Woodyard/
Fiber Supply

Providing 11% of the global recovered paper supply, the U.S. South consumes most of this regionally, contributing to the flat costs of southern softwood fiber

Southern OCCRecovery Rate Stabilizes
Regional Softwood Virgin Fiber Costs

by ROBERT J. CHLEBNIKOW, Editor

This lower recovery rate is mainly due to lower population density. For example, in 1996 the recovery rate for paper and paperboard in the South was about 39% or 13.5 million tons compared with the overall North American recovery rate of 43%, or 45 million tons as Figure 1 shows.

The Jaakko Poyry forecast for the year 2000 indicates an expected recovery rate of paper and paperboard in the South of about 42%, or 16 million tons. The North American recovery rate will increase to 47%, or 54 million tons. As Figure 1 illustrates, the South currently supplies approximately 30% of North America's recovered paper and is expected to continue this trend in the future.

It is important to maintain a global perspective when looking at the role of recovered paper in the South. In 1996, the overall worldwide recovery rate for paper and paperboard was about 41%, or 117 million tons. The Jaakko Poyry forecast for the year 2000 indicates an expected worldwide recovery rate of paper and paperboard of about 44%, or 143 million tons.

The forecasted growth rate for worldwide recovered paper supply is more than 5%/year, expanding slightly more rapidly than the North American rate. Representing approximately 11% of the current worldwide supply, the U.S. South plays an important role in the global recovered paper supply (Figure 2).

RECOVERY BY GRADE. For 1996, recovered paper by grade in the South is illustrated in Figure 3. Almost half of the 13.5 million tons recovered was old corrugated containers (OCC). It is important to note that about two-thirds of the OCC available for recovery was collected.

The next largest grade in terms of recovered tons was old newspapers (ONP). With almost 3 million tons collected, ONP represents 54% of the total available for collection. However, the grade with the highest recovery rate was high grades (HG) and pulp substitutes (PS). The reason this group has a 100% recovery rate is that it is classified as containing only preconsumer printer and converter scrap.

The category mixed paper (MP) is a mixture of various qualities of paper. This grade may contain coated and uncoated groundwood, coated and uncoated freesheet, or bleached and unbleached kraft in any combination. Mixed paper may originate from residential sources, such as recycling programs, and commercial sources, such as floor sweepings from paper processing plants.

As supplies of higher grades tighten, tissue and board mills may substitute mixed paper for OCC and ONP. The extent of this type of substitution is dictated by prices and by the substituting mill's ability to use unsorted mixed paper. Some of the newest North American containerboard mills -- Visy's mill in Staten Island and Weyerhaeuser's mill in Cedar River, Iowa, for example -- were designed to use a significant amount of mixed paper in their furnish.

SUPPLY, DEMAND, AND NET TRADE. The overall picture of the supply, demand, and net trade for recovered paper in the South is shown in Figure 4. The top bar represents the supply of recovered paper, and the next bar represents the amount consumed by Southern mills or the demand for recovered paper.

The majority of recovered paper in the South is consumed by southern mills. In 1996,approximately 12.5 million tons of recovered paper were consumed locally, and about 2 million tons were exported, mainly to Mexico.

There were also 620,000 tons exported offshore. Because the more favorable logistical ports for serving the offshore markets are in the Northeast and on the West Coast, the amount of recovered paper exported offshore from the South is currently limited. The balance of the net trade is made up of intra-regional flows.

RECOVERED PAPER DEMAND. When examining the recovered paper demand in wood equivalents, it is helpful to look at the differences in conversion rates or yields of recovered paper into recovered fiber. The difference between recovered paper and recovered fiber is analogous to the difference between wood chips and wood pulp. Also, as Figure 5 shows, all tons of recovered paper are not the same.

For example, when OCC is used in the production of linerboard, roughly 92% of the OCC ends up in pulp or recovered fiber. In newsprint, the ratio is somewhat lower at an 82% yield. For tissue, it is the lowest at 70%. As Figure 5 indicates, the overall global average conversion rate for recovered paper to recovered fiber is about 87%. However, there are differences by grade and product.

Using the conversion rates of recovered paper to recovered fiber, average paper furnish, and average pulping yields by grade, the overall wood equivalents for the 12.5 million tons of recovered paper consumed by Southern mills can be calculated. Figure 6 shows the relative balance between virgin woodfiber and recovered paper in the production of pulp and paper in wood equivalents.

The pulp and paper industry in the South consumes about 205 million m3 of woodfiber based on 1996 capacity. Paper mills consume about 170 million m3, which is made up of 130 million m3 of pulpwood and 40 million m3 of recovered paper in wood equivalents. The balance, or 35 million m3, goes into market pulp that is utilized outside the southern U.S. If it is assumed that a world-class pulp and paper facility uses about 3 million-4 million m3 of pulpwood, then the amount of recovered paper used in the South is enough fiber for 10 to 12 world-class pulp and paper facilities.

Figure 7 shows the South's fiber furnish broken out by grade in wood equivalents. Once again, two themes stand out. One is that linerboard or corrugated materials is the paper grade with the highest demand for woodfiber in the South. Almost half of the fiber used by paper mills is in this category. Secondly, OCC is the largest grade of recovered paper used in the South.

In paper and paperboard manufacturing, the overriding emphasis is for a certain grade of recovered paper to be used in the production of the same paper and paperboard grade. This means that, for example, in the production of newsprint, the most important grade is old news and magazines.

However, depending on the price, availability, quality characteristics, etc., other recovered paper grades are utilized. Figure 8 illustrates the main products for recovered paper. As previously mentioned, the largest use of recovered paper in the South is for the production of containerboard -- linerboard and corrugating medium. Almost half of the recovered paper goes into these products. The combined product categories of containerboard, boxboard, newsprint, and tissue represent about 80% of the overall use of recovered paper in the South. Only about 6% of the recovered paper goes into the production of printing and writing papers.

OCC CONSUMPTION IN THE SOUTH. When examining the demand for recovered paper, it is important to focus on OCC since it is the main grade of recovered paper used in the South. For 1996, about 7 million tons of OCC were consumed by southern mills. This is equivalent to almost 25 million m3 of pulpwood.

Figure 9 shows the main consumers of OCC in the South. The top ten consumers noted in this figure used about 60% of the OCC recovered in the South.

Figure 10 shows the end uses of southern OCC. In 1996, 70% of the OCC went into containerboard, followed by 11% into boxboard, 9% into corrugating medium, and the balance into other products.

FUTURE CONSUMPTION. Based on the Jaakko Poyry forecast for the year 2000, the mix among end uses in the South will remain about the same. In addition, fiber flexibility will be a key competitive factor in the future. For recovered paper consumers, this means flexibility to combine various grades, as well as virgin and non-woodfiber as economics dictate.

In terms of fiber consumption, paper mills can be divided into the following three main categories:

• Virgin fiber pulp-based mills (use no recovered fiber)

• Blended pulp-based mills (typically consuming 10%-20% recovered fiber, with blended newsprint mills possibly consuming 40%-50% recovered fiber)

• 100% recycled pulp-based mills (use no virgin fiber).

Known new projects and existing capacity for OCC in the South are shown in Figure 11. Mills requiring 100% furnish of either recovered fiber or virgin fiber have little flexibility to vary their furnish. Blended mills are able to substitute a certain percentage of recovered fiber for virgin woodfiber when recovered fiber costs less than wood. In this way, blended mills are better able to control fiber costs than either of the other mill types. Since recovered paper prices have been more volatile than pulpwood, these mills are able to enter and leave the recovered paper market depending on relative recovered paper vs pulpwood costs.

Over the long term, the cost of OCC has been much more volatile than the cost of pulpwood, as shown in Figure 12. Particularly in examining the recent past, the cost of OCC has been volatile due to new capacity coming online. This trend should continue for some time. Given the equivalent volume of wood OCC represents, it is difficult to imagine what differences there might have been in the softwood pulpwood cost line without OCC. Described in another way, OCC has contributed to the relatively flat, stable costs of southern softwood pulpwood over time.

As a consequence, recovered paper price volatility affects 100% recycled mills more than blended mills. When recovered paper represents a small percentage of the overall furnish, blended mills may have a better ability to pay for recovered paper, on the margin, than 100% recycled mills.

Blended mills can also reduce their dependence on recovered paper when prices are high, which can quickly relieve tightness in the recovered paper market. At a 100% recycled mill, lower operating rates cause an equivalent reduction in recovered paper consumption. By contrast, blended mills often reduce recycled production while maintaining virgin production at optimum capacity. Thus, a blended mill seeking to reduce overall production will affect recovered paper demand disproportionately when compared with a 100% recycled mill. This dynamic guarantees a pivotal role for blended mills in determining recovered paper demand, balances, and prices.

Robert J. Chlebnikow is a senior consultant for Jaakko Poyry Consulting