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ISRI Paper Spotlight: Analysts gauge how COVID-19 affects the paper sector

Analysts say recovered paper demand has shifted as a result of the pandemic.

June 5, 2020

In the first half of 2020, prices for recovered paper spiked as a result of changing supply-and-demand dynamics partially affected by the COVID-19 pandemic. 

During the Institute of Scrap Recycling Industries (ISRI) Virtual Event: Spotlight on Paper that took place June 3, the association kicked off the webinar by diving into prices and demand trends for recovered paper. Speakers for the webinar were Jose Gonzalez, a senior principal at Stockholm-based AFRY Management Consulting, and Sanna Sosa, principal consultant at AFRY Management Consulting, and it was moderated by Joe Pickard, chief economist and director of commodities at ISRI.

According to statistics from the U.S. Bureau of Labor Statistics (BLS), prices for recovered paper (or wastepaper as the BLS identifies it) are up about 50 percent in April compared with prices in March, and prices are up about 40 percent compared with where they stood one year ago.

“That’s significantly different certainly than other scrap commodities,” Pickard said, noting that copper-based alloy scrap prices are down 21 percent year over year, aluminum scrap prices are down about 20 percent year over year and ferrous scrap prices are down about 28 percent year over year. 

While prices for recovered paper are up, Pickard said volumes so far this year are down a bit compared with 2019. According to figures from the Washington-based American Forest & Paper Association (AF&PA), 49.2 million tons of paperboard were recycled in 2019 compared with 52.7 million tons recycled in 2018.  

“[AF&PA] attributes most of this to the drop in recovered paper exports, which were down 13.7 percent mainly as a result of China’s import restrictions,” Pickard said. 

He added that exports of recovered fiber are also down this year. For the first quarter of 2020, recovered paper exports in general were down 14.5 percent compared with last year. However, recycled pulp exports increased almost 75 percent in the first quarter of 2020 compared with the same time frame in 2019. Conversely, exports of other grades of recovered fiber declined. Old corrugated containers (OCC) exports were down 16.8 percent in the first quarter of 2020 compared with the same time frame in 2019; newsprint exports were down 23 percent compared with the same time frame in 2019; and mixed paper exports were down 20.5 percent compared with the same time frame in 2019. 

Economic prospects

Gonzalez said economic projections have been changing frequently in the first half of 2020 as a result of COVID-19. Based on a compilation of economic forecasts from leading investment banks, he said the median projection of gross domestic product (GDP) growth is about -5.7 percent for 2020. 

Comparatively, he added that GDP growth was at about -2.8 percent in the Great Recession in 2008 and 2009. “For this year in 2020, we have made a significant contraction in the economy,” he said. 

The pandemic has changed consumer habits, with more consumers ordered to stay at home. 

“We all feel that COVID-19 will have a dramatic impact for the pulp and paper sector in 2020 but potentially beyond that as we’re all navigating through challenging economic environments,” Sosa added. “We at AFRY also definitely are strong believers on the opportunities in this sector as we all are defining the new normal.”

Recycled pulp markets

One positive of the pandemic is it has brought back volatility to recovered paper prices. Gonzalez said prices of recovered paper had been depressed throughout 2019, driven by China’s restrictions on recovered paper imports and due to weak containerboard demand. 

“We expect volatility [for recovered paper prices] to continue for the rest of the year, especially in the second and third quarters, given supply shortages with some municipalities dropping recycling,” he said.

Gonzalez said the industry will need to watch out for China’s plans for recovered paper in 2021. As it stands, China is currently reducing the amount of recovered paper it imports this year and plans to stop all imports of recovered paper by 2021, which will leave a gap in the market. Gonzalez said about 5 million metric tons of capacity are expected to come online in the U.S. and Southeast Asia to consume OCC from North America. He said about five projects are coming online in the U.S. to consume recycled pulp in particular, including plans from Nine Dragons, Phoenix Paper, Empire Recycled Fiber and Kamine Development Corp.

He added that about 4 million metric tons of recycled pulp capacity has been added since 2019.

Tissue markets

On the tissue side of the business, COVID-19 has led to increased performance for the at-home tissue products. These products consume primarily virgin fiber, such as bleach kraft pulp. Prior to the pandemic, Gonzalez said at-home tissue products were performing well and the demand has only increased since then. 

“The retail sector or at-home sectors performed solid during COVID-19 and even to date as we see grocery stores with empty shelves,” he said. “This end use is enjoying great momentum.”

However, away-from-home tissue products have been in less demand because of COVID-19. These products use mostly recycled fiber. Gonzalez said this market has been “severely hit” by COVID-19 as end markets such as restaurants, hotels, offices and schools have been closed because of stay-at-home orders. “The stay-at-home orders switched consumption to the retail side, so of course, that’s why we’re seeing this phenomenon.” 

“There are clear concerns for the away-from-home markets,” Sosa added. “Even after COVID-19, we could see more people choosing to work from home and students taking classes online.”

While demand for tissue products in general is rising, the away-from-home products likely will struggle, Sosa said. “There is risk that recycled fiber consumption in the away-from-home sector could be smaller than it was before the pandemic."

Packaging markets

In recent years, containerboard markets have been delivering strong earnings before interest, taxes, depreciation and amortization, Gonzalez said. 

He added that about 14 companies have about 5.6 million tons worth of containerboard projects in the pipeline currently, most of which will consume OCC and some mixed paper. 

However, there have been concerns that some of this capacity might not come online as reported.

“Even before the pandemic, there were a lot of concerns among analysts and in general that there might be overcapacity developing in the North American containerboard market,” Sosa said. “Already last year, containerboard demand was down, driven by trade tensions we had as well as troubles in the agriculture sector. As we move through the pandemic, we see some of these projects most likely at a high risk of delays and perhaps even some cancellations.”

She noted the positive factors affecting containerboard markets, such as strong e-commerce and retail grocery sales. Yet manufacturing still impacts containerboard demand, and she said that might cause a negative impact on containerboard markets. 

Both Sosa and Gonzalez said conditions are a bit stronger for cartonboard markets this year. Sosa said sales are up for many products that use cartonboard, such as frozen food and cereal. She said the industry could see an uptick in cartonboard demand, particularly for coated recycled board (CRB). 

“We do think there could be potential for demand uptick that are COVID-19-driven growth in packaged food consumption and the long-term shift or trend in North America from plastic to fiber-based packaging solutions that could drive further capacity investments in the North American cartonboard sector,” she said.