name is banking on the survival of the newspaper—at least the news-collecting end of the business. Billionaire investor Warren Buffett, CEO of Berkshire Hathaway (Omaha, Neb.), shocked the market with his purchase in May of 63 daily and weekly newspapers from Media General (Richmond, Va.) for $142 million. At the time of the purchase, Buffett publicly acknowledged that the newspaper industry faces substantial challenges, but he asserted that in towns and cities where there is a strong sense of community, “there is no more important institution than the local paper.”

The Office-Tissue Link

While lamenting the decline of ONP as a major recovered paper grade, some traders have expressed similar concerns about the future availability of office paper, which is an important furnish for the tissue business. The concern is that the growing use of electronic communications could reduce the supply of office paper. Scott Fasken, owner of Colorado Document Security (Grand Junction, Colo.) and president of the National Association for Information Destruction (Phoenix), doesn’t buy it. “I don’t think we’re seeing a decline in paper use in offices,” he says. “Yes, there is a lot of information exchanged electronically. Then it’s printed out. Everybody prints out e-mails and other electronic files. I agree with the person who once said that we’ll have a paperless office when we have a paperless bathroom.”

NAID signed up more new members in the first quarter of 2012 than in any other quarter in the organization’s history, Fasken points out, indicating growth in the document destruction business, with the potential of even more growth to come. Despite laws and regulations that mandate consumer privacy and information security, a lot of businesses still are not shredding their office paper, he says. “As an industry, document destruction services need to talk to people not about shredding, but about compliance,” he says. “When people understand their liability, they realize that they need to start shredding. That will result in more office paper being recovered. Running out of scrap paper is not one of my biggest concerns.”

That’s good news because one U.S. paper production category that shows the promise of short-term growth is tissue, Wood says. Wausau Paper (Mosinee, Wis.), for example, plans to start a new production line for recycled tissue products next spring at its converting facility in Harrodsburg, Ky. That line will have a 75,000-ton annual capacity. RISI expects North American tissue demand to grow by about 1.5 percent a year over the next several years, said Esko Uutela, a Hamburg, Germany-based economist for the company who specializes in the tissue sector.

In today’s tissue market, mills generally use recycled fiber more heavily in commercial, away-from-home products. If producers begin to substantially increase the recycled content of home-based tissue products, it would make a substantial change in demand for office paper, Wilson says. “If the environmental movement pushes consumers to demand recycled content in retail tissue, it would put a tremendous crunch on supply because demand would go through the roof. Right now there seems to be enough to go around.” Uutela isn’t so sure of that, however. Though tissue producers do want to meet the requirements of “green” certification programs by using more recovered fiber, they’ll find a diminishing supply of that material, he says. “The tissue sector is growing, but the availability of recovered printing and writing paper needed to make tissue is declining,” he says, which will be “a big challenge for tissue companies.” Major tissue producer Kimberly-Clark (Dallas) recently announced plans to cut its consumption of virgin wood fiber in half by 2025, he noted, but it won’t necessarily replace that material with recovered fiber. Instead, the company plans to test alternatives such as bamboo and wheat straw.

Cascades’ mills are committed to using secondary materials to produce value-added papers and packaging products, Rasmussen says. He expects consumer interest in sustainability to make its commitment to using recovered fiber worthwhile. “Some mills have the flexibility to switch to virgin pulp if the cost of recycled fiber gets too high,” he says. “But when you make guarantees of a certain percentage of recycled content, you’re locked in.”

Pragmatic About Packaging

Along with tissue, the packaging sector seems to hold the most growth potential of any grade on a global scale, market watchers and participants say. Though the recession took its toll on North American packaging production, production has rebounded somewhat in the past couple of years, says Rachel Kenyon, vice president of the Fibre Box Association (Elk Grove Village, Ill.). Despite a reduction in the number of box plants from 2010 to 2011, production of corrugated boxes increased 0.5 percent. Box shipments declined 8 percent from 2008 to 2009, but they grew 3.5 percent in 2010 before last year’s half-percent gain, she says. (The association only disseminates historical data, she points out—it does not create industry forecasts, thus it cannot comment on whether such growth will continue.)

With the bulk of the growth in packaging production coming from China, which relies on imported recycled fiber to make containerboard, some traders question whether U.S. mills will be squeezed for OCC. Wilson says U.S. producers need not be overly concerned. “There absolutely will be enough fiber in total to go around,” he says. “Whether it will all be OCC, I don’t know. North American [packaging] producers can always increase production from wood if the supply of recycled fiber is tight and if the price gets too high. … It is not a problem here to make linerboard out of trees. In some ways there is an economic incentive to do it. If power is expensive, making containerboard out of trees provides a financial incentive over OCC.” The average U.S. corrugated box contains 46 percent recycled content, Kenyon says. “Most mills in the U.S. are swing mills, so they can use a portion of virgin fiber—byproducts of dimensional lumber production—and a portion of recycled fiber,” she says. “The [proportion of each] they use depends on the market price of those raw materials.” That ability to adjust the proportion of primary and secondary material “reduces these companies’ exposure to volatility in the marketplace,” Kenyon says. OCC recyclers also should not worry about competition from virgin material, Wood says. That flexibility at the mills is the free market at work. “If the price of OCC gets too high, the mills use wood, and the price comes down,” he says. “It’s as pure an example of a supply-and-demand market as you can find. Wood isn’t a threat to OCC. It’s a complement to OCC.”

RISI saw a contraction in North American demand for containerboard in 2011, but it expects demand to rebound this year and next year, growing about 3 percent and 2.5 percent, respectively. Research it conducted for the Paperboard Packaging Council (Springfield, Mass.) put those numbers in perspective, creating a bearish outlook for U.S. boxboard producers globally. North American demand for cartonboard will continue to grow very slowly, “perhaps as much as 11 percent below pre-recession peaks, and production is likewise expected to remain stagnant. We expect very slow growth in folding carton production through 2016,” says Kim Guarnaccia, director of marketing and communications for PPC. Further, “Asia has a huge oversupply in boxboard right now, so we expect that [Asian companies] will be exporting a lot of that to the U.S. and elsewhere—including to some of our traditional export markets,” Guarnaccia says. “Unfortunately, we expect that to cut down on U.S. exports.”

Even worse, she says, the council’s economists are predicting another recession will hit in 2015. “We’re struggling out of what our economists feel is a depression over the last few years, and as soon as we get a foothold and start a little growth, we’re going to be hit again,” she says. “So their long-term predictions are not very encouraging.” Another wave of economic tumult could trump all other variables in determining the near-term fortunes of the North American paper industry.

Ken McEntee is editor and publisher of The Paper Stock Report and Paper Recycling Online (www.recycle.cc).