Staying afloat: strong offshore orders are helping boost paper stock markets. How long can the conditions hold up?

Recycling Today, April, 2004 by Dan Sandoval

Never again. Pure speculation. Never again in my lifetime. If you were in the paper recycling market in the mid-1990s you might have heard these phrases or similar ones to describe the soaring paper stuck markets. Old corrugated (OCC) and old news (ONP) were both moving for more than $200 per ton. A host of paper stock dealers were frantically looking to lock in tonnage as demand surged.

Domestic mills, finding themselves short of supply, got into a bidding war for tonnage, driving up prices to historic highs. Offshore markets, afraid of being left out of the market, also hiked their purchase prices, further propelling markets.

At the same time, some paper stock dealers who sensed strong markets began speculating, with some warehousing material in anticipation of even higher prices. The absence of large blocks of material exacerbated the situation.

After a strong run-up, the inevitable crash came. Some recyclers who speculated that the market would keep climbing ended up out of business. Others who were enjoying huge profits saw those profits fritter away.

Price and demand declined. Some mills, sensing that they were taken advantage of, "began repaying the favor." The deceleration left markets for some grades in the doldrums.

A NEW RUN-UP. After several years of desultory movement, price and demand bounced along. During the past year some of these very same comments have resurfaced. Prices have been climbing, demand remains strong, and a number of vendors see the makings of another run on the markers.

Whether prices will reach the levels that they attained in the mid-1990s has yet to be seen. However, more than a few paper stock dealers say that conditions are ripe for a prolonged surge in markers.

The driving force for this optimism? None other than China. During the past several years, Chinese buying has moved from steady to spectacular. In conversations with a host of paper recycling executives, the sense is that new capacity continues to come on stream throughout Asia, especially China. These new orders have filtered through the market as many of these mills look to lock in tonnages to guarantee that they have an adequate supply of material to run their machines.

In the very short term there appears to be a lull with some grades. However, most paper stock dealers contacted express the opinion that markets should remain fairly strong for most grades, with mixed paper and old corrugated containers leading the way.

A source from one large West Coast brokerage firm puts it more succinctly: "It is going to be a good year, although there will be some bumps in the road."

At one time mixed paper was the orphan grade. In light of its inconsistent nature, mixed paper routinely went for such a low price (if not a charge) that many processors only handled the grade as an offshoot of another grade that they collected.

However, mixed paper markets have gone full circle. Partly because of the perception that limited markets for mixed paper existed, many generators stopped collecting the material; processors stopped processing it and now there seems to be a shortage of material on the market.

NO MIXED OPINIONS. The reasons for the strength in mixed paper can be attributed to the buying strength from China. As Chinese paper makers continue to add capacity, the demand for mixed paper has jumped. Whether the mixed paper is a soft mix or hard mix, there doesn't seem to be much that is slowing the grade down.

The grade also is more closely mirroring old corrugated containers. With the supply of OCC starting to reach its maximum recoverable level, more consuming mills are seeking out mixed paper as a substitute grade.

"Mixed paper is hot, hot, hot," says Bill Moore, principal of Moore & Associates, an Atlanta-based paper industry consulting firm. "It is taking on a life of its own," he adds.

"There is so much capacity coming on line in China. It is staggering," says Moore. And, with more capacity coming on line, mills in China continue to scramble to try to lock in tonnage to feed their machines.

While the much ballyhooed new capacity coming on line is stirring much of the push to China, the West Coast exporter notes that a significant amount of old capacity, both in North America as well as overseas, is closing. However, he adds that much of the older capacity coming offline in China is more of the "Mom and Pop" variety.

While the talk always seems to lock on China as the market, domestic paper mills have also been buying large blocks of OCC and other bulk grades as of late.

During the winter months, a number of mills, especially in the Eastern half of the U.S., let inventories diminish. This has forced some of these same mills to now come in much stronger to purchase larger blocks of paper stock, especially OCC.

The strong buying in February and March offset some pullback by Asian mills and has allowed markets to remain from stable to strong.

One paper stock dealer on the East Coast notes that more mills are willing to pay higher prices to guarantee they receive enough material through their doors. While a number of mills are paying premiums of as much as $15 or more, some paper stock dealers feel that Asian buyers, who have been the main driver for the stronger market during the past several quarters, will also have to re-enter the market to ensure that they are receiving enough supply to feed their machines.