To best understand the market for recyclables in March, one must distinguish between paper and the container grades (metal and plastic) as described below. (If you are short of time – the summary version is that while paper has continued to decline, plastics and metals have increased as is normal this time of year. The increase for the container grades has helped reduce the overall decline in the value of ResMix.) Now for the details…
The market for paper has continued to decline due to the radical change in China’s buying pattern. In the past, China consumed over 50% of the world’s recyclable paper. Today, they may account for less than 20%. In discussions with major Chinese buyers, we have learned that China is restricting their purchases to just source separated material available from post-industrial and commercial suppliers. To our knowledge, they are not purchasing any paper from comingled recycling suppliers. This narrow focus has substantially reduced demand for paper overall which has led to the recent dramatic decline in pricing including a modest further decline in March.
With China out of the market for paper from comingled suppliers, MRF’s have been forced to find movement for their paper with buyers in other countries. These buyers are well aware of China’s demand shift and have been assertive in dropping their pricing in response.
Our good news is that Pioneer has been successful in finding movement for all of the paper volume we expect to generate during the month. While we remain cautious about movement in April, we are confident we can avoid landfilling for now.
In contrast to paper, the demand for metals and plastics has been actually improving with corresponding higher prices for these grades. This results from a seasonal demand shift related to preparing for increased orders of plastic products used in the construction, agricultural and landscaping industries. For metals, the increased demand is related to robust demand for construction materials and the seasonal upturn in demand for beer and soda during Spring and Summer.
Now for some prospective , let me share that over the past eight months, I have been heavily involved in discussions with municipal decision makers trying to help them understand what China’s National Sword initiative has and will mean for Recycling programs in the Northwest. Invariably, I am asked “Why has the value of ResMix declined so much?” Many of these decision makers assume that it’s because the cost of processing recyclables has increased with the increased effort to improve the quality of the materials we sell.
I do agree that the cost of processing has increased with the additional sorting and slower belt speeds, but it’s very clear that, far and away, the largest factor in the decline in value for ResMix is a direct result of lower commodity values. For example, since March of last year, MIX paper has declined 113% and now has a negative value. OCC (cardboard) has declined by 67% and is now at historic low values. These two paper grades together account for over 75% of the total material in ResMix by weight.
While Plastics and Metals have held their value over this period, at only 15% of the total ResMix yield, their pricing has been overwhelmed by the decline in paper value. The math is simple; China’s drastic demand reduction (shift to the left) for paper recyclables has dramatically lowered the value of ResMix.
As for the immediate future, Pioneer is planning for low paper values for many months to come. Additionally, we are expecting higher ocean freight rates and difficulty in obtaining bookings given the severe disruption the change in China represents for ocean shippers. Over the long run we are more optimistic. In time, we do expect values to improve significantly as I will try to explain in my letter next month.