The pricing trend for SOP should point upward over the next decade.
After reaching the record-breaking quarterly U.S. average price of $298 per ton in the third quarter of 2011, sorted office paper (SOP) took a precipitous drop in price over the next two quarters, bottoming out at $167 per ton in the second quarter of 2012. Since then, prices for the grade rose slowly, but steadily, for the balance of 2012.
Many factors are at play with regard to the SOP market, and this article will delve into them.
Printing and writing (P/W) papers supply is the starting point for the available papers that make up SOP. It should be noted that P/W papers include mechanical, chemi-mechanical and chemical pulp grades. The papers contained in SOP are primarily made up of chemically pulped grades, but the most readily available American Forest & Paper Association (AF&PA) databases used for analyzing the supply/demand of SOP are for all P/W grades. Uncoated freesheet grades (based on chemical pulp), which are the primary constituents of SOP, make up approximately 50 percent of all P/W papers. Mechanical pulp papers (coated and uncoated, such as magazine paper and newsprint) are about 30 percent of P/W, with the balance being coated freesheet.
On the demand side, we use deinking high grades (DHG) as the variable of choice for much the same reason we use P/W for supply—database availability. SOP is the largest component of DHG, but the category also includes ledgers, computer printouts (CPO—chemical pulp based but an almost obsolete grade) and “various grades of bleached converting scrap to be deinked.” Another significant component of DHG is coated book stock (a coated freesheet grade), widely used in the tissue sector.
The largest user of SOP is the away-from-home tissue sector. Exports of U.S. DHG now comprise the second largest use of the grade. SOP exports have grown significantly in the last five years but still are much smaller in amount (and in the percentage of total use) than the bulk grades of OCC, ONP and mixed paper.
Supply Trends for Office Papers
- The use of office papers in the developed world is declining.
- Document destruction activities (a major source of SOP) continue, but growth of this supply in the U.S. is slowing.
- The generation of recovered printer paper grades (many of which are interchangeable with office papers) also is declining in the developed world because of an overall downturn in printing.
SOP Demand Trends
- Tissue is the largest market for SOP and is a major growth sector in all regions of the world, but not all new capacity is based on recycled fiber.
- Recycled fiber is a major source for away-from-home tissue production in many markets (North America, Europe, Middle East and some Asian countries, but not China, for the most part).
- Deinked pulp is also a large user of office papers, driven by demand for recycled content in a variety of products (e.g., copy paper, cups, packaging and magazines) primarily in the U.S. and somewhat in Europe.
Much less DHG is used in the production of P/W papers than in the production of tissue or for export. The use of recycled fiber in P/W papers is limited to several areas of the world, primarily in the U.S., some Western European countries and India. The reason for the limited use of woodfree deinking grades in P/W papers is that it is the most uneconomical form of paper recycling because of high yield losses in the deinking process. In comparison, producing away-from-home tissue products from woodfree deinking grades is economical and is the reason why increased usage has occurred over time. The production of freesheet deink pulp is slowly increasing primarily in a few developed countries in light of interest in sustainability in a variety of products, such as specialized packaging grades and paper cups, for example.
The last usage category for DHG is the recycled paperboard sector, where it is used in white top layers in linerboard and boxboard products.
Tissue production throughout the world has grown over time. For about 10 years, the use of recycled fiber in global tissue manufacturing has been steady at about half of the sector’s fiber supply. Going forward, recovered paper use by the tissue sector is expected to be stable, but higher prices for woodfree deinking grades could reverse this trend.
The use of recovered paper in the tissue sector varies by region, with North America, Europe and the Middle East having substantial recycled-fiber-based production. Much of Asia’s new tissue capacity and a substantial amount of Latin America’s capacity are based on virgin fiber.
Use of P/W papers in the developed economies is declining. This will constrain the supply of SOP available for use.
U.S. supply of P/W papers peaked in 2004 and has declined more than 9 million tons per year since then. Peak recovery of P/W papers occurred in 2007 and has been off by more than 3 million tons per year since then. Even with growth in the use of P/W papers in Asia, Eastern Europe and several other regions, the production decline in North America, Western Europe and Japan will more than offset this new available supply.
In the U.S., we have noticed a slowdown in the growth of SOP from the document destruction sector as this business matures and the use of hard-copy documents for records storage declines. The medical services industry, once a major source of recovered paper, is rapidly moving toward digital records. Signs point to the legal system and governments, once steady sources of office papers, moving to increased use of electronic documents.
The other major source of woodfree deinking grades, the printing industry, also has been on a steady downturn in the developed world. While the global recession of 2008/2009 caused a downturn in all paper production, the P/W and printer sectors decreased dramatically. This was not only because of the recession but also because of a structural trend toward increased electronic and Web-based communications, which produces fewer hard-copy documents. Going forward, the developed world’s P/W papers production will not reach the highs of five years ago.
Another large source of SOP, the postal service in the form of direct mail, has been declining as electronic communications replace these hard-copy mailings.
The three primary drivers of SOP price are:
- Supply and demand for SOP – This is typically controlled by the declining office papers supply in the long term. In the short term, demand from the tissue sector is a prime driver.
- Bleached virgin pulp prices – This alternative source of fiber for tissue manufacturing can be substituted for woodfree deinking grades and, when the economics favor virgin pulp use, many mills will replace some of their recovered fiber with this material.
- Prices for the other major grades of recovered paper, all of which tend to move together.
While SOP prices will fluctuate, the overall trend line for pricing during the next 10 years is clearly upward. This is primarily because of the constrained supply of P/W papers available for recovery. However, SOP prices are bounded by the cost of bleached pulps used in tissue, as they can be readily substituted for recycled fibers if prices reach levels that are uneconomical. Indeed, major new tropical hardwood pulp mill projects have the potential to overwhelm the market supply for this category of fibers, especially if world P/Wpapers production stagnates.
With a constrained supply of P/W papers available for recovery, new sources of recovered paper for the tissue industry must be found. Several areas have shown promise, one being single-stream recovery in the commercial sector, which has been increasing in the U.S. and will be able to recover more materials from offices. This more efficient type of recovery allows haulers and processors to economically recover material from small generators of office papers, and the ease of material handling for these generators encourages greater participation in recycling programs. However, the most important issue with single-stream commercial recovery is the quality of the SOP produced.
Another potential source of recovered paper for the tissue industry is postconsumer polycoated bleached paperboard packaging. We expect that more of these grades will be recovered; however, their total available supply is fairly small.
Source: www.paperrecycles.org and Moore & Associates
The author is president of Moore & Associates, an Atlanta-based consulting firm providing market research and strategic services to the paper recycling industry. He can be reached at 770-518-1890 and through www.MARecycle.com.