Investments in Recycling Required to Restore Value in the UK Paper Packaging Supply Chain

As the largest European recovered paper (‘RCP’) exporter to China, the UK is most affected by China’s recent tightening of RCP import restrictions. The UK market is now facing an oversupply and significant price declines. In contrast, the new legislation is having a positive effect on containerboard and boxboard producer margins, as the prices of these products are remaining high, driven by firm demand. But RCP oversupply requires new thinking on recycling at every level of the supply chain if the UK wants to tackle the potential financial losses resulting from the changed market conditions.

UK RCP relies heavily on exports to China

The UK is the second-largest RCP exporter to China after the US, accounting for 15% of China’s global imports and 15% of the RCP imports from Europe in 2016. This corresponded with 4m tonnes of RCP, out of 8m tonnes collected in the UK. UK RCP exports to China by category have been increasing until 2017, when issuance of import permits was temporary halted (see Figure 1) and China tightened its RCP import policies. Old corrugated containers (OCC) and mixed paper were the largest RCP export categories, accounting for about 65% and 30% respectively.

Also, China is a more important market for the UK than it is for other European countries. In 2016, 90% of UK OCC exports and 67% of UK mixed paper exports went to China (see Figure 2). The size of the UK’s RCP export volumes and its reliance on a single market, combined with the lack of recycling capacity at home, make the UK more vulnerable to export disruptions.

China-RCP-Fig1

If the UK does not quickly find alternative markets, this disruption could lead to a 50% to 60% drop in UK OCC exports, leading to a significant loss of around GBP 170m to GBP 335m. Similarly, the permanent loss of mixed paper exports because of China’s complete import ban would result in a loss of at least GBP 145m.1

Pressure on RCP markets is felt differently across the supply chain

Between January 2018 and May 2018, China’s new RCP policy drove UK domestic OCC prices down by 30%, as happened to other Western European countries as well (see Figure 3). Mixed paper prices are under even more pressure. During the same period, UK domestic prices plummeted by 70% (see Figure 4). In comparison, countries like Germany (which does not export to China) were less affected, seeing a 43% price decrease.

China-RCP-Fig2

For packaging board products – for which RCP is the main element in production costs – the situation is completely different, due to strong demand and somewhat restricted supply. Despite falling OCC prices, the UK domestic recycled containerboard price even increased by 10% – compared to 5% in Germany – from January 2018 to May 2018, providing an additional margin next to savings on production costs (see Figure 3). A similar trend can be seen in the recycled boxboard segment. Low mixed paper prices have allowed boxboard producers to stabilise prices and improve their margins even without the price increase (see Figure 4).

Short-term pain, longer-term gain

Due to RCP oversupply, UK stocks are full up. Some RCP is ending up in incineration plants (although capacity is limited) or even in landfill. The UK needs to deal with the RCP excess that it cannot immediately absorb. This coincides with the potential risk of having fewer export opportunities to the EU after Brexit.

This disruption is calling for longer-term strategic solutions at every link in the supply chain. UK waste companies need to invest significantly in improving RCP collection and separation to produce the right RCP quality, to meet both European and global demand. Legislative support might be needed to stimulate this.

Also, paper packaging companies would benefit from working together with local authorities and waste companies to improve recycling practices. Leading European paper packaging players like DS Smith and Smurfit Kappa, who have high-quality integrated recycling businesses in the UK, could play a role in sharing their best practices.

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1 For possible China policy scenarios, please see our recent report ‘Turning a New Page: Impact of China’s RCP policies on Global Paper Packaging

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