The Market: $150 SOP shocks traders

Published by The Paper Stock Report - www.recycle.cc

By Ken McEntee

October 14, 2011

Sources on October 14 confirmed that Georgia Pacific is dropping its price of non-contract sorted office paper (SOP) and coated book stock (CBS) to $150 a ton effective on October 17 for its Eastern and Midwestern mills. Information was unclear whether that price also would include mills that draw from the west, such as the Muskogee, Okla. mill.

That price, which no other company has reportedly matched as of October 14, represents a decrease of more than $100 a ton for SOP in less than a month.

That free fall in prices trivialized a $30 to $50 per ton drop in SOP prices reportedly being paid in the Northeast U.S. and Eastern Canada – a decline that otherwise would have been described as astonishing.

“The Canadian mills are still paying in the $220 to $230 range,” said one broker.

Meanwhile, traders speculated on how much lower SOP prices might go as early as next week.

Prices at the Green Bay mill dropped from $250 in September to $200 on October 1 to $150 in mid-October..

“If Georgia Pacific is paying $150 for prime material, there is no telling where Fibrek and Kimberly Clark are going to be for the lower quality of fiber they buy,” said one. “I see this as a very strong statement about the state of the market. I anticipate a continuing erosion of pricing.”

The timing of Georgia Pacific’s announcement sets up an interesting pricing sheet in this issue of The Paper Stock Report. As of the close of business on October 14, sources said Canadian producers Cascades and Kruger had not yet responded to GP’s drop. But they anticipated a nationwide free fall in SOP prices during the week of October 17. As this issue stands, Eastern mill prices are still listed at $200 to $220, while other Southeast and Midwest prices reflect the $15o price being paid by GP mills.

Traders said domestic mills that use SOP and CBS are loaded with inventory, while export demand also is lackluster.

“CBS and SOP are very ugly,” said an East Coast broker before the word spread about GP’s price drop. “Coated book is at 200 or well under. South America has been out of the market for the last three months. SOP at the NY pier was $230 on October 1 and it is down to $210 today.”

The drop in prices of sorted white ledger (SWL), so far, have not been as dramatic as SOP. One reason, sources said, is that there is not a lot of SWL available on the market.

“I had a hard time putting five loads together this week,” one broker reported.

At the same time, though, large Southern consumers like International Paper and Boise reportedly were turning the grade away.

Nevertheless, with a huge price difference between SOP and SWL, packers are expected to start sorting more ledgers out of their office paper.

There may be a small window of time for that strategy to work, but in a sort time you can expect ledger prices to drop in line with the other white grades, traders said. Along with drops in deinking grades, pulp substitutes also continued to weaken this month in line with wood pulp prices.

According to a broker in the Northwest, Waste Management and GP Harmon Recycling, which have indexed contracts with large document destruction companies, stand to take huge hits on SOP.

“They are paying $270 a ton for paper and selling into Mexico for $210,” the broker said.

Before GP’s announcement, traders noted a “chaotic” market, but many described is as a large market correction and no reason to panic. Afterward, all bets were off.

“In the long term, we’re still in a fiber-short world,” said one broker. “Demand will continue to outstrip supply. My suppliers are in shock right now, but I think were going to find a balance in the next few weeks. Last time I checked people were still using toilet paper.”

Another broker questioned low prices would actually go.

“Mills understand that they need a supply network,” he said. “It is not good to shock the market.”

OCC

With SOP making the biggest news, the fall of old corrugated has almost gone unnoticed.

“The worm has turned on OCC,” said an east Coast broker. “I’m not sure why. All of my suppliers are busier with OCC than they have been in a while. Although none of the mills seem to be in the market to buy extra tonnage, the market is not horrifyingly out of balance. I just visited 10 to 15 suppliers and nobody was backed up with OCC.”

Regardless, domestic and Chinese mills have stopped buying and some traders were bracing for a price tumble.

According to one source, International Paper’s Cedar Rapids mill in Iowa has told its suppliers to sell its tonnage off elsewhere through the end of November. If you have to ship OCC to the mill in November, you’ll get $100 a ton, the source said.

On the export market, Ralison International, which buys for China’s Lee and Man Paper, reportedly has told suppliers not to ship any more tonnage this month.

According to one broker, American Chung Nam, which supplies China’s giant Nine Dragons Paper, is issuing purchase order with the price “to be determined.”

“You can ship, but the containers will be on the water before you know what you’re getting paid,” he said.

An East Coast exporter described the OCC market as “unglued.”

Traders said some of the market weakness predated China’s annual National Day holiday that starts on October 1. But there was some panic when buyers returned to the office after a week off.

“It’s not something that suppliers shouldn’t anticipate,” said one broker. “But there is anxiety when you’re trying to call your customers and they are not answering the phone. Then when the buyer gets back to the office he is bombarded with 15 people panicking to reach him on the phone. I don’t blame the buyers for wanting to step back and take a breath.”

Before the holiday week, U.S. OCC was reportedly moving to China from Los Angeles for $271 per metric tonne, delivered to major Chinese ports. After the holiday prices were around $242. Exporters at mid month were paying suppliers about $210 per ton FAS in Los Angeles and around $190 in Seattle, traders reported.

“The Chinese buyers aren’t really aren’t saying very much right now,” said one broker. “And some of them are not placing orders or releasing prices.”

According to an East Coast broker, “America Chung Nam is staying out of the market as an attempt to bring prices down.”

Domestically, traders said, board mills are generally sticking to contracts and taking virtually nothing else.

“There is a lot of downtime in China and the price of OCC was too high for too long,” said a West Coast broker. “Now mills are waiting for prices to come down. The mills we’re selling to figure that if the CIF price is $240 today, if they wait a week it will be down to $215 maybe. The CIF price has fallen $35 a ton since the end of September.”

Traders noted the Chinese government’s tighter control of credit as another factor in reducing containerboard demand.

“How is a box shop going to buy from a linerboard mill when they can’t get the credit?” asked one exporter. “Inflation in China is a lot higher than the government is reporting. Normal people with college degrees can’t afford the basic necessities. Nine Dragons has a huge debt to equity ratio. That’s bad. After all that expansion the mills are running very slow.”

Import licensing also has been cited as a factor to watch over the next two months. Chinese mills need to apply for licenses to import recovered paper for 2012. Under current licenses, tonnage needs to arrive before December 20, one exporter said.

“There is no doubt the big players like Nine Dragons, Lee and Man and Asian Pulp and Paper are going to get their licenses,” he said. “But the government is really cracking down on the smaller guys.”

Some traders say that while OCC prices are dropping now, Chinese mills will want to be sure to get orders received by December 20.

That’s one reason why U.S. scrap paper exports generally see an upward bump in volume between October and December.

“We’re always very strong in the fourth quarter,” one export says. “Normally the Chinese buyers know that prices are down from the summer and they come in pretty strong.”

That’s what one brokerage is expecting.

“We’re betting that by November the OCC price is going to start back up due to increased export demand,” said an exporter there. “I am looking for bump up in the beginning of November, then some downward movement for the next several months.

Nine Dragons threw another fly into the ointment last month with the announcement that the start-up of six new paper machines has the delayed. Nine Dragons brought on substantial new capacity this year, bringing the company’s total capacity to 11.5 million tons per year. The six new machines, which were scheduled to start up this year, would have added about 2.4 million tons of new capacity.