OCC tightening in some markets, Kappa says

By Ken McEntee

Old corrugated container (OCC) prices remained relatively low during the first half of the year, but prices are showing signs of tightening in American markets, Smurfit Kappa executives said during a second quarter earnings call. On the heels of reports that China may double down on import restrictions by banning OCC, Smurfit Kappa executives hinted that Chinese buyers may be getting more active in Europe.

“Our view is that we are already starting to see some tightening up, especially in the American markets, said CEO Anthony Paul Smurfit. “The reality is that these low levels, as well as some secular trends such as e-commerce, which are showing more disposal of containerboard into landfill, I think that you’re going to see wastepaper prices going up. I don’t know if it’s going to happen in Europe in September or October or January, but it’s going to happen. We’re already seeing it in our Americas business, some trending upwards and some tightness in the market. And that’s despite China being out of the market. So I think one has to always work on the assumption that wastepaper is a temporary phenomenon. And in a sense, that’s good for us. We’ve always said that we got a short-term relief, but in the end we prefer high wastepaper costs.”

CFO Ken Bowles said OCC prices have gone up slightly in certain parts of Europe.

“We’ve seen it at the Rotterdam port and we’ve seen it in a couple central parts of Latin America,” he said. “So maybe the Chinese are coming back.”

Anthony Smurfit said China needs to address how it will fulfill its containerboard needs in the event that they ban OCC, as some reports have indicated.

“And I think we just saw this week that Vietnam was talking about doing something similar – banning mixed waste and OCC. And yet at the same time, you’re seeing OCC prices start to move up in the U.S. right now. And so there’s a lot of different trends in that whole area that are somewhat difficult to understand. I think the overarching trend that is true is that China is really fixed on making sure that it is seen as an environmentally clean country. I think they have decided that they are not going to be the junkyard for the world. Frankly speaking, they were receiving a lot of, literally, rubbish, and they’re saying, ‘No more.’ And so that is going to change the trends, but as to how it’s all going to play out, I think it’s really difficult to say right now. But I do think ultimately, whatever shift happens ultimately, OCC starts moving up.”

Overall, Smurfit Kappa reported a strong first half of the year.

“We are very pleased to deliver significant year-on-year improvement against all our key performance metrics in the first half of 2018,” Bowles said. “Pricing for both recycled containerboard and kraftliner were stable in the second quarter, after increases in both grades in the first quarter. Industry inventory levels of recycled containerboard remained below critical levels in June, highlighting the tight market situation notwithstanding some recent capacity additions. And finally, we completed the acquisition of Reparenco (a Dutch paper and recycling business) in the period. And this really secures our current and future recycled containerboard needs for the region. Our Americas business equally showed significant year-on-year improvement in the first half. The region continued to recover recent containerboard price increases, whereas you’ll recall we’re some 300,000 metric tonnes short of kraftliner. We will also benefit further from the ramping up of our 2017 paper machine investments in both Colombia and Mexico.”

Anthony Smurfit said the company projects good demand in most of its markets. “Global containerboard markets remain in a good situation,” he said.

Other highlight of the earnings call were:

  • Smurfit: The increasing focus on substitution of plastic and related substrates is very much in its infancy and is a truly fantastic opportunity for both Smurfit Kappa and the broader sector. In one example, Kappa has moved from a multi-material solution to a paper-based packaging solution, critically removing polystyrene from the packaging and replacing it with its paper-based honeycomb product.
  • Bowles: There is a tightness in wood supply for papermaking.
  • Smurfit generally said Kappa is in the market to buy, if an opportunity would arise. “Basically in the Americas we would obviously look to buy, but we really don’t have that many opportunities,” he said. “We have a very large deficit of paper. And we have trees in Colombia. We have a mill system in Colombia. We have expertise in Colombia, and we need kraftliner. So if we can make a project work down there, it’s something that we will consider doing, but I want to do that in a very controlled way.”
  • Recycled containerboard inventory levels in Europe are well below the critical level, Bowles said. Smurfit added that the market is in very good shape on the testliner side. “As you know, we just bought this company that was selling into the free market,” Smurfit said. “Most of the customers that they had, many of them we’ll retain maybe in a different shape and a different way because logistics costs are an issue for us. And as we sit here today, there’s been no pressure on testliner prices to go down. And ordinarily I think the market is very tight in that area.”
  • Asked about the impact of e-commerce on the box market, Bowles said, “It’s kind of difficult sometimes to define what e-commerce actually is because you’ve had customers for a long period of time. The (postal service) in the states, for example, which are the e-commerce institution kind of distribution partner. I think Europe is probably less advanced in this e-commerce model than the U.S. is. We’ve a lot of the e-commerce partners who use plastic bags to ship rather than corrugated, and indeed in the whole kind of idea of returnable e-commerce, which is again a growing trend.
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