Are Wastepaper Markets Collapsing?

The following is from Deutsche Bank's Paper & Packaging report prepared by Mark Wilde, research analyst:

Old corrugated containers (OCC) and box clippings (DLK) represent important inputs for many containerboard producers, providing about 40% of the U.S. containerboard fiber furnish.

Oct. 27, 2011 - Trade reports from Europe & North America suggest that a decline in wastepaper prices has accelerated dramatically in recent weeks. Terms like “semi-free fall” and “unmitigated disaster” are showing up in our email box. Based on these reports, it’s not hard to envision m/m declines of $50+/ton in many wastepaper grades. If the declines continue into November, the Q4/Q3 drops could be even larger.

Old corrugated containers (OCC) and box clippings (DLK) represent important inputs for many containerboard producers, providing about 40% of the U.S. containerboard fiber furnish. We would estimate these grades could fall $40-50/ton (or more) when the trade papers report estimated prices next week.

The declines are occurring across all wastepaper grades. We’ve received reports suggesting that sorted office paper (SOP) could see m/m declines approaching $100/ton. Some of our sources are drawing parallels to late 2008/early2009 when wastepaper became a virtual “free good” and some mills were using it as a boiler feedstock. While we’re not convinced that the market is getting that bad, it is clearly deteriorating rapidly. Players should be rethinking plans for Q4 and beyond.

The key issue appears to be a virtual evaporation in Chinese demand for wastepaper sourced from both North America and Europe.

Trade sources are pointing to an inventory-reduction drive by big Chinese containerboard producers (Nine Dragons, Lee & Man, etc.) as well as their agents. At the same time, containerboard demand within China itself has slowed — a factor underscored by Nine Dragons’ recent decision to defer several new containerboard machines. It is also possible that tighter credit conditions in China may also be part of the equation.

Be careful what you wish for???

While the sharp drop in wastepaper costs should provide significant Q4 cost relief for many of our paper & packaging companies (especially, Rock-Tenn, International Paper and Sonoco), sustained lower costs could prove a mixed blessing.

  • First, lower wastepaper costs on a sustained basis would not be a good indicator of the health of global paperboard markets.
  • Second, lower wastepaper costs will reduce the cost structure of recycled mills around the world.

In the context of a soft global economy, they could provide room on the cost side for mills to reduce prices and go after market share. Asian and European containerboard mills are more dependent on wastepaper than US mills and would gain some relative global advantage. If costs remain low for some time, they could become more aggressive in export markets. In the US, there are several small recycled containerboard mills owned by third-tier producers. These mills are often heavily geared to open-market sales and capable of having an impact on market pricing.

SOURCE: Deutsche Bank