OCC Pricing Headed Up on Lower Supplies

Dec. 7, 2009 - Recycled fiber costs appear to be rising, say analysts covering the Paper and Forest Products sector for Deutsche bank.

“Although the rally is young, most of the reports we've received suggest meaningful upward momentum in the market,” said Deutsche Bank's Mark Wilde. “We believe prices for old corrugated containers (OCC) are up roughly $10/ton across most of the U.S. (most regions averaging $80-90/ton), but the momentum is upward and some reports suggest that it is accelerating.”

The reason for the price uptick? Shrinking supply due to lower wastepaper generation at both box plants and retailers, noted Wilde. In addition, tight pulpwood supplies across parts of the southern U.S. are swinging some mills to increased use of recycled fiber.

In the short-term, the situation will mean higher costs and tighter margins for recycled boxboard and containerboard mills.

From a pricing standpoint, the rally is coming late in Q4 and it's not likely that quarter-to-quarter OCC costs would be up more than $10- 15/ton. But, if the rally continues, the quarter-to-quarter change could be larger in Q1 2010.

Although producers may cringe a bit at the price trend, a rapid bump in fiber costs could force greater production and pricing discipline and could help support a Q1 $50-70/ton pricing initiative on containerboard, Wilde pointed out.

“We also note that improving markets for containerboard are typically accompanied by tighter wastepaper markets and higher wastepaper costs,” he said.

“OCC is the marginal source of incremental fiber at many paper mills, so it tends to feel the impact of market upturns,” Wilde added.

SOURCE: Deutsche Bank

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