Paper mill operators anticipate strong demand for corrugated packaging will continue to drive up prices for recovered fiber, according to recent earnings calls.
Major recycled fiber users International Paper, Sonoco, WestRock and Packaging Corporation of America discussed their OCC outlook in calls with investors over the past month.
The companies, as well as equipment supplier Kadant, also described ongoing shipments of recycled pulp to China, as well as that country’s sustained investment in mill infrastructure.
Demand and pandemic pressure drive price increase
Several companies recalled the dramatic run-up in OCC prices that began in early 2020 and continued for several months, largely driven by the coronavirus pandemic.
Julie Albrecht, vice president and chief financial officer for packaging giant Sonoco, said OCC prices averaged $71 per ton throughout 2020, and that the company anticipates OCC will increase to average about $90 per ton this year.
WestRock CEO Steve Voorhees said the company experienced a $36 per ton increase in recovered fiber cost throughout 2020, compared with the previous year. WestRock uses recycled fiber and operates a recycling division that includes several MRFs.
“Generation was strong, but demand was also very strong,” said Jeff Chalovich, president of corrugated packaging at WestRock. Pulp producers in India and other Asian countries increased OCC purchases from the U.S., Chalovich said, and “the overall recycled fiber supply domestically was adequate.”
But there were container freight pressures as a result of the pandemic, multiple company leaders said. For example, WestRock’s freight costs for the full year were up as much as 3% to 5%, the company reported.
“All of those things we see driving up pricing,” Chalovich said. “And we don’t see really a big difference in that over the course of the next quarter or so.”
Several companies forecast that fiber costs will continue to rise throughout 2021.
Ward Dickson, chief financial officer for WestRock, said the company anticipates a “meaningful increase” in OCC prices for the full year of 2021, compared with 2020.
“In fact, our outlook right now is that recycled fiber cost will potentially increase $15 to $20 sequentially from Q1 to Q2, and then maybe another $5 per quarter as we go out into Q3 and Q4,” Dickson said.
Mark Sutton, International Paper CEO, said it’s unclear how the second part of 2021 will pan out with material pricing. But he said the company expects that recovered fiber, overall, will be $15 to $20 per ton more expensive in the first quarter than it was during the fourth quarter of 2020.
“Maybe a little bit more than that on OCC,” he said, adding that it will depend on many factors in such a fast-moving market.
International Paper is among the largest paper companies in the world and is a major player in the recycled fiber space. The company anticipates input costs will increase by $30 million during the first quarter of 2021, driven largely by recovered fiber cost increases and distribution costs, including freight.
Thomas Hassfurther, executive vice president of corrugated products for Packaging Corporation of America (PCA), said OCC hit a low point in pricing after China’s ban but has “moved up dramatically from that point.”
PCA anticipates it will continue to move up in the future, “strictly just based on supply and demand,” Hassfurther said.
Global market reshuffles following China ban
The Chinese government expanded its 2018 plastic and mixed-paper import ban to cover all recovered fiber beginning this year. The major OCC end users say the Chinese paper industry is obtaining material through other channels, and that significant investment is in the works to sustain that material flow. That suggests strong demand for OCC despite the market volatility of recent years, company leaders said.
“I think you’ve already seen the market is beginning to adjust, and is just adjusting last year and maybe even late 2019 in anticipation of this,” said Sutton of International Paper. He described a “rebalancing across other export markets for OCC.”
Sutton was asked for his opinion on whether China’s recovered fiber import ban will remain or be relaxed at some point. He said International Paper has consistently taken the Chinese government at its word when it comes to recovered material import bans, concluding that the Chinese import ban will likely stay in place.
PCA, which uses recycled fiber at some of its mills, discussed the impact of China’s imports ban and what it means for the global OCC market moving forward.
“It took a while to digest China’s exclusion of OCC and moving to other fiber,” said Hassfurther of PCA. “And as you see, pulp is up dramatically and being shipped over there as well as linerboard being shipped directly over to China, as an example.”
U.S. recycled pulp exports skyrocketed from 48,000 short tons in 2018 to 295,000 short tons in 2019, and they increased again to 362,000 short tons in 2020. China is the largest overseas buyer of U.S. recycled pulp, bringing in 88% of exported U.S. pulp last year.
This material is collected and processed in countries outside China and then shipped into the country for use in paper production. Linerboard, meanwhile, is a paper product used in containerboard manufacturing and is not subject to China’s import restrictions.
“They’re just gaining their fiber in some other form, other than OCC,” Hassfurther added. “OCC has then found markets elsewhere around the world. The global outlook is very strong and we know it will continue to be so.”
Kadant, which manufactures machinery for paper mills, commented on the mill activity in China and the U.S. during the company’s Feb. 18 earnings call.
CEO Jeff Powell noted the company announced a “big order” within China in late 2020.
“We’re still surprised [at] how many projects are in the discussion stages in China,” he said. “They just never cease to amaze us with their ability to bring more and more capacity online and absorb it.”
One recent example of significant new capacity in and around China is a $4.6 billion investment by Nine Dragons. That facility will take in recycled pulp and produce paper products.
Powell of Kadant added that “there’s talk about some more conversions in North America,” particularly as e-commerce has grown significantly during the pandemic. Mills have converted equipment and retooled production as demand for printing and writing papers has decreased and demand for corrugated packaging has grown. Recent examples include mills in Rumsford, Maine, Kingsport, Tenn. and Duluth, Minn.
Greater demand for e-commerce boxes has boosted demand for the OCC that goes into them.
“That growth has accelerated this year, and experts are forecasting that’s something that will probably remain after the pandemic goes away,” Powell said. “So there’s definitely demand for packaging and discussions about more conversions coming online to meet that demand.”
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