Looking east: recyclers look to China and Asia as keys to current and future growth.

As the largest recovered paper grade, old corrugated containers (OCC) account for almost half of the tonnage of recovered fiber in the world market. With such market power, OCC can drive prices for other grades like mixed paper, although this grade has been impacted more by the document destruction business, which has increased its supply.

To a large degree, as goes OCC, so goes the market. With that in mind, understanding the trends that drive OCC flow domestically and in foreign markets is essential to navigating the recovered paper industry.

OCC AT HOME. Different regions and countries have different approaches when it comes to using recycled fiber in their containerboard. For instance, North America typically uses about 40 percent recycled fiber in its production, while Japan uses more than 90 percent.

Regions and countries also differ across the globe in their recycling capacity. North America is losing capacity, while investment in additional recycling capacity in Asia is skyrocketing and is predicted to continue to do so for the next several years. From 2003 to 2007, North America will lose nearly 2 million metric tons of additional recycling capacity, while Asia will gain more than 11 million.

The difference can also be seen in which grades are adding the most recycling-based production capacity. Worldwide recycling capacity for packaging grades, at 12 million metric tons, far outpaces their nearest competitors--old newspapers (ONP) and old magazines (OMG)--which will see less than 6 million metric tons of additional investment through 2007.

It follows that the areas of the world where manufacturing is booming are the areas where packaging is most needed. This is illustrated by comparing the North American paperboard markets to those in Asia. North America is closing more mills and losing capacity for recycling because the goods that need to be packaged are not being manufactured there. Manufacturing in Asian countries, on the other hand, is booming, and the packaging market is following suit.

Because of this dynamic, North America and China stand out as two of the biggest players in today's OCC market. Since the late 1990s, North America has been the world's chief net exporter of OCC, and China and other Asian countries have dominated the import market. This trend is expected to continue until at least 2010.

While export numbers have been increasing, OCC use in the United States has been flat to waning for many years.

After 10 years of strong increases with a peak at 65 percent, use of OCC in U.S. containerboard has been in slow decline, as has its use in recycled paperboard. Use of OCC in construction products has been relatively stable. In 2004, 62 percent of U.S. OCC went to containerboard, while 19 percent went into the export market, and 17 percent went to make recycled paperboard.

The United States has also been collecting more and more OCC since the mid-90s, though a few sources of OCC have yet to be tapped. While most of the "easy-to-get" sources are all being collected, residential OCC is still under-recovered. The increasing use of star screens in sorting should help recover more, however. In addition, small commercial sources of OCC can be prohibitively expensive to collect.

THE WORLD STAGE. The dominant player in the growing export market for the United States is China. Nearly half--48 percent--of exported U.S. OCC goes to China.

Of the approximately 43 million metric tons of recovered paper consumed by China, nearly 30 million metric tons, or approximately 70 percent, is OCC.

China is now the largest importer of U.S. recovered paper, exceeding the United States' North American neighbors Mexico and Canada. More than 40 percent of Chinas total recycled paper imports come from the United States, a fact that has been driving the U.S. market for several years.

Western Europe has also proved to be a valuable source of OCC for China. Collection of OCC has shown more growth than that of other grades since 1990 and is predicted to continue growing until at least 2010.

Imports of OCC to Western Europe have remained fairly steady since 2001, while exports have steadily increased during those years.

European exports illustrate China's growing dominance. In 1998, of the 1.25 million metric tons Europe exported to China and Asia's Far East region, less than 0.25 million metric tons of that material went to China. But by 2004, of the nearly 3 million metric tons exported to Asia's Far East and China, approximately half--or 1.5 million metric tons--was sent to China specifically.

Japan, too, has discovered Chinas growing appetite for recovered paper. Japan's recovered paper exports have grown from 0.25 million metric tons in 1999 to nearly 2.75 million metric tons in just five years. Approximately 1.75 million metric tons went to the Asia Far East region in 2004, while another 2.5 million metric tons went to China.

Chinas lack of virgin forests and recent manufacturing boom have created an atmosphere of excessive demand for recovered paper and an increasing level of consumption that is expected to continue through at least 2010.

LOOKING AHEAD. The market for OCC is anticipated to remain generally strong for the next several years, but many factors will determine the future success and market power of the grade.

Quality will become an increasingly important issue in the global OCC market. Dealing with non-fiber contaminants, ash and moisture will become more and more a thorn in the industry's side as countries try to pull OCC from additional sources.

U.S. OCC quality is on the decline, both in terms of contaminants and in fiber length, but it is sill among the world's best.

On the other hand, the quality of OCC from Asian boxes is improving. The material is less reliant on straw/ bamboo pulp, and the stock preparation in Asian mills has been improving steadily throughout the last few years.

Wax contamination has been another growing concern. It's a killer for the mills and is particularly prevalent in tonnage from supermarkets. A number of manufacturers are exploring substitutes for wax to combat the contamination problem.

Bale inspection as well as new technologies to deal with contaminants will become increasingly important in the OCC market and in the recovered paper market as a whole.

While increasing energy costs could put downward pressure on OCC pricing in the near future, some variables would put upward pressure on prices.

Regardless, OCC is expected to remain the dominant grade in the recovered paper market for the next five years at least. All eyes are on China, waiting to see if the country's appetite for recovered fiber, particularly OCC, will be sustained and how its consumption will affect the market as a whole in the coming years.

This feature is based on a presentation given by Bill Moore and Peter Engle at the Paper Recycling Conference & Trade Show in late June.

Editor's note: the following is based on "OCC Close Up: A Comprehensive Analysis of the Grade," the post-conference workshop presented by Moore & Associates at the 2005 Paper Recycling Conference and Trade Show.