The market for recyclables, especially for paper grades has continued to improve over the past four weeks. All of us want to know why and how long these improved prices will last.
The why is straightforward but often misunderstood. It is misunderstood because the why is a series of actions (or a chain reaction) that are numerous and which occur in many venues around the world.
Simply put, demand for recyclable paper has slowly improved (shifted right) over the past year as economies around the world, and especially the US, have steadily expanded. This has created a need for more boxes of all types. In turn, this has increased demand for box paper (linerboard, medium and boxboard ). The shift in box paper demand has, in turn, shifted the demand for recycled paper.
To understand the full impact of this demand shift on the price for recycled paper we must also look at the supply of that paper. When we do, we see a perfect storm for higher pricing as the supply of residential papers of all types is essentially fixed (a vertical supply curve). When stronger demand meets a vertical supply curve, we can expect dramatic increases in price which is what we have seen over the past few months.
As for the future, I see nothing that would impede the normal seasonal uptick in demand for paper that accompanies the harvest season here in the US. All other things being equal, this would indicate that pricing for recycled paper could improve further in the near term.
When will this upward pricing spiral end? First and foremost, if there is a change which reduces demand for new boxes (like a trade war or much higher interest rates), we will certainly see pricing for recycled paper fall. More likely, before the fundamental demand for new boxes changes, we will see demand for recycled paper soften due to what economists call the substitution effect.
If prices continue to rise, we will probably see mills substitute lower grades of paper like MIX for OCC and ONP. Further, we may see consumer product manufacturers substitute to less expensive and completely different types of packaging materials. For example, they might try to substitute a plastic bag for a cardboard box for certain products. To the degree substitution occurs, it will lower demand and pricing with it.