Flipping the World: Challenges of Growing North America Recycled Containerboard
Historically, North America has been a major producer of virgin-based containerboard, but increasing sustainability demands and the improved quality of recycled grades have meant a slow shift towards recycled. Such a shift, however, brings challenges with it due to the increasing reliance on the volatile old corrugated containers (OCC) market. Producers may identify new strategic opportunities as a response.
Past: predominantly virgin-based containerboard
As a major containerboard producing region, North America behaves differently compared to most of the rest of the world. Recycled capacity only accounts for one-third of total capacity in North America, while it accounts for at least 70% of production in the rest of the world (with the exception of Oceania), (see Figure 1). The reasons for this difference are manifold:
• North America has abundant forest areas, providing ample supply of virgin fiber for containerboard producers. In Europe and Asia, forest land is limited and producers are forced to find other competitive solutions, rather than importing virgin fiber.
• Until recently, North American consumers and the industry lagged behind Europe in prioritizing sustainability issues. There has been less regulatory and consumer pressure to develop an efficient recycling system.
• The higher strength of the virgin fiber-based boxes used to be more important in North America, due to the transcontinental shipments needed across greater distances.
Figure 1: Global installed containerboard capacity virgin-based vs. recycled grades
Present: Growing recycled share
Although the North American market is current fully supplied with virgin containerboard, the share of recycled capacity has been growing in the current decade. Since 2007, the production of virgin containerboard has shrunk by 7.5%, while its recycled counterpart has grown by 37.9% (see Figure 2). North American recycled capacity is expected to continue expansion by approximately 750,000 tons through 2017, according to RISI. Kruger successfully converted its Trois-Rivières mill to recycled linerboard production this May, and Corrugated Supplies is planning a new recycled containerboard facility in Wisconsin, opening later this year. Besides this, old newsprint mills are being converted to recycled containerboard mills in order to retain the value of assets, avoid mill closure cost and related environmental penalties. Such converted plants can also make use of the infrastructure in place. These conversions, however, still face large capital requirements. Additionally, newsprint mill conversion might be harder to achieve in the U.S. due to the less optimal locations for obtaining OCC.
Figure 2: North America containerboard capacity and year-on-year growth of virgin vs. recycled, million tons
Growing recycled containerboard capacity is driven by strong demand in North America, and is based on:
• Growing commitment to sustainability: North American consumers have growing preferences for sustainable products and, therefore, larger offtakers increasingly look for packaging solutions that are perceived as more sustainable. For instance, Walmart commits to “maximize recycled and sustainably sourced renewable content” from packaging vendors. In response, packaging suppliers are increasingly committing to focus more on recycling—the American Forest & Paper Association has, for example, committed to achieve a 70 percent rate of paper recovery from recycling by 2020.
• Improved quality and lower cost of recycled grades due to innovation: demand is growing for more customized and lightweight boards that are of a comparable quality and performance to virgin containerboards.
Despite the additions in recycled capacity, North American containerboard producers are struggling to satisfy domestic demand for recycled materials due to a shortage of OCC supply. Both North American and European OCC supply is closely intertwined with the global market, challenged by competitive pricing from Chinese mills. In addition to a lack of an efficient domestic recycling system, the emergence of e-commerce also appears to lower OCC generation. As online distribution requires smaller boxes mixed with plastic materials, the recycled products are often downgraded to mixed paper recycling grade.
Future: new strategic opportunities
Rabobank expects North American containerboard producers to continue to invest in recycled containerboard capacity. This would imply an increasing industry reliance on the volatile OCC global market. Short-run choices may be made to defend margins, by passing OCC price hikes on to customers. In the long-run, some North American recycled players may consider further vertical integration of recycling facilities into their business. For instance, Pratt Industries, America’s fifth largest containerboard producer with 100% recycled production, opened its newest Material Recovery Facility in Atlanta in May 2017. We also expect the industry to work more with local communities and businesses across North America to maximize waste diversion and improve collection of high-quality OCC; similar to what top European recycled players such as Smurfit Kappa and DS Smith do.