Persevering with uncertainty over financial situations, together with inflation and altering shopper patterns pushed by the pandemic, is tamping down expectations for a powerful OCC market turnaround in H1 2023.
Recyclers and packaging executives who postulated that the sharp 2022 recovered fiber worth and demand hunch would possibly ease in early 2023 are reevaluating their expectations as situations wrestle to enhance rapidly.
“From November till most likely concerning the final three weeks, pricing has been dropping or stagnant at a cheaper price … Now we have seen it in different commodities additionally that pricing goes down, and that’s reflective of the demand that is happening,” mentioned Bret Biggers, senior economist on the Institute of Scrap Recycling Industries. “Simply not too long ago, it is beginning to come up as a result of there’ve been some studies from mills that they are getting extra orders.”
Funding agency Jefferies launched a commodity worth report this month exhibiting that OCC costs had been down 74% yr over yr in February, following January’s 78% year-over-year drop. It notes that “recycling costs crashed in 4Q22” because of an imbalance of provide and demand, and “[w]e would anticipate to see some enchancment from the file 4Q22 lows as we transfer all through 2023.”
Nevertheless, the report factors to hesitance amongst main recyclers, primarily based on steerage shared in February: GFL Environmental and Waste Connections anticipate no enhancements of their estimates, whereas WM, Casella Waste Programs and Republic Providers anticipate a modest restoration.
Extra inventories and underwhelming shopper buying in This autumn 2022 contributed to lackluster OCC demand. Procurement managers are “making the guess that they will want the identical quantity or fewer containers” amid faltering demand and “producers usually are not seeing individuals making orders,” mentioned Chaz Miller of Miller Recycling Providers.
“Containerboard manufacturing was down fairly dramatically — about 8% — within the third and fourth quarter [of 2022] from the earlier yr. This can be a drag available on the market proper now,” Miller mentioned. “The irony is the gross sales information for January was really up over what it usually is. It is a bizarre economic system.”
The OCC worth for the Northeast U.S. was $32.50 per ton in January, which is almost the identical as December however down $111 yr over yr, in accordance with a regional market report that Miller prepares for the Northeast Recycling Council. Costs within the Northeast are usually barely higher than different elements of the nation; the nationwide common for OCC in January was $29.06 per ton.**
”A part of the explanation why demand has gone down is due to the elevating of rates of interest by the [Federal Reserve] … which ends up in demand being lowered in several industries which corrugated helps,” Biggers mentioned. For instance, increased rates of interest depressed shopper spending and consequently the quantity of fiber packaging wanted for retail and e-commerce.
Throughout latest earnings calls, quite a few fiber producers cited inflation, constrained shopper buying and buyer destocking as elements negatively influencing earnings.
Worldwide Paper reported in January that its 2022 U.S. corrugated field gross sales fell 6% yr over yr as customers shifted their pandemic purchases of products to providers and leisure as an alternative. IP executives additionally famous retailers’ ongoing destocking of elevated inventories following pandemic provide chain disruptions, and that the corporate joined different producers in elevating field and containerboard costs. Nevertheless, the decrease OCC costs helped IP’s backside line as a result of the price financial savings offset worth will increase for different inputs, like vitality, that go into recycling OCC into new packaging.
Graphic Packaging Worldwide reported comparable headwinds throughout its earnings name, and CEO Michael Doss mentioned, “December was weaker as we anticipated it to be, fairly frankly, given a few of the destocking that our clients have talked to us about. However look, we had been in a position to end the quarter with optimistic progress.”
Early this yr, packaging corporations typically predicted that Q1 would stay flat whereas Q2 would decide up to some extent. However throughout his firm’s Q1 earnings name this month, Greif CFO Larry Hilsheimer cautioned of “additional deterioration in pricing within the paper trade” if present patterns persist. “We imagine that if this quantity development in paper continues like this, it is inevitable that there shall be some worth strain” in 2023.
“The CEOs on the numerous corporations had been saying, ‘Effectively, we predict costs are going to get higher,'” Miller mentioned. “Because the yr goes on, they’re saying they anticipate the price to rise modestly over the yr.”
Ongoing packaging lightweighting efforts and e-commerce sector evolution are additional compounding demand and worth strain. Amazon, as an example, “is utilizing much less paper containers, they usually’re definitely utilizing much less tonnage of paper of their containers,” Miller mentioned. As a substitute, the e-commerce big is transitioning to extra versatile packaging, whether or not that is plastic, light-weight paper or a mixture, he mentioned. Amazon notes in a weblog put up about its lightweighting efforts that it has lowered its use of corrugated containers in North America and Europe by 35% over the previous 5 years, and its total packaging optimization efforts have saved about 60,000 tons of cardboard yearly.
“What is occurring within the OCC market is the manufacturers are additionally saying they need it lighter, they need much less materials used. So there was some lightweighting of corrugated containers,” Biggers mentioned. “That may be a development that has been happening for a pair years and that continues.”
One other issue anticipated to affect OCC demand and costs each within the coming months and long term is the quantity of recent capability coming on-line this yr. The extra capability consists of:
- Domtar’s Kingsport, Tennessee facility resumed operations in January after a $350 million mission to transform it to a recycled containerboard plant.
- Cascades’s transformed Bear Island containerboard mission in Ashland, Virginia is scheduled to restart on the finish of this month. The closing value is estimated at $515 million to 525 million.
- Pratt’s $400 million, 450,000-square-foot recycled paper mill in Henderson, Kentucky is slated to start operations this fall.
Coming down the pike, development will start quickly on a 700,000 sq. foot corrugated field manufacturing unit adjoining to Pratt’s Henderson plant, and it’s anticipated to change into operational in 2026. Development additionally will start quickly on Graphic Packaging’s not too long ago introduced $1 billion, 640,000-square-foot coated recycled paperboard mill in Waco, Texas that’s scheduled to start operations in 2026; GPI will shut three smaller, much less environment friendly crops, however total capability will nonetheless improve no less than 5% with the Waco plant’s opening.
The continuing financial uncertainty has the potential to have an effect on the timing and influence of those and different investments. All issues thought of, “all of the hesitation on pricing proper now’s justified,” Miller mentioned.
Biggers strengthened that sentiment, saying, “There’s nonetheless that worry of the recession this yr, and I have never heard many economists backing off on what they mentioned.”