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Chinese actions tank US OCC prices

Nov 18,2018 1136

The U.S. OCC market plummeted last week as China substantially slows its recovered material imports. Inside China, the lack of import capability has driven domestic OCC prices sky high.

According to paper industry publication RISI, average U.S. OCC prices fell from $146 to $156 per ton as of Sept. 29 to a low of $93 to $101 by Oct. 6, a 36 percent decrease in one week.

RISI also reported exporters estimate OCC shipments into China declined by at least 40 percent in September. Industry insiders say the market is essentially in the hands of the Chinese central government, a scenario that’s unprecedented.

Paper recycling consultant Bill Moore described recent conversations with other paper industry veterans about the massive shift in the OCC market: “In 30 years, we’ve never seen anything like it.”

Moore, president of Atlanta-based Moore & Associates, added, “It’s an external force, though. It’s not a normal market.”

The frozen permits are one of several current Chinese import restrictions underway. In July, the country told the World Trade Organization (WTO) it would ban imports of certain scrap materials beginning in January 2018. In August, it released a proposal for significantly lower contamination limits in imported materials. In September, programs and recycling companies across the U.S. began feeling the impacts.

Effectively banned

The fluctuation is particularly dramatic, as OCC was selling at record prices before the recent fall. The massive drop is a result of China delaying issuance of import permits, which have not been renewed since May. OCC isn’t named in the ban notification submitted to the WTO, but without renewed import permits, it is effectively restricted from moving into China.

As China’s actions drive down the price of OCC in North America, inside China, the opposite is occurring: OCC is trading for close to $500 per metric ton, RISI reported last week.

“They’re not importing, so they have to squeeze every last piece out of their domestic market,” Moore said. “It’s a real dichotomy.”

Experts have predicted OCC could be used to replace mixed paper as a feedstock for Chinese mills if mixed paper imports are banned completely. In that case, the OCC market would be driven up substantially. But the lack of import permits has prevented that from happening. Moore said it could still come to pass once import permits are renewed.

In the U.S., many domestic generators are looking at the situation as an inventory-building opportunity, Moore said. They know OCC will come back strong, he explained, so they are building up inventory during the current market low, which would pay off once the prices shift back up.

“I think it’s transient on the OCC side,” Moore said.

But mixed paper, Moore said, is “really in trouble,” due not only to the current lack of import permits but also to the anticipated ban on certain types of recovered paper imports. An expert at Sonoco Recycling recently voiced similar opinions about future prospects for OCC and mixed paper.

Industry faces choices

All fiber grades are in a swamp in terms of pricing right now, Moore said, which is driving the U.S. supply up. Even moving the materials is becoming increasingly difficult, let alone securing a desirable price.

In the near term, recycling companies and municipal programs could be forced to choose between storing mixed paper, landfilling it or removing it from the program, all of which come with their own consequences. An additional option is to upgrade equipment or hire more manual sorters to produce a higher-quality paper product.

On the consumer end, manufacturers may choose to expand their consumption capacity for lower-grade mixed paper.

“They can’t use the quality of mixed that’s out there without capital investment, and I think they’re going to make those investments, but the fastest you can do it is one year, two years is the other side,” Moore said. Companies are taking note of the advantage Pratt Industries, the largest consumer of mixed paper in the U.S., enjoys at the moment, he said.

Moore doubts OCC will be landfilled due to the domestic demand for it. Although there’s a dearth of mixed paper consumers in the U.S., there are numerous large OCC buyers, including WestRock, International Paper, Pratt and others.