Are the global OCC markets taking a breather – if so, for how long?
How high demand, changing recycling systems and supply chain issues have impacted the OCC markets around the world
After an extremely strong summer, the global OCC markets calmed in October-December 2021. The market softness started in Asia, where OCC import prices dipped in September-October and declined further in November and December. Affected by the movements in the Asian markets, US OCC prices edged downward in October for the first since November 2020 and continued to slide in through December.
Meanwhile, the European markets stabilized in October and softened in November and December, although Europe has continued to reduce its dependence on exports. So, what has happened to move the market into a different direction?
The strength in the global OCC markets had been supported for the last 18 months by three major developments:
- Strong demand from the paper packaging markets
- Changing recycling systems due to the pandemic and the rise in e-commerce
- Supply chain issues
Packaging demand: A fundamental factor in OCC market strength
Boosted by the exceptional containerboard markets, US OCC demand increased by 4% in 2020, the highest growth rate since 2011. The momentum continued in 2021, and OCC consumption grew by another 7% year on year in the first nine months of 2021. In addition to the broadly robust containerboard demand and production, new recycled-fiber-based containerboard capacity allowed OCC demand to expand at a faster pace than containerboard.
Similarly, Western European OCC demand increased by about 3% last year and is estimated to grow by another 5% in 2021. Asian OCC demand also rebounded in the second half of 2020 and the first half of this year thanks in part to the recovery of Chinese demand for paper packaging and recycled fiber. After all, a big portion of Southeast Asian and Indian OCC imports have been utilized to produce containerboard and recycled pulp to be shipped to China.
The demand strength can be seen in the trade data. Malaysian OCC imports surged by 374% in 2020 and increased by another 126% year over year in the first eight months of this year to feed its new recycled pulp and containerboard lines. Similarly, Thailand OCC imports jumped by 98% year on year in the first three quarters of this year. Overall, US OCC exports increased by 16% year over year through September 2021 despite China’s import ban, and exports to non-China Asia expanded by 96% during this period. At the same time, Australian OCC exports to non-China Asia skyrocketed by 132%.
Pandemic disruptions and e-commerce business boost OCC demand
On the supply side, the pandemic and the rapid growth in e-commerce affected the paper recycling business significantly. The pandemic interrupted the operation of paper recycling business in some regions, such as Asia and Europe, through restriction measures, including lockdowns, taken by various governments to curb the spread of infection.
Meanwhile, the rapid growth in e-commerce sent many more corrugated boxes into the residential waste stream, which in general has lower recycling rates than the commercial sector. Overall, paper recycling efficiency was lowered in 2020-21.
Added distribution steps complicate OCC trade
OCC flows have changed from 2020 to 2021. When China was allowing OCC imports, OCC sourced from North America, Europe, Oceania and Japan was exported to China, utilized to make containerboard in the country and then returned to the major OCC exporting regions in the form of corrugated boxes protecting Chinese export goods. However, since China implemented its import ban on all recovered paper grades, including OCC, at the end of 2020, OCC flows have changed substantially.
Now OCC is first shipped to Southeast Asia and India to be used to make recycled pulp and containerboard, which are then shipped to China to produce containerboard or/and be converted to corrugated boxes. The corrugated boxes are then sent to the major OCC exporting regions together with Chinese goods and eventually recycled as OCC in these regions.
The flow of OCC now has added steps, and the current shipping issues, such as port congestion and container shortages, have made the situation even more complicated. Therefore, there is a lot of OCC fiber on the water or stuck at various ports in the form of OCC, recycled pulp or corrugated boxes and not available to paper mills. Various local transportation issues in different regions also added extra pressure to the OCC supply chains. Mills’ OCC inventories reduced significantly, and mills had to pay higher premiums to secure the necessary supply to run their machines to fill orders.
Broadly speaking, these three developments all contributed to the extreme tightness of the global OCC markets late last year and in the first three quarters of this year. However, with the slowing in the Chinese economy and consumer spending, Chinese demand for paper packaging and recycled fiber has softened recently, which has slowed Southeast Asian and Indian OCC imports. Meanwhile, domestic OCC demand in North America and Europe has started to cool off a bit as containerboard inventories improved.
On the supply side, OCC collection in North America, Europe and other regions picked up somewhat in the fall due to the broader reopening of economies. Although the supply chain issues have not fundamentally improved, the shipping constraints are started to show signs of progress. All of the small changes have added up, and both the demand and supply sides of the global OCC markets now have an opportunity to take a breather. But how long it will last is unclear.
Demand and supply balance will remain tight
Where is the Chinese economy heading and how will that impact its manufacturing sector and paper packaging demand in the near term? When will Malaysia and/or Vietnam implement their mixed paper import bans and other restriction measures, if at all? Has the e-commerce-driven paper packaging demand boom leveled off in Europe and North America? On the supply side, how soon will the recycling industry improve its efficiency to catch up with OCC demand? When will the supply chain issues, including the shipping constraints, be resolved?
None of these questions are easy to answer and there is significant uncertainty about how long it will take to rebalance OCC demand and supply.
But one thing is certain: global containerboard production will continue to move toward recycled as the majority of planned capacity will be based on recycled fiber. This means the OCC demand and supply balance will remain tight in the medium and long term on a worldwide basis.