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Picking up from last week...
With the push from landfill costs in Europe and the United States, plus the other drivers I have mentioned previously, manufacturers and scientists began to work in earnest on the performance requirements for recycled containerboard products. The abundance of new recycled containerboard mills moved the products, recycled linerboard and fluting, to the mainstream of the market, which produced a growing interest in improving performance from the research and manufacturing fields. Additionally, marketers, such as the ubiquitous Amazon, wish to advertise that their shipping containers and dunnage are recycled and recyclable.
Separately but nearly simultaneously, the shipping industry changed standards used to measure the performance of a corrugated box. Starting at the appearance of the corrugated box, in the late 1800's, the railroads, the primary domestic shipper of the day, developed a standard called Rule 41. This standard was necessary for, up to the time of its adoption, corrugated boxes were made of all manner of paper calipers and construction. This was causing the railroads tremendous expense as these boxes were bursting while being loaded and unloaded from box cars. Rule 41 fixed this problem by imposing a standardized basis weight for box construction. Essentially, the liner layers in the box had to be made from "42# liner" which was a basis weight designation of 42 pounds/one thousand square feet. Based on the paper construction of the day, this served the industry and the users well. In fact, it worked so well, it remained the de facto standard into the 1990's, a run of one hundred years.
With the coming of high recycled content containerboard, and the consequent reengineering of the product, Rule 41 became obsolete. With starches and other additives, recycled containerboard could be engineered by recipe to be just as strong and stiff as virgin linerboard. In fact, this new engineered product has driven a reduction in basis weight to where I would say linerboard today is closer to an average of 33#/one thousand square feet, a 21% reduction. This reduction has served the end users well. It reduces the tare weight of their shipments and it has reduced the growth in the number of containerboard mills required to produce the demand in area (square feet or square meters) necessary. By necessity, this has produced a reduction in cost for the user and ultimate consumer on a constant currency basis.
Along with the growth of recycled containerboard grades in Europe and the US, as we all know, the China economy has been booming. In both Europe and the United States, simultaneous with local demand for recycled paper and paperboard, China has been in the markets driving up demand as well. Having no substantial forests, China had to buy fiber wherever and under whatever conditions they found it. In the early years, the late 1990's and early 2000's, China was an undisciplined player, suddenly buying all the material available and six months later stopping all purchases. This was wreaking havoc on the recycled containerboard manufacturers in the United States and Europe.
Recycled containerboard mills are referred to in financial circles as "tolling facilities." This means they purchase raw materials on the open market, do certain work and enhancements to it within their asset boundaries, and then sell the finished product on the open market. In such an environment one must focus on the financing costs and operating costs within their asset boundary; there is no other place to protect or enhance profitability. With China behaving as I described above, this put these facilities in a financial predicament. With nearly all their asset boundary costs fixed, profitability is completely at the mercy of outside forces.
In the summer of 2017, China initiated the "National Sword" campaign to reduce the importation of foreign waste material. Simply, they wanted to eliminate the importation of foreign waste that would end up in their landfills. This essentially dried up the export markets for wastepaper in the US and Europe for as currently formulated, they could not meet the National Sword standards. Prices plummeted due to reduced demand and these tolling facilities, not only in US and Europe, but also in other markets such as Australia and New Zealand, enjoyed record profits as their input costs declined.
Record profits attracted expansions and conversions of newsprint machines (experiencing a dismal decline) to recycled containerboard grades. This is the current state of the market, except for recent developments, which we discuss as we wrap up.
Be safe and we will talk next week.
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