Economic downturns and recessions have wreaked havoc in a number of industries, and the paper recycling industry is no exception. After seeing steady growth throughout the 1980s and 1990s, the paper industry entered the new millennium with declines, riding a wave of consolidation. Ultimately this forced the paper recycling industry to increase efficiency and rationalize its capacity.
What factors led to these changes? To gain an understanding of the state of the paper recycling industry in Canada and the U.S., we need to look at the specific factors affecting demand. We can begin to understand by taking a look at the “4 Cs” of demand: consolidation, credit risk, capacity and consumption.
The “four Cs”
Although the rate of mergers is decreasing from what the industry saw in the 1990s, consolidation continues to be a factor in both Canada and the U.S. Most of the previous focus was on consolidating paper mills, but other segments are consolidating as well. For example, earlier this year, Waste Management Inc. and The Peltz Group formed Recycle America Alliance, which represents eight million tons per year of paper waste.
Recycle America Alliance has approximately 3,300 employees, operates 80 recycling plants and provides marketing responsibility for more than 180 locations. In addition, the Alliance operates seven container processing facilities, one plastics recycling facility and four electronics recycling facilities.
How has consolidation affected the makeup of the industry in the U.S.? In 1996, the four largest containerboard companies held 40 per cent of the market, but by 2000 that number grew to 55 per cent. In newsprint, the top five producers account for 67 percent of worldwide capacity. Three companies control 75 percent of the tissue market.
Consolidation has also been an ongoing trend in the Canadian market. According to the Canadian Pulp & Paper Association (CPPA), since 1995 Canadian companies negotiated at least $37-billion in asset acquisitions at home and abroad. These companies have been involved in more than 50 major merger and asset sales, and the number of “pure” Canadian companies, with solely Canadian-based manufacturing, continues to dwindle.
Credit risk is another factor affecting demand in the paper industry. In the past two years there have been a number of bankruptcies and closures, including Plainwell Tissue, American Tissue, FSC and others. In addition, the recent wave of mergers and consolidation has meant many “blue chip” companies have taken on larger amounts of debt. This has led to significant debt downgrade. Until economic conditions improve and debt levels rationalize, credit will need to be watched more closely than ever.
In 2002 U.S. paper and paperboard capacity continued to decline, the first time total industry capacity declined in consecutive years. A survey from the American Forest & Paper Association (AFPA) found that capacity declined 1.9 per cent in 2001 and 1.3 per cent in 2002. Looking ahead, the survey projects a continued decline, including 0.5 percent in 2003, 0.8 per cent in 2004 and 0.4 percent in 2005.
In the U.S., machine shutdowns, imports and a maturing, consolidated industry reduce capacity levels. In the past two years, 40 mills and 104 machines closed, according to the AFPA, eliminating more than six million tons from the U.S. market. As the paper industry continues to struggle with lower demand and increased competition from abroad, the outlook continues to tighten. Ultimately, this will prove to be beneficial for the industry’s long-term health.
Canada saw an increase of 2.3 per cent in 2002, following a decline of 5.7 per cent in 2001, according to CPPA. Since Canada exports more than 80 per cent of the pulp and paper it produces it’s particularly sensitive to economic and political events.
Consumption has dropped as well. In 2000, 35.7 million tons of recovered fiber were consumed domestically, a decline from 1999. While domestic consumption rates are projected to grow modestly, if at all, the export market is very much alive and well. In China, imports of recovered fiber experienced double-digit growth rates for many years, making China the largest recovered paper consumer in Asia. Even as China continues to increase capacity, it does not have sufficient domestically generated fibre, meaning it will continue to import its paper at a high rate for the foreseeable future.
What is the outlook for the paper recycling industry? In the short-term, the outlook for recovered fiber prices is positive. Even though domestic demand is not robust, supply rates continue to be low. Quite simply, large generators of recovered fiber (manufacturers and printers) are producing less waste due to weaker orders and improved operating practices. With supply rates as low as they are even a modest increase in demand (domestically or abroad) have a dramatic increase on price.
In the long-term a number of significant and as yet undetermined variables will affect the industry:
As the consumer base continues to consolidate, how will the supply base react?
How can the industry continue to rationalize cost?
The industry will continue to globalize — how will this affect the supply/demand balance?
How will macro-economic trends and any further destabilization affect the industry?
As the industry continues to improve, it will face serious challenges to meet world demand, particularly as world economies strengthen.
Brian Fielkow is executive vice president of the Recycle America Alliance, LLC, based in Milwaukee, Wisconsin. E-mail Brian at brian_fielkow@ peltzgroup.com