The market for all of the residential paper grades declined significantly for August. The why feels like “deja’ vu all over again”. In the past two weeks the Chinese government has announced that they will no longer purchase Mixed Paper as well as all residential scrap plastics of all types by the end of this year. Additionally, they have stated a desire to grow their domestic recyclable collection and to increase significantly the domestic production of pulp from both bamboo and straw. Holy smokes, “Here we go again!”
As is April, the short term impact of these announcements has been to create signification uncertainty for both the mills and mill buyers. Their responses have ranged from reducing their purchases to eliminating their orders for August all together. This short term response of fear and uncertainty has reduced demand temporally but should not be confused with a long term shift in demand. The world economy is still humming along. Demand for packaging materials has not peaked. Because the underlying demand has not changed, as in April, we expect the mills to gradually increase their orders over the next few months back to a normal level notwithstanding the normal decline in seasonal demand this time of year.
The long term impact of these announced changes by the Chinese Government is more troubling. To the degree that the Chinese build new pulp capacity from bamboo and straw, it will permanently reduce demand for recyclable pulp all other things being equal. This would lower pricing, perhaps significantly. Additionally, the prohibition on all residential scrap plastic will require suppliers such as Pioneer to find contract processors to wash, flake and further sort the plastic prior to shipment to China. The total production capacity to process plastic in this manner does not currently exist and it is not yet clear how quickly new facilities of this type could begin producing. More disruption and uncertainty. Not good for pricing, that’s for sure.
As for the near future, we expect pricing to remain even more volatile than this time last year. We are hopeful mill demand will reassert itself sometime this Fall.