FINANCIAL ANALYSTS: U.S. OCC prices strengthen in June thanks to surging export demand

NEW YORK, June 5, 2017 (Viewpoint) – excerpt from KeyBanc Capital Markets

U.S. national average OCC prices were up by $14/ton in June, with prices up $10/ton in the containerboard-heavy Southeast, $5/ton in the boxboard-heavy Midwest, and $25/ton on the West Coast thanks to surging export prices to China. Export prices to China were up a substantial $37/ton, the largest increase since last September and the biggest monthly increase in at least the last 13 years since RISI began tracking export OCC prices.

RISI noted several examples last week that indicated that U.S. mills would continue to pay higher prices for OCC through the end of June. On June 2, one of the 10 largest containerboard mill systems in the U.S. paid $50/ton over the P&PW May price for OCC, according to RISI’s contacts. Another large mill system apparently committed to paying $40/ton over the P&PW price for June deliveries in one region. In addition, export demand was indicated to be “steady to strong” through at least the third week of this month.

Given China’s strong demand for U.S. OCC of late, we don’t expect OCC prices to meaningfully soften anytime soon. We also believe that the continued growth of e-commerce – which appears to be driving much of the growth in U.S. box demand – will limit the amount of boxes that are being recycled (and thus domestic OCC supply), a phenomenon that Sonoco Products (SON) and other producers discussed on their 1Q17 calls. RISI in fact noted the holiday “Amazon effect”, which it indicated reduced OCC collection from homes when e-commerce demand was at its seasonal peak.

That said, several U.S. market participants said they thought U.S. export prices were near the “top”, with one large U.S. supplier asking: “Are we setting ourselves up for another crash?”

The 2Q17 national average OCC price is $149/ton and the Southeast average price is $160/ton; sequentially, the national average price in 2Q17 was up $8/ton and the Southeast price in 2Q17 was up $13/ton. International Paper (IP) guided to essentially flat OCC prices sequentially, while WestRock (WRK) guided to prices up $10-$15/ton sequentially. Graphic Packaging (GPK) assumed flat OCC prices from April (May and June prices averaged $147/ton in terms of the national average price, slightly lower than the April price of $152/ton), though at the same time it gave itself credit for fully successful CUK and CRB price increases in April/May as part of its 2018 price/cost guidance of “at least a $40 million positive”. As we now know, the second CRB price increase attempt failed and the CUK increase was only partially successful.

Higher recycled fiber costs are obviously a short-term drag for these companies, and we don’t expect any additional containerboard or boxboard price increases later this year to offset any additional cost inflation.

Adam J. Josephson, KeyBanc Capital Markets