New sources of recovered paper for the recycled tissue industry must be found, say Bill Moore and Susan Cornish of Moore & Associates. Here they analyse the long-term trend, and consider potential answers.
Although the global use of recycled fibre as a percentage of tissue/towel mill furnish has peaked, recovered paper (RCP, also known as PfR [paper for recycling in Europe]) is still an important raw material for the sector. Figure 1 shows the fibre sources used by the world’s tissue mills over the last several decades. Since peaking in the year 2000 at about 50%, recycled fibre (RCF) use has declined slowly to the current level of 35%. RCF is being primarily replaced by chemical fibre pulp. This decline in RCF usage by the tissue sector can also be seen in Figure 2 which shows the global usage of RCP by paper and board product grade. In 2008, tissue grades consumed 16.6m tonnes of RCP (8% of world usage) and this dropped to 15m tonnes by 2018 (6% of world usage). The decline in RCF usage is primarily caused by changes in the available supply of the RCP grades relevant for tissue manufacturing. Printing & Writing papers (P&W) are the primary source of RCF for tissue/towel production. Figure 3 shows the global consumption of P&W papers and tissue grades over the last twenty years. From its peak in 2007, global P&W paper consumption has declined from 119.4m tonnes to 98.4m tonnes in 2018. During that time frame, global tissue consumption increased from 26.9m tonnes in 2007 to 39.2m tonnes in 2018.
When recovered, P&W papers account for a substantial share of a statistical grade called deinking high grades, or DHG. The world’s primary sources of DHG are North America and Europe where developed economies imply more ‘knowledge workers’ who are the heaviest users of P&W paper grades. Uncoated Freesheet (UFS) is the largest product category within P&W papers, and in both North America and Europe demand has declined significantly in the past five years. UFS demand dropped an average of 4.6% annually from 2015 through 2018 in North America, followed by a steeper decline of 12% in 2019. In 2020 with the emergence of a global pandemic and the closure of offices, stores, schools, public services and the like, steeps declines have continued.
In North America, demand dropped an average of 10.5% per month from January through March and an average of 36.8% per month over April and May. Given the slow reopening of businesses, we expect the decline in UFS demand in 2020 to be significant but for the rate of decline to slow somewhat in 2021.
For tissue produced from RCF, the cost of RCP is a significant component of overall production cost. Not all tissue brands/ products use RCF and the percentage that do varies considerably by region, with North America (US, Canada, and Mexico), Europe, developed Asia (Japan, Korea, and Taiwan), and the Middle East having the greatest use of RCF. RCF is predominately used in Away From Home products.
Much of emerging Asia’s new tissue capacity, particularly China (but also Indonesia and others), and a substantial amount of Latin America’s tissue capacity,
is based on virgin fibre. Because of China’s small role in the global DHG market, the country’s significant decrease in RCP imports have had minimal effect on DHG markets in contrast to major impacts on the global OCC and Mixed Paper market.
The largest grade within DHG is Sorted Office Paper (SOP), followed by the ledger grades and Coated Book Stock (CBS). Traditionally, the sources of these grades have been office recycling programmes and printer scrap. Starting in the late 1990s, the rapid growth of confidential document destruction and office paper shredding led to strong growth in the volume of available SOP. This market trend was the result of both privacy and legislative/regulatory developments in certain regions, primarily North America followed by Europe.
While banks, governments, and insurance companies had always shredded their records, the new laws increased document destruction significantly. But the document destruction business is now declining with the move away from hard copy records. Another large source of DHG, the postal services of the world, have been declining in the developed economies as electronic communications replace hard copy mailings.
The other major source of DHG, the printing industry, has also been on a steady downturn in the developed world for some time. While the global recession of 2008/2009 caused a downturn in all paper production, the P&W papers and printing sectors declined dramatically. This was not only due to the recession but also a structural trend of producing/printing fewer hard copy documents, which continues to this day.
The overall trend will constrain the supply of DHG going forward but in the short term, the pandemic has exacerbated the slow decline of the printing industry. In the US, the trade press reported many cancelled print runs in April and May and advertising spending more broadly is expected to decline as much as 13% in 2020.
While tissue is the largest user of DHG, there are several other users of DHG including production of P&W papers with recycled content, and freesheet deinked market pulp. The use of DHG in RCF-based P&W papers is limited to several areas of the world, primarily the United States, with some in Western European countries and in India. DHG is used little in P&W papers because the high yield losses in the deinking process make it relatively uneconomical. In comparison, DHG has been an economical fibre source for Away From Home tissue, the reason usage has increased for several decades.
The production of freesheet deink pulp and its use in P&W papers is declining as overall production of the P&W product grades decline. Figure 4 shows the decline in the use of DHG by the other sectors and consolidation of use in tissue products.
A major problem with the supply of DHG is obvious: the use of P&W papers in the developed economies of the world is declining rapidly which constrains the supply of DHG available. With limited growth in the use of P&W papers in Asia, Eastern Europe, and several other regions, the decline in North America, Western Europe, and Japan will more than offset this new available supply.
The developing and emerging countries of the world are not increasing their use of P&W papers as they ‘skip’ hard copy documents and move directly to electronic communications.
At the same time, tissue mill yields on SOP have declined because quality of the grade is dropping. This results in higher processing costs and an increase in SOP cycle costs (until the last low price cycle, 2019). In addition, reasonably priced virgin fibre pulp such as BEK is readily available, providing tissue mills with a good alternative.
The situation is similar in Western Europe as shown in Figure 6. UFS, which accounts for a significant share of P&W papers, is declining at a fast pace relative to DHG. Over the time frame of 2014 to 2021, UFS usage in the region will decline 1.8m tonnes while DHG demand will decrease by only 0.4m tonnes.
In Germany, prices for Multi Printing (3.10), two DHG grades used by the tissue sector, reflect this gradual decline in supply. After averaging around 200 euros/tonne through 2016 and through February 2017, prices grew steadily to the 270 Euro/tonne range by the middle of 2018, where they stayed for all of 2018. Figure 8 shows the steady decline in pricing in 2019, followed by a more recent upward price movement in 2020.
Figure 8 shows longer range US average SOP pricing from the year 2000 through 2019. It should be noted that the global RCP and DHG markets move together, differentiated only by transportation costs to the end user and currency values. There are several key takeaways from pricing trends:
- The 2011 peak of almost $250/tonne for US SOP and the 2018 German Multi Printing average price of 270 euros/ tonne represent a good upper bound price for the market going forward
- The bottom cycle pricing of $90/ton in 2001, $110 in 2005, $135 in 2009, and about $145 for 2013 – 2016 (a long trough!) shows a progression upward that Moore & Associates believes will continue. This upward movement of the bottom cycle pricing was reversed in 2019 – which in a number of ways was an anomalous year for SOP. This is a classic characteristic of ‘supply limited’ RCP grade. Expect future bottom cycle prices to increase $5 to $10/tonne in each of the next several pricing cycles.
A variety of factors have recently driven the SOP market. Panic-buying and stock- piling of tissue products in spring 2020 occurred as offices closed and the use of UFS, and hence supply of SOP, dwindled. As Figure 9 shows, this resulted in significant SOP prices increases in April and prices remain high through June. With reduced SOP supply and prices spiking upward, substitution of virgin fibrebecomes more attractive and tissue mill demand for SOP slowly moves downward.
As consumers become accustomed to the ‘new normal’ and impacts of the recession are felt by greater numbers, we expect consumer demand for tissue products and tissue production level to return to normal levels. Despite this, the ongoing structural decline in UFS usage and SOP supply may allow higher prices to hold for some time.
Coated Book Stock (CBS) and Printers Mix, the other key DHG grades used by the tissue sector, have many of the same supply and demand characteristics as SOP. High quality book printing (which generates CBS) after a steady decline, appears to be stabilizing. On the demand side, the tissue sector has reduced the usage of this low yield grade through process changes and higher levels of coated paper in SOP. Because of the demand decrease, CBS, which for decades traded at prices of an average of 120% of SOP, has been on par with SOP for the last five years and is expected to remain at that level going forward.
While we will always have peaks and valleys in commodities like DHG, the overall trend line for pricing over the next 10 years is upwards. DHG prices, however, are bounded by the costs for bleached hardwood and eucalyptus pulp as they can be readily substituted for recycled fibres if prices reach levels that are uneconomical. In the second quarter of 2020 we did see an increase in the use of virgin pulp by recycle mills as SOP prices reached high levels.
With a constrained amount of P&W papers going into the available supply, new sources of recovered paper for the recycled tissue industry must be found. Potential sources include post-consumer bleached paperboard packaging (both poly coated and uncoated), postal mail, cutting of books, silicone release papers, and greater use of Pulp Substitutes. It is our expectation that more of these grades will be recovered and used by the tissue sector.
Some of the hurdles include: collection infrastructure for the post-consumer SBS grades, high mechanical fibre content of postal mail, and a return to cutting of books. Prior to the 1990s, cutting bindings and covers off books was very common. With higher labour costs, safety issues, and higher Mixed Paper prices, this practice was significantly curtailed. With higher prices for ledger grades and lower Mixed Paper prices, will book cutting come back? There are now some highly automated book cutting systems that improve safety and reduce labour costs.
The growing brown napkin/towel business is based primarily on Old Corrugated Containers (OCC), but we are seeing increased usage of the RCP grade Mixed Paper also in these products.
Brown products, particularly napkins, are being favoured by many cost conscious restaurant chains, not only because of price but also because consumers often see brown napkins as more ‘environmentally friendly’ products. We are currently seeing a surge in OCC prices primarily because of the lack of supply from the shutdown/curtailed retail and commercial sector.
Going forward there is very large new demand for the grade as it is the fibre source of choice for corrugated box production. The good news is that the supply of corrugated boxes is growing, very much related to increased e-commerce consumer purchasing. Mixed Paper after
a price slump in 2018 and 2019, which saw negative pricing for the grade, has recovered somewhat in 2020, with OCC prices rising sharply.
While Mixed Paper may not return to negative pricing, it has the lowest recovery rate of the major RCP grade categories, so supply is plentiful. The challenge is the mixed fibre and contaminants found in this ‘catch all’ grade.
The other area seeing renewed activity as a fibre source for tissue manufacturing is non-wood pulps: bamboo, bagasse, wheat straw, grasses, and other agricultural residues. Most of the action on these sources of fibre is still in its infancy, but consumer interest in ‘greener more sustainable’ products may be an important driver here.
As the global recovery rate for all RCP grades increases, it is inevitable that overall quality is declining. Two factors contribute to this: the ‘next tonne’ of recovered material is usually more contaminated than the last, easy-to-get tonne, and collection systems become more varied as volume increases.
While this has affected the low grades of RCP more than DHG, the tissue sector has also seen quality decreases in much of their RCF supply. There is a move to better measure and control RCP quality in many parts of the developed world, with Europe leading the way.
These systematic and sometimes real time measurements not only contribute to better being able to monitor and control RCP quality, but for the tissue sector, they may play an important role in the fibre recipe and process operation adjustments based on changing RCP incoming quality and composition. The most sophisticated of these RCP measurement systems can accurately measure full bales for moisture, plastics and other contaminants, ash, mechanical vs. chemical fibres and even brightness.
In conclusion, all businesses face challenges as conditions change in their markets. The sources and usage of recycled fibre in the tissue sector presents some significant issues that the industry is working toward meeting.
As the use of Uncoated Freesheet office papers and the supply of SOP diminish, production of packaging is increasing generally, creating more SBS scrap. BothSBS scrap and mechanical fibre grades such as magazines and coated groundwood sections are being used more in tissue production, however growth in this area does not counteract the decline of SOP.
In general, SOP and CBS supply will continue to decline for the next ten years but will hit the practical minimum after that.
With the acute short-term downturn in SOP supply as a result of the pandemic, short term SOP and CBS market prices are very strong. Demand for SOP will be modest as the industry shifts toward virgin fibre over the long term.
Higher bottom cycle prices for SOP and CBS can be expected with limits on top cycle prices due to virgin pulp substitution – except when pulp prices trend upward.