Recovered paper prices changes in the historic relationships: recovered paper prices, while volatile, follow certain patterns. Market changes may be changing those patterns.

As volatile as recovered paper prices are, it is difficult to discern trends about the relative pricing of the major grades. This article examines the three major "bulk" grades: old corrugated containers [PSI (Paper Stock industries) Grade #11--OCC]; old newspapers [PSI Grade #7/8 (the newsprint deinking grade)--ONP]; and mixed papers (PSI Grade #1--MP). This article deals only with a composite of published prices on a time-lagged basis (up to the end of the first quarter of 2002).

Some significant, fundamental shifts in the pricing of OCC, ONE and MP have occurred over the past 18 to 24 months. At the writing of this article (near the end of the second quarter 2002), the recovered paper market is steadily rising and at least one of the grade price comparisons examined in this article has reverted to its historical position. With recovered paper prices, if you wait long enough, they will always change, for many reasons.

OCC is the most widely used recovered paper grade. U.S. collections generate almost 23 million short tons of OCC and domestic mills consume about 20 million short tons. Historically, OCC has always carried a greater value than ONP This is partly due to much better" OCC fiber yields than with deinking ONP for newsprint. Average yield at U.S. containerboard mills on OCC is 91% compared with average deinking newsprint yields of 82% on ONE

Figure 1 compares OCC and ONP pricing over the last 12 years (all numbers are US. dollars per short ton, the standard for North American recovered paper transactions). From 1990 through 1999 (with the exception of 1993), the price of OCC has always exceeded ONR Since 2000 and into the first quarter of 2002, the price of ONP has exceeded that of OCC. In examining some discrete timeframes during the last 12 years, from 1990 to 1999 the price of OCC exceeded ONP by an average of $12/ton. During the 27-month period from the beginning of 2000 to the end of the first quarter of 2002, ONP prices exceeded OCC by $6/ton.

[FIGURE 1 OMITTED]

U.S.RECYCLING PROGRAMS

The main causes of this shift in the relative pricing of OCC and ONP have to do with the worldwide use of recycled fiber in the production of newsprint and the generation of ONP by U.S. residential recycling programs. Newsprint producers in both North America and Europe have, for more than 15 years, been slowly shifting from a northern tier (Canada and Scandinavian) virgin-based industry to in-country recycle basis.

In North America, many of the Canadian-based newsprint mills have recycle capacity and even some of the Scandinavian newsprint mills are now at least partially based on recycled fiber. In 1990, newsprint consumed in the United States contained about 11% recycled fiber. By 2005, the recycle fiber portion of U.S. newsprint will be approximately 33%. For the same period, European newsprint went from 35% to 58% recycle fiber. The other major demand trend--most prominent in the last five years--is growing Asian newsprint production. Most Asian newsprint capacity is based almost exclusively on recycled fiber. The trend has been clear--the demand for ONP for use in deinking newsprint mills has been steadily increasing over the last 10 years.

From 1987 to 1995, U.S. residential recycling collection programs increased by 78%, an annual average growth rate of 7%. These new program introductions and expansions generated more than enough ONP to keep up with the North American and U.S. export demand for this grade. Since 1996, the growth rate of U.S. residential recycling programs (introduction of new residential recycling programs) has slowed dramatically, to approximately 1.5% per year.

Existing residential recycling programs have been static or even losing some of their ONP supply as municipal officials struggle with program costs. Residential recycling programs also suffer from the long-term mistaken impression by the average citizen that much of the recyclables collected never find their way into products. (This myth was generated by the press during the early 1990s' oversupplied recovered paper market.) Lack of new generation and continued demand helped ONP prices exceed OCC prices over the past 24 months.

ONP AND MP

The long-term historical relationship between OCC and MP prices has also changed over the last two years, but for a very different set of reasons than the OCC/ONP price relationship. MP has been gaining in price relative to OCC. Figure 2 is a 16-year analysis of the relationship of MP and OCC prices (expressed as MP prices as a percentage of OCC). During this period, three distinct phases showed the following differences in OCC price over MP price: 1986-1993-$28/short ton, 1994-2000--$44/short ton, and 2001-2002 (1stQtr)--$18/short ton. The value of MP relative to OCC has been increasing, on both a percentage and absolute dollar basis.

[FIGURE 2 OMITTED]

There appears to be a single reason for this shift in MP prices--imports to China from the United States. Recovered paper consumption in China increased 12% per year in 2000 and 2001. Future growth will continue to be strong with 20 new paper machines scheduled to come online in the years 2002 and 2003. Containerboard production will absorb a significant portion of this capacity. Almost all of chinese containerboard output is based on recovered paper, but unlike recycle containerboard production in many parts of the world, the Chinese product is based on significant quantities of MP in addition to OCC. China is installing state-of-the-art containerboard paper machines with sophisticated stock preparation systems designed to use maximum amounts of MP and still produce a finished product with acceptable strength and appearance.

China has become a significant importer of many grades of recovered paper from the United States. (see distribution changes between 1997 and 2001 in Figs. 3 and 4).

Between 2000 and 2001, China increased its imports of MP from the United States by 81%, consuming almost 2 million short tons of U.S. MP last year. This is more than double the amount of OCC that China imported from the United States. This factor alone has been enough to raise U.S. MP market prices to their historically high position relative to OCC over the past 24 months.

China's appetite for U.S. recovered paper has shown no letup, with the Asian export market being the main contributor to the price increases in the recovered paper markets during the second quarter of 2002. Interestingly enough, the Chinese government is currently considering a duty on U.S. recovered paper in a trade dispute over U.S. steel tariffs. With China's paper industry highly committed to recovered paper, it is surprising that the chinese government would consider a large tariff on such an important raw material.

MP prices are subject to significant price increases with only moderate demand increases. Historically, MP was not thought of as a "produced grade," but more of a by-product. This changed somewhat in the mid-1990s as more community based recycling programs began to collect recovered paper grades beyond ONP and produced "residential mixed paper." However, just like ONP there has been little growth in the generation of MP in the last three years. With low market prices for MP and OCC in 2000 and 2001, there has been little incentive for paper recycling collectors and processors to produce more material. The current strong upward market movement is due only in small part to increased demand--a stronger driver is the lack of supply growth.

CHANGING MOMENTUM?

It will take a sustained period of higher recovered paper prices to reenergize both the residential and commercial/industrial generator market to produce more recovered paper. During this period, we could gain see a realignment of the interrelationship of OCC, ONE and MR In the second quarter of 2002, recovered paper prices moved up very rapidly. OCC has shown the strongest price movement and, for re first time in more than two ears, OCC prices nationwide exceeded ONP prices.

Figure 3. U.S. recovered paper exports by destination country--1997

Canada       26%
Mexico       16%
Korea        14%
China        13%
Taiwan        8%
Indonesia     5%
Japan         5%
Thailand      3%
All others   10%

Note: Table made from pie chart.

Figure 4. U.S. recovered paper exports by destination country--2001

China        35%
Canada       21%
Korea        10%
Mexico        8%
India         5%
Indonesia     4%
Taiwan        3%
Japan         2%
Italy         1%
All Others    7%

Note: Table made from pie chart.

IN THIS ARTICLE, YOU WILL LEARN:

* How fundamental shifts have occurred in the pricing of OCC, ONP and mixed papers (MP)

* How the main causes of this shift are the worldwide use and generation of ONP

* What it will take to re-energize the residential and commercial/industrial generator market

ADDITIONAL RESOURCES:

* Request previous articles by William Moore an recycling by going to www.marecycle.com

* For information on the Pager Recycling Working Group, go to: www.prwg.com

* Go to www.tappi.org/paperu/ to learn recycling basics at TAPPI's "Paper University" Enter "recycling" in the search bar

About the author: William Moore is president of Moore & Associates a paper recycling consulting firm focusing the supply and demand of recovered paper worldwide. Prior to his eight years as consultant, he held a series of positions in the solid waste, per, and recycling industries. These included founder and vice president of Paper Recycling International and director of recycling for Waste Management Inc. He was responsible for the startup of Waste Management's "Recycle America" program, the largest introduction of recycling services in the United States. Contact him at [phone], or through Moore & Associates website at www.marecycle.com.