Export Price Correction Timing
25-10-2007
Recovered Paper packers have enjoyed peak prices through most of 2007 due to both high recovered fibre and low ocean freight rates. These almost record high prices will soon correct hastened with currency appreciation which is a lottery dictated by the USA economy. This does not mean a market crash, nor an over correction, nor a seasonal inventory adjustment but more a price restoration for virgin pulp increases, energy or bunker oil surcharges and ocean freight increases which will inevitably be paid for by shippers and/or packers.
 
Recovered paper prices always follow virgin pulp. Historically recovered paper price increases lag pulp increases but lead with pulp decreases. This will continue to do so whilst mills prefer to pay higher prices for known virgin pulp qualities and whilst finished paper and board prices sell at cost due to over capacity

It is becoming increasingly evident that even without new de-inking capacity not yet installed that recovered paper supply is shrinking for many reasons.
  1. Recovery has reached a plateau in most northern hemisphere developed countries.
  2. Environmental safeguard laws in Asia that ensure correct non contaminated MRF grades are being exported from developing countries restrict growth as single stream collection has its quality limitations.
  3. Grades if co-mingled are often not fit for purpose following inadequate MRF sortation and are being correctly rejected and returned from China and other Asian countries due to contamination.
  4. Global industry consolidation is increasing non profitable plants closures.
The questions are when and how much?

Our best estimate is now December 2007 and again during the 1st Quarter 2008. As to the measurement of correction it is more difficult as we neither know US currency, oil prices nor ocean freight rates only to say that a 5 to 10 percent correction will be mild which equates to US$10-20 per tonne but inevitably more likely 10-20% is possible for some bulk grades all subject to market conditions.
In considering such swings one must value firstly global pulp and paper prices with capacity utilisation. Sure there are seasonal adjustments especially in China and during Ramadan, however Chinese suppliers have over capacity which is unlike to change for some time as export will get harder as Vietnam, Malaysia and others have new capacity coming on during 2008/9 as has Visy in Australia. In fact most grades remain in over supply so the global industry has some capacity adjustments to think about.
 
Unfortunately, the paper industry bullish cycle is peaking with more normality expected to resume from mid 2008. Smart packers have sold their plants when the multiples from global groups with superannuation investors are so high around 10-12 times EBIT, and good luck to them. The new local or global heavies will struggle in the future to repeat such investments for low returns if they are not fully integrated as they will soon have taken full administration control by non paper industry trained management who have no idea of the complexity of running plants and the meaning of waste paper definitions. Already we are seeing the result of their expensive claims with the introduction of short term no claim clauses. This has already happened once this year with a trader’s bankruptcy estimated to be $10 million for paper, plastics and transport.
 
This is a cyclical industry with thankfully less volatility now than a decade ago. China since 2002 has saved global butts but must itself slow down from 2008. Thankfully the remainder of Asia and India are themselves re-investing to reduce the global reliance on China for raw materials.