UK exports of recovered paper, a risk analysis, April 2007 … · 2019-05-09 · UK exports of recovered paper, a risk analysis, April 2007 Assessment of the UK export market for

UK exports of recovered paper, a risk analysis, April 2007

Assessment of the UK export market for recovered paper

The study assesses trends in the global market for recycled paper and board and the UK’s changing position in this market. It analyses the impact of alternative forecast scenarios to 2015, the nature of the risks to the forecast and possible ways to mitigate these risks

Project code: MSP010 ISBN: 1-84405-325-3 Research date: April 2007 Date: June 2007

Front cover photograph: Recovered fibre at UPM-Kymmene Shotton Paper Mill

WRAP, Hawkins Wright Ltd, UK, and EU Consulting believe the content of this report to be correct as at the date of writing. However, factors such as prices, levels of recycled content and regulatory requirements are subject to change and users of the report should check with their suppliers to confirm the current situation. In addition, care should be taken in using any of the cost information provided as it is based upon numerous project-specific assumptions (such as scale, location, tender context, etc.). The report does not claim to be exhaustive, nor does it claim to cover all relevant products and specifications available on the market. While steps have been taken to ensure accuracy, WRAP cannot accept responsibility or be held liable to any person for any loss or damage arising out of or in connection with this information being inaccurate, incomplete or misleading. It is the responsibility of the potential user of a material or product to consult with the supplier or manufacturer and ascertain whether a particular product will satisfy their specific requirements. The listing or featuring of a particular product or company does not constitute an endorsement by WRAP and WRAP cannot guarantee the performance of individual products or materials. For more detail, please refer to WRAP's Terms & Conditions on its web site: www.wrap.org.uk

Published by Waste & Resources The Old Academy Tel: 01295 819 900 Helpline freephone Action Programme 21 Horse Fair Fax: 01295 819 911 0808 100 2040 Banbury, Oxon E-mail: [email protected] OX16 0AH

Assessment of the UK export market for recovered paper 1

Executive summary Global paper and board consumption has grown at an annual average growth rate of 2.9% pa for 1990-2005.In common with the rest of the developed world the UK has seen a lower growth rate of 1.9% pa for the same time period, and indeed UK paper and board consumption has stabilised at around 12.5-13.0Mt since the late 1990s. Despite this low growth rate, the UK has seen its import deficit rise from 4.5Mt in 1990 to nearly 6.5Mt in 2005 due to decreases in production and capacity, most notably in recent years. The UK now has the capacity to produce 5.6Mt or 45% of the paper and board it consumes. Despite an increasing RCF utilisation rate between 1990 and 2005 the decrease in production has led to an actually decrease in RCF usage by about 375,000t since 2000. Against this background of reduced UK paper and board manufacturing capacity reducing the RCF utilisation there are many drivers to increase the collection of recovered fibre in the UK. Most notably legislation in terms of the targets for the diversion of biodegradable waste from landfill in the Landfill Directive and Local Authority recycling rate targets and voluntary agreements between the government and the paper industry. In 2006 just over 8.1Mt of paper and board was recovered in the UK; 4.1Mt was re-processed into recycled paper and board in the UK, and 4.0Mt exported for the same purpose; this is a tenfold increase from 1990, and has a current estimated value of around £300 million. Collection is predicted to grow by over 20% to over 10 million tonnes in 2015, although UK share of global exports is likely to remain static at about 8%. This export volume has been increasing at an average rate of over 16%pa since 2001 and this is likely to continue, although at a slower rate, as recovery increases. This exposes the UK recovered fibre market to three risks; volume risk, the possibility that surplus of RCF available for the export from the UK is too large to be absorbed by the world market; price risk, that possibility that although sufficient export opportunities may exist the market price of RCF is insufficient to cover the collection costs; the political risk is that political or environmental pressure, directly or indirectly, limit the UK’s export opportunities. This study concludes that the UK should be able to export its surplus RCF onto the world market since much of the rapid growth in paper and board capacity in Asia, will be sufficiently dependant upon imported RCF to absorb the projected surpluses. Indeed there is some concern that the worldwide supply of RCF may be insufficient to provide fibre for all the new Asian mills. This study predicts that by 2015 China’s RCF demand will account for 58% of the world trade in RCF. China already accounts for 50% of UK exports and this volatile demand is directly linked to the fragility of the Chinese economy. Such exposure to one market, especially one so large, could introduce another element of risk, as any change, however small, in the growth of Chinese paper and board production growth would have a greater impact on import demand, and international RCF prices. India, with its population of more than one billion people is clearly a paper ad board market with great potential. However, this potential is till largely unrealised with India’s paper and board production at 6.6 million tonnes in 2005 compare to the 56 million tonnes of China for a population estimated to be around 1.3 times that of China. In the long term India will be increasingly influential in the global paper and board market with implications for Europe and the UK in particular due to traditionally close Anglo/Indian business links. Mitigation of this risk could be to increase investment in UK production capacity to reduce the UK’s reliance on the export market. Strengthening of relationships with overseas importers of RCF could also be helpful, particularly if long term contractual arrangements could be secured to guarantee a certain level of off-take. This could also enable the negotiation of longer term shipping rate contracts and thereby further revenue control can be achieved.


It is also necessary for the UK to ensure that its RCF surplus quality and availability matches the demand of the local and overseas markets where possible, the price risk may also be partially mitigated by this strategy. If recycling and legislation targets were framed around quality and value in addition to volume this would further guarantee that the UK surplus was in demand overseas. The baseline forecasts used in this report show that by 2015 the UK could be importing 7.9M tpa of paper and board and exporting 6.2M tpa RCF. This equates to the export of 60% of the UK’s recovered fibre compared with just 16% from the rest of Europe.


Contents 1.0 Global overview........................................................................................................................ 5

1.1 Paper and board consumption ..............................................................................................5 1.2 Paper and board production .................................................................................................5 1.3 RCF collection and utilisation ................................................................................................6 1.4 International trade in recovered paper ..................................................................................6

2.0 The United Kingdom................................................................................................................. 8 2.1 Paper and board consumption ..............................................................................................8 2.2 Paper and board production .................................................................................................8 2.3 Recovered fibre utilisation....................................................................................................9 2.4 Recovered fibre collection ....................................................................................................9

2.4.1 ONP/OMG ............................................................................................................10 2.4.2 OCC + Kraft .........................................................................................................10 2.4.3 High Grades .........................................................................................................10 2.4.4 Mixed Grades .......................................................................................................10

2.5 The UK’s net trade in RCF ..................................................................................................11 3.0 Global overview (excluding the UK) ...................................................................................... 12

3.1 West Europe (excluding the UK) .........................................................................................12 3.2 North America...................................................................................................................13 3.3 Japan...............................................................................................................................13 3.4 China ...............................................................................................................................13 3.5 Asia (excluding Japan and China) .......................................................................................15 3.6 The rest of the world.........................................................................................................15

4.0 Alternative forecast scenarios................................................................................................ 16 4.1 The United Kingdom..........................................................................................................16 4.2 Other West Europe............................................................................................................17 4.3 North America...................................................................................................................18 4.4 China ...............................................................................................................................18 4.5 The impact on RCF pricing .................................................................................................19

5.0 Conclusions ............................................................................................................................ 20 5.1 Volume risk ......................................................................................................................20

5.1.1 Opportunities for investment in recycled paper capacity ...........................................20 5.1.2 Strengthen relationships with overseas buyers of RCF ..............................................20 5.1.3 The manner and enforcement of regulations ...........................................................20 5.1.4 The need to improve the sorting of RCF and to avoid the collection of mixed grades...21 5.1.5 Provide incentives to encourage the better sorting of RCF ........................................21

5.2 Price risk ..........................................................................................................................21 5.2.1 Landfill taxes safeguard the profitability of recycling.................................................21 5.2.2 Shipping costs ......................................................................................................21


Glossary OCC Old Corrugated Containers OMG Old Magazines ONP Old Newsprint P&B Paper and Board RCF Recovered fibre Recovery rate The collection (recovery) of recovered fibre (RCF) divided by the

consumption of unconverted paper and board, expressed as a percentage. Note that the consumption of unconverted P&B is not necessarily indicative of the amount of P&B that is available for collection. The export of converted products, for example as packaging or publications, will reduce the amount available for collection. Likewise imported converted products will increase the amount of P&B available for collection.

Utilisation rate The consumption (utilisation) of RCF divided by the production of

paper & board, expressed as a percentage


Mass balance assessment and baseline forecasts 1.0 Global overview 1.1 Paper and board consumption Global paper and board consumption has grew from 239 million t in 1990 to close to 368 million t in 2005, or by an average annual growth rate of 2.9% p.a. The study predicts that this rate of growth will continue, taking global paper and board consumption to more than 492 million t in 2015 (Table 1). Slowing demand growth in the industrialised countries (particularly North America and Western Europe) will be counterbalanced by sustained growth in Eastern Europe, China and the rest Asia. By 2015, the average global growth rate is forecast remain at around 3.0% p.a., mainly because China’s relative weight in the global average is growing continuously. Table 1: Global consumption of paper & board by region, 1990-2015 thousand tonnes

1990 2000 2005 2008 2012 2015 1990-05 2005-15

WORLD TOTAL 239069 325614 367779 402932 451580 492685 +2,9% +3,0%

West Europe 60225 81402 83085 87104 92272 96155 +2,2% +1,5%

UK 9409 12887 12516 13027 13165 13300 +1,9% +0,6%

Other WE 50816 68515 70569 74077 79107 82855 +2,2% +1,6%

North America 83408 100604 98223 99628 98926 98115 +1,1% -0,0%

Japan 28218 31851 31548 32088 32605 33010 +0,7% +0,5%

China 14374 37022 57692 71605 94675 115185 +9,7% +7,2%

Other Asia 16764 31329 39096 45932 54606 61590 +5,8% +4,6%

Rest of the World 36080 43406 58135 66575 78496 88630 +3,2% +4,3%

% change p.a.forecast

Source: Hawkins Wright, EU Consulting The highest consumption growth rates will be seen in tissue (+3.9% p.a.), corrugating materials (+3.7% p.a.) and woodfree papers (+3.2% p.a.) (Table 2). Global newsprint consumption grew slowly in 1990-2005 (2005 being exceptionally weak), but over the next decade is should benefit from continued growth in China and Eastern Europe in particular. North American newsprint consumption will continue to decline. Table 2: Global consumption of paper & board by grade, 1990-2015 thousand tonnes

1990 2000 2005 2008 2012 2015 1990-05 2005-15

Total Consumption 239069 325614 367779 402932 451580 492685 +2,9% +3,0%

Newsprint 34195 40534 39395 42376 45486 48235 +0,9% +2,0%

Mechanical P&W 22240 29159 32666 35771 39575 42615 +2,6% +2,7%

Corrugating materials 65100 98569 117247 131620 151716 169065 +4,0% +3,7%

Woodfree P&W 46223 70241 80045 89285 101119 111005 +3,7% +3,3%

Tissue 13960 21175 25862 28877 33644 37720 +4,2% +3,8%

Others 57351 65936 72564 75003 80040 84045 +1,6% +1,5%

forecast % change p.a.

Source: Hawkins Wright, EU Consulting 1.2 Paper and board production As with consumption, production growth will be concentrated in the developing world and particularly in China and the rest of Asia (Table 3). The share of global production taking place in West Europe, North America and Japan will fall from 62% in 2005 to 49% in 2015. Conversely, the share of production taking place in China, Other Asia and the Rest of the World is forecast to rise from 38% to 51% over the same period.


Table 3: Global production of paper & board by region, 1990-2015 thousand tonnes

1990 2000 2005 2008 2012 2015 1990-05 2005-15

WORLD TOTAL 239629 325549 367752 402932 451580 492685 +2.9% +3.0%

West Europe 63290 88656 94647 99456 105039 109230 +2.7% +1.4%

UK 4912 6604 6033 5415 5380 5415 +1.4% -1.1%

Other WE 58378 82052 88614 94041 99659 103815 +2.8% +1.6%

North America 88017 106876 102463 102463 100960 99200 +1.0% -0.3%

Japan 28086 31828 30951 31580 32170 32655 +0.6% +0.5%

China 13635 30844 56000 71195 95135 116600 +9.9% +7.6%

Other Asia 13834 31307 38535 44317 53217 60835 +7.1% +4.7%

Rest of the World 32767 36038 45156 53921 65059 74165 +2.2% +5.1%

% change p.a.forecast

Source: Hawkins Wright, EU Consulting 1.3 RCF collection and utilisation In 2005, the raw materials used to manufacture the 368 million t of paper and board produced worldwide comprised 186 million t of recovered paper (RCF), 188 million t of primary fibre, mainly woodpulp, and approximately 50 million t of minerals and fillers (kaolin, calcium carbonate etc.). The apparent loss of raw material during the conversion into finished paper amounted to about 50 million t. These processing losses include fines, sludge, moisture etc. and unusable RCF, including the clays/fillers etc that the RCF contains. If it is assumed that the losses from woodpulp were 5% and the balance from was from RCF, the figures imply an average RCF yield of approximately 78%. Looking ahead, RCF is forecast to account for a steadily increasing share of the global papermaking furnish (Table 4). In 2005, the global utilisation rate was 51%, having increased from 36% in 19901. By 2015, the global utilisation rate is expected to reach 58%, implying the consumption 286 million t of RCF: i.e. during 2005-2015 global RCF utilisation is expected to grow by 4.4% pa or by 100 million t. Recovered fibre collections will follow the pace of utilisation on a global scale. Recoveries and utilisation show a steadily rising trend. OCC + Kraft grades will show the highest global collection rate (83% in 2015 v 77% in 2005), followed by ONP/OMG (69% in 2015 v 62% in 2005).). Table 4: World total - RCF utilisation and utilisation rate, 1990-2015 thousand tonnes

1990 2000 2005 2008 2012 2015 1990-05 2005-15

Total Utilisation 86613 152540 186211 213854 252162 286164 +5.2% +4.4%

ONP +OMG 18912 36686 44461 50382 57732 64074 +5.9% +3.7%

OCC + Kraft 37431 69832 90595 103942 123605 141258 +6.1% +4.5%

High grades 10996 16816 17030 19968 23208 26020 +3.0% +4.3%

Mixed 19274 29206 34125 39562 47617 54812 +3.9% +4.9%

Utilisation rate 36% 47% 51% 53% 56% 58% +14% pt +7% pt


Source: Hawkins Wright, EU Consulting 1.4 International trade in recovered paper In 2005, the total volume of world trade in RCF was approximately 42.3 million t: i.e. around 23% of total recovered RCF was traded internationally and 77% was consumed in the country in which it was collected (Table 5). By 2015, world trade in RCF is forecast to reach 77 million t, by when it will account for 27% of total worldwide collections of RCF.

1 The utilisation rate is calculated by dividing RCF utilisation by paper and board production.


Table 5: Global trade in RCF, by grade, 1990-2015 thousand tonnes

1990 2000 2005 2008 2012 2015 1990-05 2005-15

WORLD TOTAL 12248 26762 42313 54000 68000 77000 +30065 +34687

ONP + OMG - - 14000 17000 21000 23000 - +9000

OCC + Kraft - - 15000 20000 25000 29000 - +14000

High grades - - 3500 5000 7000 8000 - +4500

Mixed - - 9800 12000 15000 17000 - +7200

forecast Change

Source: Hawkins Wright, EU Consulting Net RCF exports from developed regions to less developed regions were almost 24 million t. By 2015, the flow of trade between the two regional groups will more than double to 48.5 million t. There are sound economic reasons for this increasing flow of trade:

North America and Europe are fibre-rich with well developed and highly productive forest industries. In

contrast, much of the developing world, and in particular China and East Asia, has very limited forest

resources. (China, for example, has 20% of the world’s population but only 4% of its forests.) True, there are

extensive forest resources in parts of the developing world – in Latin America and Indonesia, for example –

and in Russia, but the most rapidly developing countries in Asia are dependent on imports for the majority of

their fibre requirements.

There is a natural inverse relationship between the regional trade balances in manufactured goods and the

trade balances in RCF. As the Chinese and Asian economies develop and become the world’s principal

manufacturing bases – with large trade surpluses in manufactured goods with North America and Europe –

the flow of packaging and printed materials wrapped around these manufactured goods is steadily rising.

These materials become available for collection in the country in which the manufactured goods arrive: i.e.

very often North America and Europe. These materials must be returned for reuse either as finished paper

and board or, more likely, as RCF.

Figure 1 summarises the baseline forecast net trade balances of the different regions through 2015. An important point to note is that by 2015, China’s net imports will represent nearly 60% of world trade in RCF, up from 40% in 2005. The growing importance of China in the global market for RCF, and the risks that this implies, is a theme is a central theme of this report.


Figure 1 Global trade balances, 2005 and 2015.

-23591

+23772

-48519

+48519

-60000

-40000

-20000

-

+20000

+40000

+60000

W Europe, N America, Japan China, Other Asia, ROW

thou

sand

tonn

es2005

2015

Source: Hawkins Wright, EU Consulting 2.0 The United Kingdom 2.1 Paper and board consumption Paper and board consumption in the UK has stabilised at a level of 12.5-13.0 million t/y since the late 1990s. Advertising spending growth has been weak and consequently so has the demand for printed media. Also, rising imports, particularly of manufactured goods has hit the manufacturing sector with knock-on effects on the domestic packaging industry. Since 1990, consumption has grown by 1.9% p.a. Going forward paper and board consumption will grow at a slower rate than in the past. Consumption will remain cyclical, but the study’s baseline forecast for UK paper and board consumption sees growth of just 0.6% p.a. over the period 2005-2015 (Table 6). Table 6: United Kingdom - Consumption of paper & board 1990-2015 thousand tonnes

1990 2000 2005 2008 2012 2015 1990-05 2005-15


Total Consumption 9409 12887 12516 13027 13165 13300 +1,9% +0,6%

Newsprint 1859 2617 2565 2650 2725 2765 +2,2% +0,8%

Mechanical P&W 1118 1422 1493 1500 1525 1540 +1,9% +0,3%

Corrugating materials 2059 2536 2376 2450 2475 2490 +1,0% +0,5%

Woodfree P&W 2057 3399 3209 3400 3440 3465 +3,0% +0,8%

Tissue 576 905 991 1077 1180 1260 +3,7% +2,4%

Others 1740 2008 1882 1950 1820 1780 +0,5% -0,6% Source: Hawkins Wright, EU Consulting 2.2 Paper and board production Paper and board production in the UK has grown even more slowly than domestic consumption, and indeed both production and capacity contracted sharply during the past two years.2 The only sector where investments have continued to be made is the tissue sector. As a result, the UK’s import deficit of all paper and board grades has risen from 4.5 million t in 1990 to nearly 6.5 million t in 2005.

2 In 2006, UK production of paper and board totalled 5.6 million t, 7.5% less than in 2005.


The outlook for the UK paper and board industry is not promising. Expansion plans are few and are very much concentrated on tissue, while in other grades mills and machines have been closing. Even though some new investments could utilise the available RCF, energy and labour costs eliminate the small advantage of raw material availability. The study’s baseline production forecast assumes that, with the exception of tissue, the only other significant investment in paper and board capacity in the UK in 2007-2015 will involve one new newsprint machine. The baseline forecast is for UK production of paper and board to drop from 6.0 million t in 2005 to 5.4 million t in 2015, or by 1.1% pa (Table 7). Table 7: United Kingdom – Production of paper & board, 1990-2015 thousand tonnes

1990 2000 2005 2008 2012 2015 1990-05 2005-15

PAPER & BOARD

Total Production 4912 6604 6033 5415 5380 5415 +1.4% -1.1%

Newsprint 696 1100 1135 1110 1230 1295 +3.3% +1.3%

Mechanical P&W 167 273 268 290 300 320 +3.2% +1.8%

Corrugating materials 1325 1872 1691 1325 1100 1100 +1.6% -4.2%

Woodfree P&W 1078 1473 1252 1065 1090 1000 +1.0% -2.2%

Tissue 448 724 794 875 960 1050 +3.9% +2.8%

Others 1198 1162 893 750 700 650 -1.9% -3.1%


Source: Hawkins Wright, EU Consulting 2.3 Recovered fibre utilisation UK recovered fibre utilisation grew at a rate of 3.0% p.a. between 1990 and 2005. However, since 2000 annual recycled fibre consumption has declined by 375,000 t. This is directly related to the decrease in paper & board production. The utilisation rate increased marginally from 74% in 2000 to 75% in 2005. Recycled fibre utilisation will have been further affected, negatively, by the mill closures in 2005-2006: RCF utilisation declined by 7.5% in 2006 to 4.17 million tonnes. The baseline forecast predicts that UK RCF utilisation will total 4.0 million t in 2015, down from 4.5 million t in 2005. The decrease is almost entirely related to the expected fall in the production of corrugating materials (Table 8). Table 8: United Kingdom - RCF utilisation and utilisation rate, 1990-2015 thousand tonnes

1990 2000 2005 2008 2012 2015 1990-05 2005-15

Total Utilisation 2876 4882 4507 3986 3953 4049 +3.0% -1.1%

ONP + OMG 558 1373 1545 1491 1624 1695 +7.0% +0.9%

OCC + Kraft 1348 2182 1890 1603 1434 1424 +2.3% -2.8%

High grades 375 898 759 710 751 788 +4.8% +0.4%

Mixed 595 429 313 182 144 142 -4.2% -7.6%


Source: Hawkins Wright, EU Consulting 2.4 Recovered fibre collection Recoveries of paper and board have increased sharply in the UK during the past few years. Throughout the 1990s, the UK was amongst the group of countries with the lowest recovery rates in Western Europe, but the collection rate has increased very rapidly from 40% in 1998-1999 to 62% in 2005 and, according to preliminary figures, to 64% in 2006 (Table 9). Voluntary agreements have contributed to the increase, but legislation and targets that oblige local authorities to organise collections have accelerated the growth in recoveries.


Figure 2 The collection (recovery) of RCF versus its utilisation in the UK. Note the widening export

surplus

-

2000

4000

6000

8000

10000

12000

1990 1995 2000 2005 2010 2015

thou

sand

tonn

esUtilisationRecovery

Table 9: United Kingdom - RCF recovery 1990-2015

thousand tonnes1990 2000 2005 2008 2012 2015 1990-05 2005-15

Total Recovery 3121 5336 7765 8681 9661 10208 +6.3% +2.8% ONP + OMG 571 1607 1768 3237 3719 3961 +11.1% +3.6% OCC + Kraft 1387 2172 1694 2879 3156 3312 +4.5% +2.1% High grades 418 987 949 1102 1226 1351 +5.6% +3.6% Mixed 745 570 1354 1463 1560 1584 +4.1% +1.6%


Source: Hawkins Wright, EU Consulting 2.4.1 ONP/OMG The collection rate of ONP/OMG has increased from 19% in 1990 to 68% in 2005 and there is still room for further increases. The collection rate is expected to exceed the Western European average: a collection rate of 77% is predicted for the UK in 2015. Note that this forecast assumes a relatively high degree of sorting, particularly of household collections. However the trend is now towards co-mingled collections, which typically produce increasing quantities of Mixed Grades (which are mostly exported). If there is no price incentive for sorting for the export market, an increasing share of ONP + OMG collections will appear in the Mixed Grades category. The categorisation of RCF into either ONP/OMG or Mixed Grades, is largely a function of the available infrastructure, RCF prices relative to sorting costs and sales opportunities. 2.4.2 OCC + Kraft OCC and Kraft collections have traditionally been tapped quite successfully in the UK. In 2005, the OCC collection rate in the UK was 113%. However, this is misleading as earlier studies show that there may be at least one million tonnes (if not 1.2 million t) of packaging materials arriving to the UK wrapped around imported goods. Excluding these indirect imports of corrugating materials, the “actual” recovery rate in 2005 was around 75-80% in the UK. The baseline forecast shows the OCC recovery rate rising to 133% in 2015, although the actual rate will be around 90-95% depending, of course, on the development of indirect imports. 2.4.3 High Grades High Grade collections, mainly originating from offices and printing plants, have increased slowly but steadily. For this grade of recovered material the main problem has been, and will continue to be, weak demand growth from most end-use sectors apart from the tissue sector. High collection and deinking costs (due to a high percentage of sludge from pigments and fillers) make collection unattractive. 2.4.4 Mixed Grades Mixed Grades are the fraction that remains from different collections, typically as unsorted materials. A lot of household collection, and part of office collections, are categorised as Mixed Grade because sorting may not be


economically viable. For this reason, the collection rate of mixed grades, calculated from the consumption of “other paper and board”, is misleading and can easily exceed 100% when large quantities of ONP+OMG and some office paper (High Grade) collections and are sold as mixed grades. Mixed grade collections have not been popular in the UK. However, they are expected to rise with increasing collection efficiency: all paper and board materials are increasingly collected, not just the most valuable grades on a selective basis as was the case to a great extent in the 1990s. However, the recovery of Mixed Grades is forecast to grow more slowly than that of other grades (by 1.6% p.a. during 2005-2015) on the assumption that household collections will be subjected to a relatively high degree of sorting. 2.5 The UK’s net trade in RCF The UK has traditionally been a net exporter of recovered fibre, although in the past the net export surplus was rather small. It was only in late 2002 that exports started to increase very rapidly. Exports are currently running at 350,000-400,000 t per month and in calendar year 2006 exports reached almost 4 million t.3 The baseline forecast indicates that the UK export surplus of RCF will grow to 6.2 million t by 2015 (Table 10). The main surplus will continue to be in ONP+OMG, as a result of only moderate investments in ONP+OMG recycling capacity in 2007-2015. Table 10: United Kingdom - Net trade in RCF, 1990-2015 thousand tonnes

1990 2000 2005 2008 2012 2015 1990-05 2005-15

Total Net Trade +245 +454 +3258 +4695 +5708 +6159 +18.8% +6.6%

ONP + OMG +13 +234 +1223 +1746 +2095 +2266 +35.4% +6.4%

OCC + Kraft +39 -10 +804 +1276 +1722 +1888 +22.4% +8.9%

High grades +43 +89 +190 +392 +475 +563 +10.4% +11.5%

Mixed +150 +141 +1041 +1281 +1416 +1442 +13.8% +3.3%


Source: Hawkins Wright, EU Consulting The export surplus of OCC + Kraft grades will grow by more than one million tonnes from 0.8 million t in 2005 to 1.9 million t in 2015. Transport packaging materials from imported manufactured goods will form a substantial additional potential that will be increasingly mobilised into UK collections.

Figure 3 UK exports of RCF have grown from about 50,000 t a month in 2001 to over 350,000 t a

month in late 2006

0

50

100

150

200

250

300

350

400

450

Jan-01

Jul-01

Jan-02

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

thou

sand

tonn

es

Monthly data

3 month moving average

3 the net trade, after allowing for imports, was 3.8 million t


Figure 4 UK net exports of RCF are expected to continue to expand, reaching 6.2 million t in 2015,

from 3.8 million t in 2006

-200-

+200+400+600+800

+1000+1200+1400+1600+1800+2000+2200+2400+2600

1990 1995 2000 2005 2010 2015

thou

sand

tonn

esONP/OMGOCC KraftHigh GradesMixed

Source: Hawkins Wright, EU Consulting High grades will also see major growth in the surplus, although from a much smaller base. However growth may depend more on export demand rather than the still vast untapped collection potential. The export surplus of Mixed Grades is not expected to grow significantly. But, the volume of mixed grade exports could be substantially higher than forecast if the sorting of household collections does not develop to the extent that the study assumes, with the result that parts of the ONP+OMG and High Grade streams are sold as Mixed Grade RCF to the packaging paper and board mills. 3.0 Global overview (excluding the UK) 3.1 West Europe (excluding the UK) West Europe (excluding the UK) was a net importer of recovered paper from North America until the mid-1990s, but since then the region has increased its net export surplus. The surplus peaked at just under 2.5 million t in 1999. This development was mainly due to the increased collections and export surplus in one country, Germany. But massive new investments in recovered fibre-using paper and board capacity in 1999-2003, together with falling domestic paper and board consumption, reduced the German and other West European surplus in 2000-2003. Improved collections in countries such as Italy, France and a number of smaller countries have contributed to the growth of the surplus after 2003, in spite of the fact that several new investments in new paper machines (mainly corrugating materials) were realised in 2004-2005. The closure of older machines released RCF for the new machines. France turned from a net importer to a net exporter in 2003 and Italy in 2004. By grade, OCC/Kraft grades have been and will remain the main export grade, but the ONP/OMG surplus from household collections is expected to grow substantially towards the end of the forecast period (Table 11). Part of this material will be exported as Mixed Grades.

Table 11: Other West Europe - Net Trade in RCF, by grade, 1990-2015 thousand tonnes

1990 2000 2005 2008 2012 2015 1990-05 2005-15

Total Net Trade -1091 +2430 +3406 +5658 +7921 +9650 n/a +11.0%

ONP + OMG -112 +454 +215 +1162 +1898 +2472 n/a +27.7%

OCC + Kraft -315 +1318 +2532 +3016 +4192 +5045 n/a +7.1%

High grades -164 +222 +374 +339 +416 +543 n/a +3.8%

Mixed -500 +436 +285 +1141 +1415 +1590 n/a +18.8%


Source: Hawkins Wright, EU Consulting


3.2 North America North America – or predominantly the USA – has been the dominant contributor to global trade in recovered fibre. Net exports (excluding exports of some 2.2 million t to Canada) have grown from 6 million t in 1990 to 11.3 million t in 2005. China is today the by far most important trading partner for US recovered fibre. Export demand is the main driving force in the US recovered fibre business today. Opportunities emerging in Asia, mainly China, have attracted several new trading companies to enter this business for purely economic reasons. The study’s baseline forecast is that North American net exports of recovered fibre will double by 2015 (Table 12). Low domestic demand, escalating export demand and improving collection efficiency all point in this direction. Net exports are expected to account for slightly more than one-third of all North American recovered fibre collections by 2015. Table 12: North America - Net Trade in RCF, by grade, 1990-2015 thousand tonnes

1990 2000 2005 2008 2012 2015 1990-05 2005-15

Total Net Trade +6098 +9035 +13475 +18731 +23690 +27002 +5.4% +7.2%

ONP + OMG +1534 +3263 +3872 +5444 +7227 +8543 +6.4% +8.2%

OCC + Kraft +2276 +2943 +5981 +8322 +10038 +11185 +6.7% +6.5%

High grades +1220 +1438 +1555 +2320 +3070 +2945 +1.6% +6.6%

Mixed +1068 +1391 +2067 +2645 +3355 +4329 +4.5% +7.7%


Source: Hawkins Wright, EU Consulting OCC + Kraft grades will continue to be the main export grade. AOCC (American OCC) is a preferred raw material at Asian (Chinese) mills because of its high quality and reliable deliveries. Some companies, such as Nine Dragons and Lee & Man are examples of dependence on AOCC: there are financial ties/integration between recovered fibre collecting/trading companies and paper mills located in China. 3.3 Japan Since 2001 Japan’s net exports of RCF have been growing and this trend seems set to continue. The study concludes that Japanese net exports in recovered fibre will rise from 3.6 million t in 2005 (3.8 million tonnes in 2006) to reach 5.7 million t by 2015 (Table 13). China is the main export destination, but exports to Thailand and Taiwan have also been large. Table 13: Japan - Net Trade in RCF, by grade, 1990-2015 thousand tonnes

1990 2000 2005 2008 2012 2015 1990-05 2005-15

Total Net Trade -612 +94 +3633 +4430 +5277 +5708 n/a +4.6%

ONP + OMG -70 +120 +1501 +1513 +1668 +1599 n/a +0.6%

OCC + Kraft -460 -43 +1558 +2093 +2416 +2844 n/a +6.2%

High grades -81 -35 +90 +162 +360 +404 n/a +16.2%

Mixed -1 +52 +484 +662 +833 +861 n/a +5.9%


Source: Hawkins Wright, EU Consulting Japan has a surplus mainly in ONP/OMG and OCC + Kraft grades. Recently also Mixed Grades exports have started to grow, although Japanese traders prefer sales of sorted materials because of their collection systems that produce mainly separated materials. For Asian buyers, Japanese ONP/OMG and OCC + Kraft have been a welcome alternative to supplies from North America and Europe. Japanese grades are liked because they are mostly free from contaminants, but on the other hand, collections include mainly grades that include a very high content of recycled fibre and very little virgin fibre. Fibre properties tend to deteriorate, and the share of fines to increase, with materials recycled several times, causing thus higher fibre losses during processing. 3.4 China China has rapidly developed into the world’s largest importer of recovered fibre. Imports have grown from less than 0.5 million t in 1990 to over 17 million t in 2005 and to a provisional estimate of 19.6 million t in 2006. North America continues to be the main source of imports (47% in 2005), followed by West Europe (27%) and Japan (18%).


Figure 5 China’s imports of RCF, by origin

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1998 1999 2000 2001 2002 2003 2004 2005

thou

sand

tonn

es

Australasia

Hong Kong

Japan

Europe

Americas

Source: China Customs

Figure 6 China’s imports of RCF, by grade

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1999 2000 2001 2002 2003 2004 2005

thou

sand

tonn

es

OCC

ONP

Woodfree

Mixed

Source: China Customs OCC + Kraft is today the largest import grade in China, boosted by the numerous new containerboard projects based on imported raw material. ONP/OMG imports were higher than OCC + Kraft imports until 2002, but there have been fewer newsprint projects than containerboard projects and thus the relationship has changed. Note also the recent growth in Mixed Grades imports; again a reflection of the many packaging paper and board capacity investments. The study’s baseline forecast is for continuing growth in China’s imports of RCF. Net imports are expected to rise to 26 million t by 2008, and to 45 million t by 2015 (Table 14). However, much will depend on the development of China’s paper and board demand, on the growth in domestic RCF collection and on the pace and pattern of investment in new paper and board capacity. The imports of OCC + Kraft are expected to grow fastest, exceeding 23 million t by 2015. ONP/OMG imports are predicted to be 10 million t in 2015 and net imports of Mixed Grades 10 million t.


Table 14: China - Net Trade in RCF, by grade, 1990-2015 thousand tonnes

1990 2000 2005 2008 2012 2015 1990-05 2005-15

Total Net Trade -420 -3709 -17032 -26204 -36841 -44837 +28,0% +10,2%

ONP + OMG -20 -1801 -4724 -6482 -8605 -10300 +44,0% +8,1%

OCC + Kraft -100 -958 -8920 -13317 -18956 -23166 +75,2% +10,0%

High grades -5 -326 -396 -580 -473 -972 +33,8% +9,4%

Mixed -295 -624 -2992 -5825 -8807 -10399 +16,7% +13,3%


Source: Hawkins Wright, EU Consulting 3.5 Asia (excluding Japan and China) Other Asia has traditionally been a net importer of recovered fibre. Several countries, including Indonesia, South Korea, Taiwan, Thailand and India, have sourced a substantial share of their recovered fibre needs from abroad, mainly from North America but increasingly also from Europe and Japan. In recent years, most Other Asian countries have experienced a declining trend in their recovered paper imports, with the exception of India. This is explained by the declining import requirements of two of the main importers in particular, South Korea and Indonesia, due to their improving domestic collection rate and to their limited investments in new RCF utilisation capacity following the Asian financial crisis in 1997. India’s RCF imports have grown steadily but not in the same way as those of China. India’s available import statistics for 2006 cover only the first nine months, which indicate only a moderate growth of some 3% (to about 1.7 million t for the whole of last year). The export data of the main suppliers confirms this estimate. India’s total imports are therefore currently about one tenth the size of China’s. India’s main import source has been the USA with imports of 0.6-0.7 million t, followed by the UK with some 310,000 t in both 2005 and 2006 (according to the UK export statistics). Other Asian net imports are expected to grow slightly during the period from 2008 to 2015 (Table 15). One of the main factors will be that India will likely import increasing quantities of RCF from North America, Europe (particularly the UK and Benelux) and the Persian Gulf countries to satisfy the fibre needs of its expanding paper and board industry. Table 15: Other Asia - Net Trade in RCF, by grade, 1990-2015 thousand tonnes

1990 2000 2005 2008 2012 2015 1990-05 2005-15

Total Net Trade -3586 -6851 -6134 -7333 -7215 -6982 +28.0% +10.2%

ONP + OMG -1044 -2008 -1602 -2495 -2704 -2814 +44.0% +8.1%

OCC + Kraft -1493 -2443 -2214 -2369 -1936 -1740 +75.2% +10.0%

High grades -288 -850 -617 -775 -895 -873 +33.8% +9.4%

Mixed -761 -1550 -1701 -1694 -1680 -1556 +16.7% +13.3%


Source: Hawkins Wright, EU Consulting India’s paper industry has several plans to establish new deinking plants to replace current domestic fibre sources used in graphical paper making, partly for reasons of quality. There is also an increasing number of packaging paper projects, although – mainly for cost reasons – many of these mills use locally collected Mixed Grades rather than imported RCF. India’s imports are expected to grow from the current level of 1.7 million t to 2.3 million t in 2008, 3.0 million t in 2012 and 3.5 million t in 2015. An increasing quantity of India’s recovered paper imports will have to come primarily from the United States and Western Europe. UK recovered paper exporters will have good opportunities to deliver increasing volumes to India, mainly of Mixed Grades (partly originating from office collections). 3.6 The rest of the world The Rest of the World (Eastern Europe, Latin America, Near and Middle East, Oceania and Africa) consists of several regions with different fibre resources – from forest-rich countries such as Russia and Brazil to countries in the Near and Middle East whose only domestic source of fibre is RCF.


The Rest of the World has recorded total net imports of between 0.4 million t and 1.7 million t in the past. Recently the import deficit has declined, mainly as Eastern Europe and Latin America show smaller deficits, and Oceania and the Near and Middle East higher export surpluses than in the past. In the future the current import deficit is expected to turn into an export surplus of more than 3 million t (Table 16). Several Eastern European countries will become net exporters, focusing on both Western European and Asian markets. The import deficit of Latin America is expected to decline with improving domestic collections. There are several investment projects in the Near and Middle East absorbing additional collections in the next 4-5 years, but thereafter the net export surplus is likely to increase again. The main growth in net exports is expected to be in OCC + Kraft grades, partly because of China’s increasing demand for this grade. Table 16: Rest of the World - Net Trade in RCF, by grade, 1990-2015 thousand tonnes

1990 2000 2005 2008 2012 2015 1990-05 2005-15

Total Net Trade -1207 -1704 -425 +24 +1459 +3300 +28.0% +10.2%

ONP + OMG -192 -423 -35 -81 -98 -65 +44.0% +8.1%

OCC + Kraft -752 -618 -123 +394 +1580 +2885 +75.2% +10.0%

High grades -163 -114 -560 -573 -357 +140 +33.8% +9.4%

Mixed -100 -549 +293 +284 +334 +340 +16.7% +13.3%


Source: Hawkins Wright, EU Consulting 4.0 Alternative forecast scenarios The second part of the report is concerned with assessing the forecast risks. It looks at how changes in the assumptions that underlie the baseline forecast model would alter the outlook for the net RCF trade balances of the United Kingdom, West Europe, the USA and China. Monte Carlo modelling The model uses Monte Carlo analysis to quantify the risks associated with the different scenarios. Monte Carlo analysis is a technique which allows us to recognise and quantify the risks than affect any and every forecast. It does this by running multiple “what-if” calculations on the baseline model. (In this report 5000 simulations were run on each set of forecasts.) It doing so the analysis assesses the probability that the actual outcome in any future year will be in line with the baseline model. In preparing the Monte Carlo analysis a number of assumptions were made about the range of possible outcomes in future years. For each forecast variable (for example production, consumption, RCF utilisation and the RCF collection rate) the study set the outer limits – the High and Low Scenarios – of possible outcomes. Using various other assumptions (e.g. the correlation between different variables) the model calculates a series of confidence bands which indicate the likelihood that the actual outcome will be within a certain range. 4.1 The United Kingdom The UK’s net export surplus of RCF will continue to expand over the next ten years, although more slowly than has been the case since 2000. The study concluded that there is an 80% chance that by 2015, net exports of total RCF will be between 5.6 and 6.7 million t, up from 3.3 million t in 2005.


Figure 7 The United Kingdom’s net exports of RCF

-

+1000

+2000

+3000

+4000

+5000

+6000

+7000

+8000

1990 1995 2000 2005 2010 2015

thou

sand

tonn

es

Baseline forecast

Scenario 40% confidence bands

Scenario upper 80% confidence

Scenario lower 80% confidence

Source: Hawkins Wright, EU Consulting The baseline predicts a decline in paper and board production from 6.0 million t in 2005 (and 5.6 million t in 2006) to 5.4 million t in 2015. However, the 80% confidence band of possible outcomes for UK productions ranges from 4.8 million t to 5.9 million t, the latter arising from an investment in capacity, most likely of newsprint and tissue. If the UK’s paper and board production – and therefore its RCF utilisation – does not grow as the base line assumes or, worse, continues to contract at the recent rate of decline, the net export surplus of RCF could be higher than the model suggests. Net exports of ONP/OMG, OCC + Kraft and High Grades will each account for roughly one third of the growth in UK net exports. Mixed Grade RCF exports are predicted to level off. This latter prediction is subject to an important caveat. It assumes that household/kerbside collections will be subject to a relatively high degree of sorting. If sorting does not develop to the extent that the study has assumed, more of the recovered paper will be sold as Mixed Grades of RCF – and less as ONP/OMG and High Grades – and the exportable surplus of Mixed Grades will be greater, possibly considerably greater, than implied by the model. 4.2 Other West Europe Between 2000 and 2003, the rapid growth in European paper and board capacity led to a decline in the region’s export surplus of RCF. However, since then, improved collections have caused the surplus to grow again. The forecast predicts that this growth will continue: a slower pace of capacity growth and continued growth in collections is expected to cause net exports to triple to 9.6 million t by 2015.

Figure 8 West Europe’s net exports of RCF (excluding the UK)

-5000

-

+5000

+10000

+15000

1990 1995 2000 2005 2010 2015

thou

sand

tonn

es

Baseline forecast




Source: Hawkins Wright, EU Consulting There is, however, a very wide spread of possible outcomes: at one extreme there is judged to be a 10% chance that net exports could be less than 5.0 million t in 2015. At the other extreme there is a 10% chance that net exports could climb to over 14.5 million t. The reason for this wide spread of possible outcomes is the relatively


minor importance of Europe’s exports of RCF relative to its recovery and utilisation of RCF. Consequently, a small change in either recovery or utilisation in West Europe will lead to a big change in net exports. If the study’s baseline forecast is correct – that the growth in utilisation in Other West Europe will slow while the growth in recovery continues – the region will become a less important market for UK RCF. It is almost certain that the UK’s exports to Other West Europe will continue to decline in relative terms. It is possible that they will decline in absolute terms as well. At the same time, Other West Europe will become a more important competitor in Asian markets. The decline in West Europe’s export surplus over the past several years has allowed the UK to capture a disproportionate share of the growth in total European exports to China. If Europe’s export surplus of RCF starts to grow again – and the model suggests that there is an >80% likelihood that this will be the case – competition with other European countries for a share of the crucial Chinese market will intensify. 4.3 North America The baseline forecast predicts further growth in North American net exports of RCF. By 2015, exports of 27 million t are predicted. However, RCF recovery in North America is more price elastic than in the more closely legislated European industry and export surpluses in the US are more a function of demand and prices than recovery targets. If Chinese demand, for whatever reason, does not grow to the extent assumed in the baseline, North American RCF net exports may begin to level off: there is a 10% chance that net exports in 2015 could be less than 23.2 million t. Conversely, firm RCF prices and higher than anticipated Chinese demand could lead to a much higher level of net exports: there is a 10% chance that net exports could be greater than 31.9 million t in 2015.

Figure 9 North America’s net exports of RCF

-

+5000

+10000

+15000

+20000

+25000

+30000

+35000

1990 1995 2000 2005 2010 2015

thou

sand

tonn

es

Baseline forecast




Source: Hawkins Wright, EU Consulting North America is major competitor of the UK’s in the key export markets, particularly in China. This may be perceived as a risk for UK RCF exporters: they could be crowded out of an important market by a relatively small change in US export availability. There is, however, an offsetting factor in that collection rates are already quite high in the US, particularly for ONP and OCC, and the US will need to search deeper into the waste stream to increase the recovery of RCF. It will do so only if RCF prices cover the marginal costs of collection and in this way the US plays an important price and market stabilising role. 4.4 China The study’s baseline forecast is for continuing growth in China’s imports of RCF. We expect net imports to rise to 26 million t by 2008, and to 45 million t by 2015. However, much will depend on the development of China’s paper and board demand, on the pace and pattern of investment in new paper and board capacity and, crucially, on the growth in domestic RCF collection. There is wide spread of possible outcomes. We assess that there is a 10% chance that total RCF net imports in 2015 could be more than 56 million t. Conversely, there is a 10% chance that RCF imports could begin to level off from 2008 and that by 2015 net imports could be less than 34 million t.


Figure 10 China’s net trade in RCF

-60000

-50000

-40000

-30000

-20000

-10000

-

1990 1995 2000 2005 2010 2015

thou

sand

tonn

esBaseline forecast




Source: Hawkins Wright, EU Consulting Clearly, countries with the greatest exposure to the Chinese market bear the greatest risk should import demand growth slow down. In 2006, China was the destination for 49.8% of UK exports of RCF, up from just 1% in 2000. This share is certain to grow much further in the future, as will the inherent risks. The grades whose future demand in China is arguably most secure are ONP/OMG, OCC+Kraft and High Grade RCF. The demand for Mixed Grades of RCF is more vulnerable, at least in the longer term. There is pressure to increase the local collection of RCF in China. As the quality of fibre in the Chinese waste stream improves (and the content of straw fibre is diluted) some of this locally collected RCF will begin to displace imports. Also, the big Chinese paper and board manufacturers are becoming much more demanding in terms of the qualities of RCF that they will accept. Mixed Grades are most vulnerable in this respect, and although our baseline forecast predicts continuing, albeit slower, growth in China’s imports of Mixed Grades, the possibility that import demand for Mixed Grades could level off, or even decline, should not be overlooked. 4.5 The impact on RCF pricing This report has been focussed principally on RCF export volumes, not value. However, it is important to be aware of the possible impact of the different scenarios on RCF pricing, and therefore on the economics of recovery. RCF markets are extremely volatile, in most cases more volatile than the markets for paper and board or those of other papermaking raw materials (pulp, minerals etc.). The volatility of RCF prices will very likely continue although, based on our central forecast of continuing strong growth in Chinese demand, we think it unlikely that there will be a return to the conditions seen in previous years where certain grades of RCF had negative value. However, the markets for RCF are, in an economic sense, inefficient. Demand and supply do not adjust quickly to price signals and to other changes in market conditions. This is a main reason for price volatility. Because much of the RCF collection is legislated, particularly in Europe, supply will continue irrespective of the price of RCF (i.e. the European supply of RCF is relatively price inelastic). Thus, if there was a hiatus in demand – for example, if China were temporarily to withdraw from the market for some reason – prices would inevitably suffer as the supply of RCF quickly outstripped demand. It is conceivable, although unlikely, that RCF prices could fall to levels significantly below the cost of recovery, requiring governments to intervene to ensure that statutory obligations and/or recycling targets are achieved. Here it should be noted that the United States plays an important market balancing role. Because RCF recovery in the US is almost entirely commercial – in comparison to Europe where it is at least partly statutory – the US collection of RCF is more responsive to market conditions (i.e. US supply is more price elastic). Thus a fall in global RCF demand, and a drop in RCF prices, would result in a greater contraction in US recovery than would likely be the case in Europe. Consequently, Europe could expect to retain more of its export market, in tonnes, acquiring market share in weak markets from commercially-driven US suppliers.


5.0 Conclusions There are two main categories of risk for the UK’s exports of recovered fibre:

Volume risk, the possibility that the surplus of RCF available for export from the UK is too great to be

absorbed by the world market;

Price risk: the possibility that although sufficient export opportunities may exist, the market price of RCF is

insufficient to cover collection costs.

5.1 Volume risk The study concludes that the UK should be able to export its surplus RCF onto the world market. Rapid growth in paper and board capacity in Asia – particularly China – much of it dependent on imported RCF should be sufficient to absorb the projected surpluses. Indeed, there is presently some concern in the industry that the supply of RCF worldwide may be insufficient to provide the fibre for all the new Asian mills. However, these fears are most likely over-stated: collection rates are rising quickly, and not just in the UK and the rest of Europe, and so long as prices remain firm there are ample opportunities to boost recoveries further. Nevertheless, the growing importance of China to UK exports of RCF does represent a risk. The study predicts that by 2015 China‘s RCF import demand will account for 58% of world trade in RCF. As far as the UK is concerned, China already accounts for 50% of UK exports. Chinese demand for RCF is potentially volatile, as is its demand for most other raw materials. Furthermore, the Chinese economy is still structurally fragile and there is every possibility of major swings in its economic prosperity as it continues to undergo adjustment from a centrally planned to a market economy. There is clearly a risk that Chinese import demand will be reduced by a slowdown in P&B production growth and, longer term, by an increase in RCF recovery in China. It should also be noted that, such is the importance of China to the world market, a small slowdown in the growth of RCF utilisation in China would have a much greater impact on import demand, and an even greater impact on international RCF prices. 5.1.1 Opportunities for investment in recycled paper capacity One way to mitigate this risk might be construction of additional recycled paper capacity in the UK. The study does not make any specific recommendations about the viability of particular investments, but it notes that under certain circumstances newsprint, printing and writings paper and tissue could offer some opportunities for expansion in the UK, notwithstanding the recent falls in paper and board production. However, to have a significant impact on the surplus, any such investment will have to be relatively large scale project. 5.1.2 Strengthen relationships with overseas buyers of RCF It would also be helpful if the UK industry could establish long term contractual arrangements with major RCF buyers overseas, for example in China and India, to guarantee a certain level of off take. Asian importers are currently known to be concerned about the long term security of their RCF supplies, and the UK is concerned about its exposure to the export market. Yet most contracts are still negotiated on a rolling monthly basis. The factors that hinder the establishment of long term contracts, e.g. the lack of a credible price discovery/settlement tool, should be addressed. 5.1.3 The manner and enforcement of regulations For sound environmental reasons, international trade in recycled materials is closely regulated. However, the manner of regulation can inhibit the search for new export opportunities. Conversely, some regulations – e.g. concerning the export of co-mingled recyclables – need to be adequately enforced to guarantee that companies who comply with the regulations are not placed at a competitive disadvantage. The authorities should continue to review their regulatory systems to minimise the constraints on exports. They should also ensure that appropriate environmental safeguards are adhered to.


5.1.4 The need to improve the sorting of RCF and to avoid the collection of mixed grades Household/kerbside collections are increasing rapidly nationwide and for reasons of cost and speed the collected materials are often subjected to a minimal level of sorting. While the resulting Mixed Grades of RCF are currently in demand, particularly from the export market, this may not be the case in the long term. To mitigate this UK collection agents should work more closely with major RCF importers, for example in China and India, to ensure that they collect and supply paper to the required specification. 5.1.5 Provide incentives to encourage the better sorting of RCF Existing legislation and local authority recycling targets measure the success of recycling initiatives simply in terms of the volume of material that has been diverted from landfill, and not in relation to the quality or value of the recovered materials. The current framework therefore provides little incentive to sort the collected RCF into higher value grades. This, in turn, increases the exposure of the UK to the international market for mixed grades of paper, a market whose future growth is uncertain. It may help if recycling legislation and targets could be reframed in ways that emphasise the importance of RCF quality and value, as well as volume. 5.2 Price risk Although the export demand for the UK’s RCF may be sufficient to absorb the surplus, there is a risk that this may be at a price that is not sufficient to cover the costs of collection. The legislated nature of RCF supply in the UK – at least as far as household/kerbside recovery is concerned – means that the price mechanism does not work efficiently to balance supply with demand. There is therefore a risk that if the demand for RCF shrinks, the supply of RCF will contract much more slowly or not at all. In this situation, prices will fall, which may have implications for commercial paper recovery businesses. It should also be noted that the economics of recycling, in which paper plays such an important role, dictate that if the collection of RCF ceases to be commercially viable, the economics of the collection of other materials for recycling (metal, glass, plastic etc.) will also change. 5.2.1 Landfill taxes safeguard the profitability of recycling By raising the costs of landfill, the main alternative disposal method, the recycler will be able to charge more for collection, thereby reducing the net costs of collection. The UK landfill tax is £24/t for active waste from April 2007. This will rise by £8/t in each of the next three years, taking the tax to £48/t in 2010. The study does not suggest an appropriate level of landfill tax, but suggests that the tax level should be monitored to ensure that it continues to achieve its recycling objectives. A higher landfill tax, and therefore lower net RCF collection costs, will also assist the development of new recycled paper capacity in the UK. 5.2.2 Shipping costs One element of price risk over which the industry has little control concerns shipping costs. The viability of UK exports of RCF to Asia is dependent on the availability of low container freight rates, to China in particular. The rates are generally low due to the imbalance in trade in manufactured goods: containers which have been used to ship goods from Asia to Europe are available to RCF exporters at cheap backhaul rates as the alternative is to return the containers to Asia empty. Container freight rates are however, volatile, and given that the unit price of RCF is low, a small change in the freight rate can have a major impact on the profit margins of the exporters. Shipping cost risk contributes to the short term nature of most RCF export contracts. If longer term freight rates could be negotiated between RCF exporters and shipping companies, it would make it easier to negotiate longer term RCF supply/price contracts, and thus mitigate an element of volume risk too.

Written by: Hawkins Wright Ltd, UK

Published by Waste & Resources The Old Academy Tel: 01295 819 900 Helpline freephone Action Programme 21 Horse Fair Fax: 01295 819 911 0808 100 2040 Banbury, Oxon E-mail: [email protected] OX16 0AH www.wrap.org.uk

Documents

UK exports of recovered paper, a risk analysis, April 2007 … · 2019-05-09 · UK exports of recovered paper, a risk analysis, April 2007 Assessment of the UK export market for