November/December 1995
Dramatic shifts in supply and demand have driven the recovered paper market to a different dimension in the past year and a half. And while pressure has eased in recent months, it’s still a paper chase out there, pushing packers, brokers, and especially mills to find ways to adapt in this challenging new market.
By Kent Kiser
Kent Kiser is an associate editor of Scrap Processing and Recycling.
For the secondary paper market, the past 18 months have been like Dorothy’s experience in “The Wizard of Oz.”
From its humdrum life in the early 1990’s, the market was swept up in mid-1994 in a tornado of activity, with demand and prices whirling skyward. As this dizzying market began to descend this summer, paper recyclers found themselves in a strange new scenario.
They weren’t in Kansas anymore.
In this unreal, Oz-like market, recyclers—like Dorothy—have experienced both good and bad. On the positive side, the market took a trip down the yellow brick road to reach record demand and process. “We enjoyed a wonderful market for eight to 10 months,” says Stan Litman, president of Texas Recycling/Surplus Inc. (Dallas), a paper packing firm.
On the other hand, market prices, which had typically fluctuated only monthly, have become more volatile, often changing daily. The market’s frenetic activity has also reportedly spurred more speculative buying and selling. Further, recyclers are facing unprecedented competition for supplies from waste haulers and, even more notably, paper mills, which are taking significant steps to secure the fiber they need and minimize their raw material costs.
To be sure, it’s a different paper world out there, and with millions of tons of new paper recycling capacity expected to come on-line worldwide in the next few years, the market promises to become more challenging—and potentially more rewarding.
Before the Boom
Back in the early 1990’s, most recyclers couldn’t have dreamed the paper market would ascend to its present lofty levels.
Back then, the market was oppressed by several factors—most notably a vast oversupply of some grades. This imbalance developed, in large part, due to the public’s mania for “recycling,” which found an outlet inn municipal curbside collection and drop-off programs. Apparently confusing collection with recycling, these programs gathered millions of tons of paper, far outstripping mill capacity to consume recycled fiber. Horror stories abounded of municipalities filling warehouses with unsellable ONP, even deposing of the material in landfills and incinerators. (What recyclers wouldn’t do for that fiber now!)
Adding to the market’s woes, this overhang coincided with a worldwide economic recession, which slowed demand for finished paper, leaving mills with abundant product inventories and limiting their production—and their recycled fiber demand.
The effect on recovered paper prices was devastating, with tags for some grades, such as ONP and mixed paper, dipping to zero and below in parts of the country, making margins tight-to-nonexistent for many recyclers. This price valley persisted through 1993 and into early 1994, with values for most major grades—including No. 6 ONP, OCC, and manifold colored ledger—declining or, at best, staying static.
Inside these stormy market clouds, however, there was a silver lining forming.
Many paper mills were beginning to retrofit old machinery and install new equipment to boost their ability to consume secondary fiber and, thus, take advantage of favorable recovered paper supplies and prices. The mills also saw this as a way to answer the growing cry for manufacture of more recycled paper—stemming from the public as well as government entities, which had begun advancing minimum-content laws and/or recycled product procurement measures. The result: Between 1990 and 1994, domestic mills completed an estimated 85 recycling-related projects and increased their annual consumption of recycled fiber 38 percent—from 22.6 million tons to 31.2 million tons—according to ReMA figures. This, in turn, pushed scrap paper’s share of the entire paper market up from 28 percent in 1990 to 34 percent on 1994.
Shooting into Orbit
In mid-1994, a chain of simultaneous events drove the recovered paper market into a headspinning ascent. For one thing, significant new recycling capacity had come on-line by then, adding pressure to the mills’ already low inventories of secondary fiber. The domestic and world economies were also reawakening, creating stronger-than-expected demand for finished paper in general, and particularly for recycled-content paper products, At the same time, export demand kicked back in, with 1994’a total reaching a record 7.7 million tons—a gain if 26 percent over 1993, according to the American Forest & Paper Association (AFPA) (Washington, D.C.).
Combined, these factors lifted demand for scrap paper into the ozone. Secondary fiber supplies, which had been affected by the severe 1994 winter, were quickly consumed, and mills as well as packers found themselves scrambling for additional tonnage to fees the industry’s hearty appetite.
This voracious mill demand shot consumer buying prices for recovered paper to all-time highs in mid-1995, with price bulletins showing OCC spiking to $250 a ton, No. 8 ONP touching $240 a ton, mixed paper hitting $140 a ton, and ONG peaking around $220 a ton. In fact, depending on the grade, high values reached this year were hundreds or thousands of percent higher than the lows of the early 1990s.
Despite this situation, many recycled paper makers found ways to buy enough scrap to keep their lines running and were largely able to pass on the added furnish cost to finished paper buyers; some, in fact, enjoyed record revenues. On the other hand, a few mills with a heavy reliance on recycled fiber were forced to close—permanently or temporarily—and some others almost shut their doors as a result of the record prices and tight supplies.
More recently, just as recyclers were wondering how much higher the market could go, demand and prices for recycled fiber began to cool off as both domestic and export demand declined due to scheduled--and extended--mill downtimes and sluggish fall paper orders.
Nevertheless, the market hasn't chilled to the point where the industry can shake off concerns about scrap paper supplies and prices. And, indeed, mills appear to be taking more and more steps to ensure their future viability in light of the sobering scenario they've been through.
Blurring the Lines
Perhaps the most notable of the strategies paper makers are employing is the move by a handful of major mills to open or expand their own collection and processing operations.
Weyerhaeuser Co. (Tacoma, Wash.) has been one of the most aggressive in this area, acquiring or opening eight packing facilities—and counting—this year alone, bringing its total number of North American processing plants to 35. Pete Grogan, Weyerhaeuser's manager of market development, explains the company's action this way: "The low-hanging fruit is gone from the recycling tree. Now we're having to go further up the tree in the interest of meeting demand. That means acquiring facilities in marketplaces where we haven't previously had access to fiber."
Other paper makers that have been steadily expanding their processing facilities include Jefferson Smurfit Corp. (St. Louis) and Sonoco Products Co. (Hartsville, S.C.), which each run their own collection and packing operations-known as Smurfit Recycling Co. and Paper Stock Dealers Inc., respectively.
Other mills, meanwhile, are teaming up with independent processors to gain a foothold on the packing end. For instance, American Power Corp. (Bala Cynwyd, Pa.) and Resource Recycling Technologies Inc. (Vestal, N.Y.) are completing work on a $16 million mixed office paper processing facility in Philadelphia that will accept commingled commercial and residential paper streams and sort the material into various grades. Under the terms of the arrangement, a certain percentage of the fiber recovered by the operation will head to American Power's existing mill in Sanford, W.Va., as well as to its mill under construction in South Amboy, N.J.
As mills extend their recycling reach, traditional packers and brokers could find themselves facing new and formidable competitors, and competition for fiber could become intense. Nevertheless, these recyclers don't appear to feel too threatened by mill moves into their territory. Litman, for instance, admits, "it's a concern of ours," but, he quickly adds, "there will always be a niche for independent packers and brokers because of their close relationships with generators and the growing need for quality feedstock by consumers." Tom Bowers, president of Schirmer Paper Corp. (Boston), a scrap and finished paper brokerage firm, concurs, though he notes that the growing competition is forcing traditional packers and brokers to be more resourceful than ever. Offering a simile, he states, "We're like a hamster in one of those caged treadmills—we have to keeprunning faster and faster."
For their part, mills claim that their processing operations aren't designed to replace their relationships with packers and brokers, but rather give them access to more fiber and help them contain their raw material costs. "We view our sourcing efforts as supplementing rather than taking away from or competing with our packers," notes George Elder, public affairs manager of Southeast Recycling Corp. (Marietta, Ga.), the fiber purchasing arm of Southeast Paper Manufacturing Co., a newsprint mill. "We haven't had any problems with dealer displacement because we have worked with them to expand supply."
Hunting Down Sources
Just as some mills have developed their own collection and processing capabilities, other paper makers are addressing their recycled fiber needs by becoming more aggressive in their purchasing strategies. One example of this is the recent decision by St. Laurent Paperboard Inc. (Toronto) to form its own trading company, St. Laurent Fibre Resources Inc. (Oakville, Ontario), which primarily sources OCC for the company's corrugated medium mills in Thunder Bay, Ontario, and Matane, Quebec.
In an even more-telling move, 10 North American deinked market pulp mills have banded together to form the Joint Purchasing Association Inc., which buys scrap mixed office, printing, and writing paper for its members. Formed in an effort to generate a steady influx of new tonnage, the association is reportedly guaranteeing U.S. and Canadian suppliers a minimum price of $150 a ton for material purchase through this program and aims to source around 650,000 tons--or 25 percent of its members' fiber needs—through its efforts.
And concerns about the availability, quality, and price of ONP and OMG have prompted the U.S. EPA, the Newspaper Association of America (Reston, Va.), and the Canadian Pulp and Paper Association (Montreal) to conduct a study to determine how to increase the recovery of those grades in the Northeast. The study's results, due in early 1996, are expected to point to ways to expand the collection infrastructure to tap heretofore untapped sources.
Another sign that mills are expanding their efforts to secure scrap paper is the recent rash of supply contracts inked not only with packers, but also directly with municipalities and waste haulers. Though such contracts have existed for years, they weren't as necessary—Or far-reaching—a few years ago when there was a plethora of scrap paper on the market as they are today. Weyerhaeuser, for instance, has been contracting with municipalities to buy their fiber for as long as 20 years—a far cry longer than the one-to-five-year contracts seen in the past. In another example, albeit less dramatic, International Recycling Corp. (Quincy, Mass.) has contracted Newark Group (Cranford, N.J.)—a recycled paperboard manufacturer with a processing/brokerage arm—to be the long term sole supplier of about 550 tons a day of primarily sorted office paper to its soon to-open deinked pulp mill in Fitchburg, Mass.
Hand in hand with these aggressive contracting efforts, some mills have been mowing their operations to accept loose loads of paper—which, by definition, are likely to come directly from municipalities, waste haulers, and other suppliers lacking in processing capability. Besides working toward increasing their potential supply base, this move could also reduce mills' buying costs since they can generally pay haulers less for loose material than they must pay a packer or broker for baled material. Recyclers point out, however, that accepting loose material can present problems for the mill related to storage as well as contamination.
Rethinking Their Feedstock
Faced with today's market scenario, a number of paper mills have been ratcheting down the paper quality chain in order to maximize the tonnage of scrap available to them and minimize the price of this raw material.
Some paper makers have started mixing greater amounts of ONP with OCC, while a few tissue mills are using mixed paper in place of office paper and some boxboard mills are substituting mixed paper for OCC. This strategy has been made possible by two mill-related trends: changes in manufacturing methods and changes in sourcing approaches.
In the fist trend, some mills, especially new operations, have been installing high-tech cleaning equipment so they can use lower-grade, unsorted paper as fiber substitutes for higher grades of scrap. "Mills have a lot more flexibility now because of improved technology," Grogan observes.
In the second trend, paper makers are looking beyond even waste haulers and municipalities to previously untapped sources of material. One good example: Weyerhaeuser has contracted with the U.S. Postal Service to handle all the undeliverable bulk business mail from 395 postal facilities in 11 Western states. This material, when combined with the office paper, newspaper, and corrugated also to be collected from these facilities is expected to add up to more than 18,000 tons of mixed paper and 2,000 tons or so of OCC annually, Weyerhaeuser reports. In a similar vein, a variety of mills have expressed interest in adding such previously unacceptable materials as cereal boxes and old telephone directories to their fiber mix.
As yet another response to the current scrap situation, some mills have decided to scale back their consumption of secondary fiber and, instead, boost their use of virgin material. One such mill is Southeast Paper, which has long touted its 100-percent-recycled newsprint but is now manufacturing a 95-percent recycled product. “With all of the predicted increases in demand, we cranked up a mothballed thermo-mechanical pulp line to decrease out reliance on recycled fiber,” asserts Elder.
In addition to giving mills some freedom from the vagaries of the recovered paper market, the ability to use both virgin and secondary feedstock gives the more raw material flexibility and enables them to compensate for poor scrap quality, when necessary.
A Future of More of the Same?
While some paper executives view this summer’s cool-off in the secondary fiber market as the harbinger of a larger and extended economic slowdown, many others see the market’s sluggishness as a temporary lag. “I believe it’s a lull before the storm,” says Litman, stating, “I’m confident there will be upward movement when the new mills come on-line in 1996.” Grogan, too, predicts a market rebound, noting, “My crystal ball says the current downturn will last into the early part of 2006, but then it will again be an extraordinary year overall for demand with good pricing.”
The realities, of course, lie in how the fundamentals of supply and demand play out. And indications are that that this equation will continue to look much as it has in the recent past, therefore increasing the likelihood that the paper recycling industry will continue to develop ways to cope with the market’s new path.
On the demand side, the paper industry is expected to bring even more additional deinking and recycling capacity on-line, increasing domestic demand for recovered paper from the 31.2 million tons by 2000, AFPA predicts. Foreign paper makers as well as secondary fiber consumers outside the paper industry—such as wallboard, animal bedding, and cellulose insulation producers—are also expected to continue increasing their demand for scrap paper, which could spell increased competition for U.S. supplies among domestic mills.
This potential is especially true considering predictions of limited supplies. At issue is the premise that the recovery rates of some pivotal scrap grades—particularly OCC and ONP—are fast-approaching their projected maximum level. For instance, OCC, which had a 62.5-percent recycling rate in 1994, is estimated to have a potential recoverability of 67 to 72 percent by 2000, according to Franklin Associates Ltd. ( Prairie Village , Kan. ). ONP, meanwhile, which had a 1994 recycling rate of 58.7 percent, has a projected maximum recoverability of 66 to 73 percent by 2000. And reaching even these supposed maximums will be difficult, most paper executives agree, because experience has shown that the higher the recycling rate, the more difficult it is to recover each new ton.
On the other hand, there's considerable room for growth in the recovery of some scrap categories, such as office paper, which is now at the 34-percent level, and mixed paper, which has an even lower recycling rate. Plus, the U.S. paper industry has assigned itself the task of recovering 50 percent of all paper used—or about 50 million tons—by 2000. Of course, to achieve this goal, the recycling industry will have to extract more fiber from existing supply sources, expand the scope and number of curbside and office collection programs, and mine new sources. "To meet growing demand for recovered paper, the U.S. paper recovery rate will need to rival the world-class rates achieved in more densely populated and wood-fiber deficient countries like Japan ," AFPA asserts.
All said, Grogan concludes, "It's a new day." To be sure, the paper industry has changed in fundamental ways in recent years—for better or worse. On the positive side for traditional packers and brokers, the expected growth in recycled paper production is likely to ensure broader demand for all types of recovered fiber. On the negative side, they could face competition as never before and will have to meet the challenge of recovering ever-more paper.
A paper chase of unprecedented proportions is on, prompting packers, brokers, mills, and waste haulers to adjust to different roles and market demands. "It's going to be pretty wild out there," Elder says. "Things will be incredibly different in the way business is done in the next few years. There will be a lot of changes." Far from being in Kansas anymore, the industry has entered an entirely new state.
Dramatic shifts in supply and demand have driven the recovered paper market to a different dimension in the past year and a half. And while pressure has eased in recent months, it’s still a paper chase out there, pushing packers, brokers, and especially mills to find ways to adapt in this challenging new market.