OCTOBER 2016 Where Might Additional Recovered Paper (RCP) Come from to Fuel China s Large and Expanding Containerboard Industry? By XIA Min, Senior Consultant, Fisher International Over the past 10 years, the Chinese containerboard industry has grown at a rapid pace of around 10% per year. Starting from a small base, it overtook US production in 2008 (Figure 1) and kept growing to became No. 1 in the global containerboard market (Figure 2), thanks to the decade-long boom in the Chinese economy. Now, China, the US and Japan together account for over 50% of the global containerboard market. Since China has such a huge containerboard business, its demand for raw fiber is one of the most important drivers shaping the global fiber trade. So we can t help but wonder about the future development of China s containerboard market, its fiber mix and where the industry might source additional fiber for its growing needs.
2 Let s look at the current status of fiber supply for China s containerboard industry. Unlike the US, recycle-based pulp (mainly OCC) dominates in fiber furnish (figure 3) as the country lacks wood raw material and imported wood pulp is much more expensive than recycled fiber. As a result, the linerboard produced in China can t compare with that produced in the US in terms of physical performance at the same grammage, but Chinese end users could use more walls in box construction to achieve the same physical performance at box level. That is one reason why there are more double- and triple-wall boxes in China than in the US. (Of course, not all boxes need to be made to the same performance levels. So a box made from 100% OCC is not necessarily inferior.)
3 In 2015, China imported 29 million tons of recycled paper to meet domestic demand, mainly from containerboard and recycle-based paper and paperboard sectors. North America, Western Europe and Japan were the key sourcing areas, together providing some 80% of China s total recycled paper imports (Figure 4). As China continues its containerboard expansion, based on announced projects as of Q3 2016 alone, approximately 13 million tons of containerboard is expected to come online by 2020 a 22% capacity increase from 2015 (Figure 5). This is a significant volume requiring large RCP resources. Just in 2017, an additional 9 million tons of RCP will be needed to back up such
4 investments (Figure 6). The question is, where could China get the additional RCP from? Let s look at anticipated developments in containerboard among the top RCP sourcing countries a pool that provides resources which could potentially support China s containerboard expansion (Figure 7). Containerboard in Japan is stagnant while that of Western Europe and North America has been growing but is, nevertheless, unlikely to see any dramatic increase in the years ahead certainly nothing like what we will see in China. Assuming the collection rate of recycled paper (OCC) does not change significantly (Fisher does expect collection rates to reach the practical limits eventually), the increase of OCC attained from new capacity outside of China (around 2 million tons) is not nearly enough to support the 15 million tons of OCC required for China s 13 million tons of new capacity. Meanwhile, since these three areas represent about 70% of the world s capacity (excluding China), China has no choice but to mainly import from these areas.
5 So, can we get more recovered fiber above and beyond anticipated new capacity in those regions? The answer is yes but not from Japan which already collects about 97% of the OCC available in the country. [ Recovery of old corrugated container is estimated to have been about 97%, derived by discounting the published figures by about 16% to eliminate the impact from the counting of corrugated container that entered the country as packaging for imported goods. - Japan Paper and Recycling Promotion Center 1.] For the US and Western Europe, although the apparent OCC collection rate is high at 90% or above 2, the actual collection rate (removing corrugated container imported along with products) is estimated at 70-80%. Room exists for further improvement in OCC collection in these two regions as we think the global practical collection rate could be 85-90%. This means that China could get an additional 5-9 million tons of OCC from the US and Europe. However, the recovery cost might go up with the marginal increase in collection rates and, together with intentions to get more volume from these markets, China has to consider its competitiveness since OCC prices might gradually raise as a result. Other than the overseas markets, the Chinese domestic market is huge and worthy of consideration as a significant OCC resource. The current waste paper collection rate in China is estimated at around 47% which is far below Europe at 70% or Japan at over 80%, for example. So China appears to be a promising source of abundant OCC provided it increases collection rates. Unfortunately, China mirrors the misleading calculations of collection rates in other world regions in that its actual OCC collection is probably higher than estimated since a big portion of containerboard consumption in China is for export purposes (boxes are exported as the packaging of end products which should be excluded from calculating the real collection rate) and thus, the real collection rate is much higher than the apparent one. Adjusted for exports, the OCC collection rate in China is not far behind that of Western Europe or the US, at around 70% or even higher. Like Western Europe and the US, China could further raise OCC domestic collection to meet the increasing OCC demand. If the collection rate increases by 5-10%, then 1-4 million tons of additional OCC could become available. Among the issues that need further consideration is the fact that China s domestic OCC quality is inferior to that of imported OCC due to its low percentage of virgin pulp and its recycling process is below the standard in advanced countries (e.g., fewer categories of OCC and more impurities such as sand). Hence in order to maintain the same performance quality, more chemicals might be used to strengthen physical properties. Moreover, it is possible that virgin pulp content might be increased slightly to compensate for the shortcomings of more domestic OCC in the mix.
All in all, RCP resources would be sufficient to support China s expanding containerboard industry in the near future. The US and Western Europe would continue to be the most important sources for OCC imports while China s domestic market would play an increasingly important role. However, the marginal increase of collection rates would possibly cause collection cost to rise gradually in the long term adding to the price volatility that comes with demand, supply, and inventory situation. Containerboard producers have to prepare themselves for the coming competition. Integration or alliance with converters and collection centers, or investment in collection systems could be options. We at Fisher look forward to helping the industry navigate the challenges. Click here to learn more about our forecast models of OCC prices. 1. For Fisher International s thinking on OCC collection and availability, see Fisher Webinar Is the World about to Run Out of OCC? Presented by Tedd Powers (March 10, 2016) 2. Source: AF&PA and CEPI XIA Min can be reached at xmin@fisheri.com Fisher International, Inc. 50 Water Street Norwalk, CT 06854 USA +1 203 854 5390 www.fisheri.com