Recovered paper prices have continued their upward climb over the last 2-3 months in both domestic and export demand.
The commodity indices have been showing larger spreads and ones with more industrial metals prices in their mix have been performing better than those with more agricultural or precious metals in their pricing matrix. Since energy is generally given the same weight across all of the major commodity indices, it appears that Q4 2016 was a strong quarter for commodity and consumer markets compared to the rest of 2016. However, all commodity indices have been increasing and that’s aligning with recently released figures from the BEA that shows an increase in consumer spending and income at the end of 2016 by an average 0.4 percent.
U.S. manufacturing had strong Q4 confidence in 2016. Supply chain managers are continuing to increase ordering month over month and matching European manufacturing confidence. Investors often rely on PMI growth such as this to indicate stable environments for futures. Personal income and spending indicators increased in December despite light employment growth during that month.
January employment growth exceeded expectations with the Bureau of Labor Statistics reporting 227,000 jobs created in January but the picture on personal spending gets fuzzier due to year-on-year wage growth falling short of expectations.
For more a deeper dive into specific international markets, take a look at the latest issue of the BIR World Mirror on Recovered Paper.
Paper Market Report
(Publisher of The Paper Stock Report)
OCC Markets on the Rise
Moving toward the Chinese celebration ushering in the “year of the rooster,” demand for old corrugated (OCC) and other low grade recovered paper continued to accelerate, surprising many traders. December-to-January price increases for OCC are rare – the last time it happened was in 2010.
Most traders anticipated higher prices still in February even as China continues to celebrate its New Year through mid-month.
“Containerboard mills domestically and in China are doing very well and are in great need of OCC,” said a broker in the New York region. “We’re getting peppered with calls from buyers who want fiber in the pipeline immediately. We normally don’t get calls like that – usually it’s a load here and a load there. People are desperately short of double-lined Kraft and OCC in particular.”
Various exporters at the end of January generally reported OCC prices approaching $250 per ton delivered into China, with some reporting even higher numbers. However, one exporter in California said, “I’m not sure what will happen after Chinese New Year. During the week just before the New Year started (January 28), things started to get quiet. When the price comes down, I expect that it will come down fast, but I don’t think that’s going to happen very soon.”
An East Coast broker agreed, noting the strong market for containerboard in the U.S. and abroad.
“Domestic capacity utilization rate is better than 98 percent,” he said. “The backlogs at the mills are at six weeks plus and growing. There will be a collapse in the OCC market, but I don’t see that happening in February. Mill inventories of raw materials are low and it’s going to take some time to adjust.”
Over the past seven years, the typical market pattern has seen OCC prices leveling off to declining between November and December, with markets flattening out through January. The exception was the end of 2012, when U.S. domestic mill prices improved slightly in December before flattening out in January.
The current trend has seen an upward bump in December, followed by a larger bump in January, to an average U.S. national mill price of close to $140 per ton, FOB seller’s dock, according to surveys done by The Paper Stock Report.
“Until November, the Chinese mills were getting all the American fiber they needed from the coasts. Then they had to start coming into the interior of the country, and that’s when prices started to move up,” said a broker in the Northwest U.S. “Until then, the Chinese were chasing a strong domestic market. Now the Chinese have exceeded domestic markets and the domestic mills are trying to keep up with export prices. I’m sure we’re going to see higher prices in February. We’re approaching the kind of numbers we saw in 1994 and 1995, and I don’t think demand is going to drop after the Chinese New Year.”
Domestically, traders said the downing of International Paper’s virgin containerboard mill in Cantonment, FL, could have an impact on the containerboard market. The mill is expected to be closed at least eight weeks after the January 22 explosion of a pulp digester and powerhouse.
“The virgin containerboard mills are running flat out and the recycling mills have been running very well too,” said one broker. “They are making a lot of money and they are going to be getting price increases on their products soon.”
Meanwhile, most traders said they are taking a “wait and see” approach to trade policies under the new Trump administration, noting that it is far too early to tell how relations with Mexico and China, in particular, will impact their business.
“My living depends to a great extent on what happens in trade with China and I am very uneasy about it,” said a broker in the New York region. “The Chinese buyers are certainly paying very close attention to what is happening here. We’re in a good position to negotiate hard trade deals with them and I think they need us more than we need them. But it is unsettling.”
A West Coast broker is less concerned.
“There is always a lot of posturing going on before trade negotiations,” he said. “Things get stirred up, but I don’t expect to see any issues. Our company is planning for business as usual.”
Costs of shipping recovered paper to China would probably escalate if the U.S. begins to import less products from that nation, a mill buyer in Southern California said.
“China exports about three times as much to the U.S. than what it imports,” he said. This large deficit has made the steamship lines want to get containers back to China ASAP to capitalize on the more lucrative route back to the U.S. This has helped make Chinese paper mills more competitive when it comes to buying waste paper. In our industry, logistics can make or break a deal so when it’s cheaper to ship a container full of waste paper in a vessel to China than it is to dray it from San Diego to Los Angeles Chinese paper buyers can compete.
If the U.S. begins to apply tariffs to Chinese goods, the higher cost may not make the Chinese products as attractive as they once were and demand will decline. If that ever happens containers may not be as cheap to export out of the U.S. and would likely cause China to reduce their purchases and look elsewhere for tons at a more economically feasible price.”
Recycling Boxboard Production Down in December
U.S. boxboard production in December increased 0.8 percent when compared to December 2015, but decreased 0.3 percent compared to November, the American Forest & Paper Association (AF&PA) said this month. In its December 2016 U.S. Boxboard Report, AF&PA said unbleached Kraft Boxboard production decreased in December over the same month as last year and decreased compared to November. Total Solid Bleached Boxboard & Liner production increased when compared to December 2015, and increased compared to last month.
Specific numbers were not released.