What's Going On With The Cardboard Market?
Like all recyclable commodities, pricing for old corrugated cardboard (or OCC as we call it in the biz) is subject to many different economic factors, but most commodities can be broken down to extremely simplistic terms, supply and demand. Throw in a global pandemic, sprinkle in some supply chain issues, add a splash of inflation, then add in some recession fears, and well.... you're bound to have some problems.
Let's Break It Down
We could get into the nitty gritty of some very specific microeconomic factors but we're going to stick to some of the key points.
Start with the pandemic. The world was thrown one doozie of a curveball with the COVID-19 Pandemic. As most of the US came to a hard stop, we started to rely on Amazon and other delivery services to deliver our goods directly to our door. This means, the bottle of shampoo was once shipped to the store in a box, along with 12 other bottles of shampoo, is now being shipped in a single box. We all know Amazon isn't the best at using appropriate box to item ratios either, if a keychain showed up in a refrigerator box I probably wouldn't bat an eye.
This, coupled with the fact that cardboard was not being recovered on a consistent basis from places that may have been closed or not producing as much waste cardboard, the OCC mills found themselves in quite the pickle. With little supply and heavy demand, mills had to start paying up big time if they wanted to keep material flow coming in. I've been told several times over my recycling career, the only way to get fired as a mill buyer is to run out of paper and this I'm sure caused some buyers to sweat a bit.
With the supply side getting light and the demand side getting pretty heavy, OCC mill buyers started to act like the rest of the country did when we heard there was a toilet paper shortage (and boy will we remember that), they started panic buying. Now, this wasn't entirely their fault, none of us knew how long this supply chain issue was going to go on for. With the market for recycled OCC at an all time high, and mill buyers paying big premiums over the Indexed price, the market was booming. Brokers and recyclers were seeing premiums at $30NT over the indexed price.
The supply chain issues started to ease up a bit and mills had a healthy inventory or material (that they paid big bucks for), the laws of supply and demand started to shift a little. Late summer we started to see premiums come back to a normal level ($15-$20 over market) and a more steady demand from mills versus the aggressive buying spree we saw earlier. The problem is the mills had built a mountain of inventory and were still buying material. One of the larger mills in the midwest region announce that it would stop taking material for about 6 weeks. There was also speculation that other large mills would be doing the same.
There are several other factors that came into play as well. Some mills take routine downtime this time of year for repairs, couple this with an already high inventory, and material that is contracted, these mills were filled to the brim with material and unable to take in more loads.
Now, here come some other economic factors to really throw a wrench into the gears. People are starting to get back out and physically shop for items instead of having everything delivered by Amazon or other delivery services. This means there's more product being shipped in one box and then put on the shelves versus what we saw during the pandemic. On top of that, we have inflation sitting at 8%, less OCVID-19 Relief money floating around ,and recession fears making headlines daily. These have caused the big movers in the market to tighten up their purse strings a bit.
Despite the Trading Economics global macro models and analysts expectations that consumer spending will be up in Q2 of 2023 and even higher by 2024, it's estimated to drop in the short term.
All of these factor into the big picture. Less spending and consuming means less demand for cardboard boxes. Less demand for cardboard boxes means lower orders for the mills. Lower orders for the mills means they have to get through the inventory that they have before they can take anymore material in. Little movement to the mills means the price they are willing to pay for baled cardboard gets lower and lower.
Premiums have started to drop and even become nonexistent. In previous down markets, the price may have sunk but premiums at least stayed in the $10-$15 over market range. Demand has dropped so fast that within the October market, mills are only offering below market prices for material. For processors, this is a problem because in order to keep material moving, they will likely have to sell it at a loss.
Haulers of loose OCC also play a big part in the overall economics of the market. If rebates get too low, the cost to haul in and bale the loose cardboard becomes problematic. If the processing cost is higher than their rebate for the material, they often times will opt to just landfill the load. This certainly isn't ideal for environmental reasons but it does reduce the amount of available material in the market. When this happens on a nation wide level, that's a lot of material getting pulled from the market.
New mill capacity will be something to keep an eye on as well. Several new paper mills have or plan to come online between now and the end of 2023. This (in theory) increases the amount of consumption in the U.S. which could drive the demand up a little higher. The key factor here is, how much have these mills already purchased, and what is the demand for corrugated material when they come online.
While nobody can truly speculate how long this will go on, some have said we should be at the very bottom of the market. Prices may stay low for a bit but probably will start to climb back up early next year. Others have said that this could go well into Q2 of 2023.
Don't play the market- We always advise our clients to move material as loads are ready. Speculating ups and downs probably won't net you big bucks in the long run.
Contract High Volumes- Often times people think of contracting their material as being handcuffed a bit. We don't see it this way. In fact, it's almost an insurance. While premiums and movement are low, in times like these, mills are still bound to taking contracted material at the premiums they agreed to.
Build Relationships- Shopping material out to the highest bidder every single time may generate a few extra dollars here and there, but building consistent and trusting relationships with your cardboard buyer means they will likely go the extra mile to keep things moving when times get tough.