Globally, recovered paper (RCP) is a fundamental raw material. More than half of the paper and board produced in the world is made from recycled fiber; it’s actually nearing 60 percent now. A lot of that paper is being produced in China.
In 2008, 208 million metric tons of RCP were used to produce new paper and board, with 49 percent going to produce case materials, which is the global term for corrugated. By 2018, 249 million metric tons of RCP were used to produce new paper, and case materials grew to consume 62 percent of that fiber. However, from 2008 to 2018, newsprint went from consuming 13 percent of the recovered fiber available to 6 percent, which continues to decline. Tissue, printing and writing papers and other grades have remained relatively stable in terms of their recovered fiber usage.
When we look around the world from a regional standpoint, North America’s RCP demand has been static from 1997 through 2019, while China’s demand increased before it petered out in the latter half of this decade. Now “other world” and “other Asia,” particularly Indonesia and India, are the areas of growth.
Currently in China
On a grade basis, the greatest growth in RCP demand has been in old corrugated containers (OCC), though we are starting to see mixed paper demand increase. RCP exports grew in the first part of this century largely because of China entering in the marketplace. Exports really shot up from North America at the start of the 2000s, and we’ve been flat now for almost 10 years. It’s a similar story in Europe, though that region has declined a bit as an exporter, particularly since 2016. Japan was an importer of RCP heading into the early 1990s. It became an exporter by the mid-2000s and has flattened out since then.
China is not as important as it once was but is still a major factor for a number of reasons. In 2016, China imported 29 million tons of RCP to support its domestic paper and board industry. Chinese regulations restricting RCP imports into the country reduced its annual import volume to 17 million tons in 2018. In 2019, we forecast that imports will fall to 12 million tons. Looming on the near horizon is a total ban on imported RCP scheduled for the end of 2020.
This leaves a tremendous shortfall of RCP in China resulting in reduced operating rates, revenue reductions and creating an unsustainable supply chain disruption in the second largest paper and board production market in the world.
Whether preconsumer grades such as double-lined kraft (DLK) or No. 9 overissue news and pulp substitutes will be exempted under this ban is uncertain, though pulp substitutes are flowing into the country freely right now. Recycled fiber pulp does not look like it’s going to be affected because it is an intermediate product. Right now, we think we’re looking at a 13-million-ton-per-year shortfall of RCP in China. That shortfall could be a driver for RCP pulp units as one piece of the solution, as well as bringing in board to the country.
As a result of China’s recovered fiber import changes, the mega mills, which are mostly owned by the top 15 companies, face significantly higher fiber costs. Within China, the values of OCC and mixed paper are much higher than they are here, and China’s mixed paper isn’t any better than our mixed paper from a prohibitives standpoint. These mills also are facing higher costs associated with moving away from using coal to using natural gas to address air pollution issues.
Many of China’s high-polluting, smaller mills have been shut down permanently. The country’s overall policy favors the large mill groups. In 2018, China was home to about 3,000 paper mills, but 38 of those sites made about 65 percent of the country’s paper and board.
The Chinese paperboard industry has made a number of moves to relocate production outside of China. A number of paper machines were scheduled to go into China from 2019 to 2021, but those machines are being redirected to Vietnam, to Malaysia and possibly to Indonesia.
The developing picture
In 2018, RCP totaled 64 percent of China’s paper and board mills’ furnish, with mechanical pulp contributing 7 percent and chemical pulp at 29 percent. Of that recovered fiber, imported material accounted for 65 percent, while domestic material totaled 35 percent. That’s going to radically change for 2019 and beyond.
One thing that these changes to its recovered fiber import policy has done for China is it’s been a boon to collection, baling and processing of this material in China. The country’s collection business has skyrocketed because of the high cost of fiber. And the high cost is because of the demand, but their fiber from a quality standpoint is inferior to North America’s.
What are the alternatives of importing RCP into China? There aren’t enough boxes in China to recover because China is an export economy. The apparent recovery of OCC in China is 55 percent, but it doesn’t account for boxes that either flow in or flow out. The real recovery rate of OCC in China is about 80 percent; it’s pretty high. It’s almost topped out. On the other hand, in the U.S. we list an apparent recovery rate of 96 percent for OCC, but because we have boxes coming in, the real recovery rate is probably only 80 percent. China and the U.S. actually recover about the same level of fiber.
Pulp is another option for Chinese mills. Some small amount of unbleached kraft pulp is produced mostly in Chile, Russia and a bit out of Canada, and there’s more of this capacity coming online, especially in Siberia because the shipping rates are good, and they have good forest resources. But unbleached kraft pulp is pretty expensive, and China’s board mills always used a little bit of it for the top layer of really high-strength appliance corrugated boxes to get good printability and more strength. But now they’re starting to use more of that, though there is only about 3 million tons of global capacity.
Additionally, the box converters are importing more linerboard and medium from the global market. This year marks the first increase in more than 10 years for Chinese imports of containerboard, but the volumes are still small.
The Chinese policy is profoundly affecting the global markets. In 2017, U.S. RCP exports accounted for 60 percent of China’s total RCP imports. In the first seven months of this year, that number fell to 33 percent: It almost dropped in half. But China is still a big market. China will remain the largest consumer of RCP globally, however demand growth will drop over the next five years.
“Other Asia” outside of China and Japan will become the growth areas for RCP use. Malaysia, Indonesia, Vietnam, Thailand, the Philippines and India will have really stepped up. India is in a pretty strong second place now for imported RCP. The country imported 4 million metric tons in 2018 compared to 3 million metric tons per year in 2016-17. That’s a big increase.
China produces about 100 million tons of paper and board. In 1999, when U.S. production peaked, we made 105 million tons of paper and board. We’re now down to about 75 million tons in 2019.
From 2008 to 2018, U.S. use of RCP only grew 1 million tons. Its use in containerboard production went from 14 percent in 2008 to 35 percent in 2018, and exports actually increased 1 percent from 38 percent in 2008 to 39 percent in 2018.
When you think about it, that’s what we’ve got to recover because not a lot of our paper goes out of the country. Thirty million tons of U.S. production have been lost in the last 20 years, but it’s mostly been newsprint and printing and writing papers. The corrugated box business in the U.S. has been growing again thanks to e-commerce following a 20-year decline because of the shift in manufacturing to China.
It’s a bit of a misnomer that we’re not exporting recovered paper anymore. We’re still exporting; it’s just going different places. It’s gotten redistributed around the world. If we look at where the exports went in 2018, we still shipped 40 percent of our RCP exports to China. That’s going to materially change this year.
India went into second place, and Mexico is still a strong buyer from the U.S., but Indonesia and India really have moved up quite a bit in their RCP buying from the U.S.
The economic growth rate is strong in India but from a fairly low base, and its use of paper starts at a low base. The country also has a lot of small, inefficient mills. The Western companies, WestRock and International Paper, that went into India were disappointed in the fairly large investments they made there. Because of the business practices in India, U.S. companies have found it difficult to do business there. Decision-making is very difficult. There’s an overabundance of imported RCP in the form of [mixed paper] and OCC all around the country now. And it’s not China by any long shot; it’s not trying to be the manufacturer of the world.
India is flooded with U.S. mixed paper to the point where the big concern is that the packers and collectors there can’t compete with low-cost imports.
India has an incredible number of small mills—a 75,000-ton-per-year paper mill is among the largest in that country. But that’s probably about to change. Nine Dragons has announced a multibillion-dollar investment to build a new mill complex in India.