High Waste Paper Prices, China, and Trade Issues, Part one

Supply and demand for waste paper grades was more-or-less in balance in the ‘90s.  Demand was sufficient to consume all the waste paper that was being recovered.  The situation changed radically on the ‘00s, however.

Demand has increased substantially in recent years due to pressures exerted by environmental organizations to include recycled fiber in grades for which it is not well-suited.  These “environmental” initiatives are costly and harmful to the environment, but they are good fund-raisers for Greenpeace, Forest Ethics, etc.  The irrefutable logic of the argument that “adding recycled fiber to value-added grades is harmful”  has been ignored by most environmental organizations, universities, and politicians.  At the same time this artificial demand for recycled fiber was being created, there were a number of new paper machines being installed around the world that had no other option but recycled fiber. In a nutshell, demand has grown a great deal.

In regard to supply, production of the high volume grades has been in steep decline.  In North America, newsprint has fallen by more than 50% (eight million tons) this decade.  Shipments of uncoated free sheet have declined nearly 40% (six million tons) and shipments of coated and SC-A grades have fallen more than three  million tons. Obviously, with consumption falling, the amount of paper available to be recovered has declined proportionately.

Many paper-related forecasts are difficult, but this one was a no-brainer. For a number of years our forecast has been for  waste paper prices to move up strongly and then continue to cycle between expensive and very expensive.  With demand growing and supply falling, high prices are the only possible outcome.  

It is true that prices for waste paper collapsed when the economic crisis began, but that was an aberration.  Waste paper inventories in China were enormous in Q4/08 when the financial crisis hit, and demand tanked.  Finished newsprint inventories in all of Asia were also very high.  As the following graph points out, wastepaper prices plummeted straight down before bottoming in Q1/09.  Prices then began moving up in Q/2 as inventories were gradually worked down.  Sorted office paper (SOP) prices are already approaching former highs (these prices also relate to the current high cost of pulp).  ONP (old newspapers) is already higher than it was at any time prior to 2007, but is still well off 2008 highs.  This surge in waste paper pricing has occurred in spite of the fact that worldwide paper demand is still weak.  See graph of prices in the following PDF, Waste Paper Prices.

This is a review for Reel Time subscribers, but the key takeaway is that demand for recycled fiber will exceed supply over the long-term future.  Prices will not return to the low levels of the 90’s, except possibly during short-term periods of economic crisis.  Waste paper prices will cycle up and down, and will relate to pulp prices.  Paper mills that require recycled fiber will generally operate at a competitive (fiber cost) disadvantage.

This short report is the first of a three-part series.  In Part two we will discuss the impact of high waste paper prices on the Chinese newsprint industry, and in Part three, we will touch on trade implications.

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