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Continued uncertainty over economic conditions, including inflation and changing consumer habits driven by the pandemic, dampens expectations of a strong OCC market recovery in the first half of 2023.
The recyclers and packaging executives who postulated that the strong 2022 price of recovered fiber and drop in demand may ease in early 2023 are reassessing their expectations as conditions struggle to improve quickly.
“From November until the last three weeks or so, prices either declined or stagnated at a lower price… We’ve seen it for other commodities as well that prices are going down, and that’s reflecting demand going downsaid Bret Biggers, senior economist at the Institute of Scrap Recycling Industries. “Just recently this is starting to happen because some factories have reported receiving more orders.”
Investment firm Jefferies released a commodity price report this month showing OCC prices were down 74% year-on-year in February, following the 78% decline year-over-year in January. He notes that “recycling prices collapsed in 4Q22” due to an imbalance of supply and demand, and “[w]We expect to see improvement from 4Q22 record lows as we move forward through 2023.”
However, the report highlights the reluctance of major recyclers, based on guidance shared in February: GFL Environmental and Waste Connections do not anticipate any improvement in their estimates, while WM, Casella Waste Systems and Republic Services expect a modest recovery.
Excess inventory and disappointing consumer purchases in Q4 2022 contributed to lackluster OCC demand. Purchasing managers are “betting they’ll need the same number or fewer boxes” amid faltering demand and “manufacturers aren’t seeing people placing orders,” said Chaz Miller of Miller Recycling Services. .
“Boxboard production fell quite dramatically – around 8% – in the third and fourth quarters. [of 2022] of the previous year. It’s a drag on the market right now,” Miller said. “The irony is that the sales data for January was actually higher than it normally is. It’s a weird economy.”
The OCC price for the Northeast US was $32.50 per ton in January, almost the same as December but down $111 year-over-year, according to a regional market report that Miller prepares for the Northeast Recycling Council. Prices in the northeast tend to be slightly better than other parts of the country; the national average for OCC in January was $29.06 per tonne.**
“The decline in demand is partly explained by the rise in interest rates by the [Federal Reserve] …resulting in lower demand across different industries that support corrugated,” Biggers said. For example, higher interest rates have lowered consumer spending and therefore the amount of fiber packaging needed for retail and e-commerce.
In recent earnings calls, many fiber makers cited inflation, constrained consumer purchases and customer destocking as factors negatively impacting earnings.
Reported international article in January that its corrugated box sales in the United States in 2022 fell 6% year-over-year as consumers shifted their pandemic purchases from goods to services and entertainment instead. IP executives also noted the continued destocking of high retail inventory following pandemic supply chain disruptions, and that the company has joined other manufacturers in raising prices for boxes and boxes. container boxes. However, lower OCC prices helped IP’s bottom line as cost savings offset price increases for other inputs, such as energy, that go into recycling OCC in many new packaging.
International graphic packaging reported similar headwinds during its earnings call, and CEO Michael Doss said: “December was weaker than expected, quite frankly, given the destocking that our customers have been telling us about. But look, we were able to end the quarter with positive growth.”
At the beginning of this year, packaging companies generally expected the first quarter to remain stable while the second would recover to some extent. But during his company’s first-quarter earnings call this month, Greif’s chief financial officer, Larry Hilsheimer, cautioned “a further deterioration in prices in the paper industry” if current trends persist. “We believe that if this trend in paper volumes continues in this way, it is inevitable that there will be some pressure on prices” in 2023 .
“CEOs of different companies were saying, ‘Well, we think prices are going to get better,'” Miller said. “As the year progresses, they say they expect the cost to increase slightly over the year.”
Ongoing lightweight packaging efforts and developments in the e-commerce industry are further adding to demand and pricing pressure. Amazon, for example, “uses less paper boxes, and they definitely use less paper tonnage in their boxes,” Miller said. Instead, the e-commerce giant is shifting to more flexible packaging, whether it’s plastic, lightweight paper or a combination, he said. Amazon notes in a blog post about its leaner efforts that it has reduced its use of corrugated boxes in North America and Europe by 35% over the past five years, and its overall efforts to optimize packaging have saved approximately 60,000 tonnes of cardboard per year.
“What’s happening in the OCC market is that brands are also saying they want it lighter, they want less material used. So there’s been some lightening of the corrugated boxes,” Biggers said “It’s been a trend that’s been going on for a few years and it’s still going.”
Another factor that is expected to influence OCC demand and prices in the coming months and longer term is the amount of new capacity coming online this year. Additional capacity includes:
- Domtar’s Kingsport, Tenn., mill resumed operations in January after a $350 million project to convert it to a recycled containerboard mill.
- Cascades Bear Island Converted Containerboard Project in Ashland, Virginia should restart at the end of this month. The final cost is estimated between 515 and 525 million dollars.
- Pratt’s $400 million, 450,000 square foot recycled paper mill in Henderson, Ky., is scheduled to begin operations this fall.
Down the pike, construction will soon begin on a 700,000 square foot corrugated box plant adjacent to Pratt’s Henderson plant, and it is expected to become operational in 2026. Construction will also begin soon on Graphic’s recently announced project. Billion dollar packaging, 640,000 squares. a foot-coated recycled board plant in Waco, Texas which is expected to begin operations in 2026; GPI will close three smaller, less efficient factories, but overall capacity will increase by at least another 5% with the opening of the Waco factory.
Continued economic uncertainty may affect the timing and impact of these and other investments. All things considered, “all price hesitation right now is justified,” Miller said.
Biggers reinforced that sentiment, saying, “There’s still this fear of recession this year, and I haven’t heard a lot of economists backtracking on what they said.”
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