After a strong 2004, many paper industry watchers felt that 2005 would cool. That doesn't look like it is happening.

The paper recycling market has long operated in a boom/bust scenario. From prices that soared to record highs to virtual overnight plummeting, where prices were at record lows, many paper stock grades have highlighted the uncertain nature of the market.

However, after a robust 2004, many people expected to see some slowing.

While there has been some slowing of some grades, old corrugated containers (OCC), the grade many paper recycling officials feel is the ultimate bellwether grade for recovered fiber, has maintained its fairly robust outlook.

What has driven the grade more than anything else has been sizable demand for the material from offshore sources, principally China.

The China situation is one of the more complex situations in the global economy presently. While a host of economic reports show that the overall world economy has been fairly flat, with modest strength from the U.S. market, China's move to modernize its economy and infrastructure has resulted in the construction of a staggering number of manufacturing facilities, from cement plants to steel mills to paper and paperboard mills.

While the perception a number of years ago was that the quality of Chinese manufacturing was suspect, newer manufacturing plants are using top-of-the-line systems.

OCC in Growing Demand
For the paper industry, no grade better demonstrates China's surging demand than OCC, along with the previously unwanted grade of mixed paper.

For OCC, a host of new mill capacity that has opened in China throughout the past several years has resulted in more material moving offshore of the United States. Chinese mill buyers, as well as their purchasing agents throughout the United States and Canada, have been buying larger blocks of material.

Adding to the shifting consumption is a change in philosophy. The earlier trend of Chinese buyers jumping in and out of the market, depending on prices, has been, for the most part, replaced by steadier buying of material. The result has been an improvement in OCC prices, which have held up fairly well over the last several years.

Responding to the increased buying by Chinese mills, many domestic paper and paperboard mills, which used to have more sway with local paper stock dealers, must keep prices more stable, even when their own local economics would dictate a price cut.

Maxed-out Recovery?
Finally, an overarching realization is that OCC is reaching its maximum recovery level. There may be some opportunities to increase the total amount of OCC collected, but, many collectors and recyclers concede, any significant incremental increase in the amount of OCC collected will be more expensive.

The American Forest & Paper Association (AF&PA) in its most recent report on paper recycling stated that OCC recovery levels topped 75 percent in 2003, a level that seems to indicate that most commercially generated OCC already has been collected.

Further accenting the strong collection infrastructure already established for OCC, a recent report by Bill Moore, principal of Moore & Associates of Atlanta, notes that OCC recovery topped 80 percent last year, and forecasts that recovery will reach close to 85 percent by 2010.

While the United States is the breadbasket for recovered fiber, the likely slowing down of the available OCC comes as new capacity from China and other Asian sources will likely increase the overall demand for the grade, resulting in the real possibility that there will be less OCC than needed to feed all the new machines.

One further note is that while many Asian mills used Western Europe as a counter weight when U.S. OCC prices climbed too high, the reality is that new capacity in Europe will swing the paper industry in this continent from being a net exporter of recovered fiber to a net importer, creating even further pressure on grades such as OCC.

China Inspects Imported Raw Materials
In the midst of all the upbeat forecasts for OCC, some key issues are starting to become more prevalent. In the past, the quality of the material being shipped to China was more suspect. This was not limited to solely recovered fiber. Highly publicized reports that containers of hazardous or putrescent waste or material being shipped have appeared. In response, the Chinese government is attempting to correct the problem by implementing an inspection and licensing policy that aims to protect the country from being shipped non-recyclable material.

The program is called “Detailed Rules on the Implementation of Registration for Overseas Supply Enterprise Exporting Scrap Materials as Raw Materials” and is administered by China's AQSIQ (The State General Administration of Quality Supervision and Inspection and Quarantine of the People's Republic of China). Under this Chinese program, any company or individual seeking to ship recyclables (including all grades of recovered fiber) must have a license from the AQSIQ.

Presently, the Chinese government is not accepting any more applications. Once receiving its license, a vendor must have the material inspected. This, the Chinese government hopes, will sharply reduce the chances of dangerous materials being shipped into the country.

One big concern for many exporters of the recovered fiber is the fact that while the policy was implemented the first of this year, it continues to be changed and the system fine-tuned, making it a challenging endeavor for shippers to keep up with the mandated policies.

Mixed Paper
While OCC has benefited from the strength of the Chinese paper mills, an even more impressive market has been that of mixed paper. Only several years ago the grade was one that people handled reluctantly. While domestic mills used the grade (as did building products companies and other secondary or minor consumers), in light of the inconsistent nature of the material, the grade was not as widely sought as other, more clearly defined grades.

However, this trend has changed, and quite significantly. A confluence of issues has propelled mixed paper to some of the highest prices it has ever seen. While, as earlier noted, OCC and old newspaper recovery levels are reaching maximum recovery levels, mixed paper is in more abundant supply.

Adding to the upward trend for mixed paper, many mills are realizing that some of the more sophisticated machines are able to handle mixed paper. For all the commotion about the amount of OCC being shipped from the United States to China, according to Moore, the country takes in far more mixed paper than OCC. Prices have reflected this trend, although as mixed paper nears and reaches OCC prices, it is likely that mixed paper prices will ease back to a more normal spread between the two grades.

Office Grade Fibers
While bulk grades such as OCC and mixed paper are enjoying a healthy export market, a grade that is seeing other issues is the office grade fibers. Traditionally collected in large-scale office collection programs and often sold to deinking mills and other consumers of cleaner grades of white paper, the explosion in the shredding business, caused by heightened security and identity theft concerns, has sharply reduced the supply of non-shredded office pack grades.

As shredding firms dig deeper into the office-recycling stream, and as more companies opt to have everything shredded, quality concerns are growing for many of these domestic mills.

In a standard sorting line, materials such as kraft paper, groundwood fiber, non-fiber materials and food wastes can be extracted before baling. The task has become much harder, or practically impossible, as shredding companies, especially mobile shredding operations, opt not to extract these materials at the front end, instead shredding all the material, including tapes, metals and even food that is mixed in, creating a significant problem for mills that have relied on this fiber as a key raw material.

While industry groups have been rushing to develop policies and standards, as well as encouraging document destruction firms to deliver a cleaner grade of shredded paper, for many shredding companies the top priority is ensuring the security of the documents, with the recycling price differences a secondary issue.

For mills, the hit has been difficult in a number of areas, including taking in a lower quality raw material, having to spend more money disposing of material that is not used to make new paper and the damage to the machinery, as well as the cost to repair or replace equipment.

Old Newspaper
Old newspaper (ONP) is another grade that has shown some conflicting signals. Demand from several offshore mills has kept the grade somewhat in balance. Despite the well-publicized difficulties in the domestic newsprint industry, the flow of material has been fairly stable as mills, both newsprint as well as paperboard mills, use sizable amounts of the fiber to make their finished product.

The grade, similar to OCC, has been pushing closer to a maximum recovery level. According to the AF&PA, recovery of this grade topped 73 percent in 2003, with modest increases expected throughout the next several years.

Some vendors have expressed two concerns. One diminishing concern is that budget cuts could reduce the number of curbside collection programs for ONP. While a number of high-profile programs have been eliminated, there doesn't appear to be any significant trend toward further eliminating curbside programs. This should keep the ONP flow steadier.

Quality vs. Single-Stream Collection
Concerns about quality, on the other hand, have been one of the louder rallying cries. Many paper mills have treated the growth in the number of single-stream collection programs with great concern.

With this method, all recyclables are gathered together in one container and then the various recyclables, such as paper, glass, plastics and aluminum cans, are sorted out at a material recovery facility. Many municipalities and haulers have embraced this method. They say that with the single-stream method, recovery levels increase significantly. Also, the actual collection and processing costs decline, making single-stream collection a more palatable method for budget-conscious public and private sector entities.

On the other side, many mills, the ultimate consumers of the fiber, have seen quality levels degrade and the costs to their systems skyrocket. Materials such as broken shards of glass are an oft-cited danger to a pulping system.

Fans of the single-stream method point out that with more sophisticated sorting machinery the quality of the material has improved greatly.

While many mills still prefer to avoid taking in fiber from single-stream collection programs, this method is growing, and mills are realizing that they have to make more changes and respond to the new way in which material is being shipped to their facilities. While quality remains a key issue for all parties, the economic reality is that market forces are causing some significant changes in the overall dynamics of the industry. With supply constraints cropping up, many mills have to adjust their operations to a new world.

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