There’s no doubt that 2019 has been an extremely challenging year for the UK recovered paper sector. As the year has gone on, trading volumes have dropped and prices for OCC, and mixed in particular, are falling to very low levels.
We are facing a perfect storm that is making the market very tough. A combination of reduced Chinese quota, Brexit uncertainty, a General Election, an increasingly difficult global economic situation, reduced demand from European and other mills, a lower PRN/PERN price plus increased shipping costs and volatile currency markets have all helped to push prices down.
Since 2013, we have seen progressive restrictions on the import of paper, led by China. Back in 2017, they announced a ban on 24 categories of waste from the beginning of 2018, including all recycled plastics and the mixed paper grade, and introduced a 0.5% contamination limit on paper. Since then, the Blue Sky inspection regime has sought to crack down on smuggling, including illegal materials like recycled plastics and mixed paper.
Over the course of 2018 and this year, China has gradually reduced the import licenses awarded to mill groups. The country has also previously signalled that it might ban imports of recovered fibre in 2020, although its draft revision of its Solid Waste law suggests that it will gradually reduce imports of foreign material without giving a date.
Exporters responded by sending material that they were unable to send to China to countries such as Malaysia, Thailand, Vietnam, Indonesia, India, Turkey and Poland. But many of these countries have followed China’s example and introduced very tough inspection regimes or are rumoured to be getting ready to do so. As a result of all of this, we have seen significant changes in where material has been sent to from the UK.
According to data from the National Packaging Waste Database, 2.6 million tonnes of paper was exported to China in 2016. For the first three quarters of this year, just 869,0000 tonnes of paper has gone to China and the view is that the export volumes will be even lower in Q4. Over that time, the market has responded by finding new destinations. Exports to India have increased to 350,000 tonnes in the first three quarters of this year, compared to just 1,000 tonnes in 2016. Exports to Turkey have jumped from nothing in 2016 to 195,000 tonnes up to end Q3 2019. We have also seen increased exports to Indonesia, Vietnam, Europe and elsewhere.
According to the European Recovered Paper Association (ERPA) in 2018, on average, more than 56.5 million tonnes of paper was collected for recycling, but 48.5 million tonnes of recovered paper was used to produce new paper. Therefore, there is a capacity gap of around 8 million tonnes. Until 2017, most of this excess was exported to China. With reduced demand for paper and a weakening global economy we are now seeing the inevitable fall in prices. For the next six to nine months, it looks like the market will remain challenging.
However, there might be some reasons to be optimistic. The Chinese mill groups have announced plans to build new mills in countries such as Malaysia, India, Indonesia and Vietnam. Other companies have announced mills in Cambodia, Laos and the Philippines. Overall, this should bring an additional 15 to 20 million tonnes of capacity onto the global market.
There is no guarantee they will buy from the UK though quality of material will be a key consideration. The Recycling Association’s Quality First campaign has promoted the issue of quality over the last few years and I’m proud to say that our members responded by creating a high quality product for the market. To ensure we continue to have access to global markets, especially when new mills come on stream, UK material has got to be among the best. It wouldn’t be a surprise if other South East Asian countries introduce tough contamination levels and inspection regimes for recovered paper in the short term, which is another reason we should be prepared with high quality product.
To ensure those who are producing this high quality product are not tainted by bad apples, we need to see more done to weed out illegal operators. This needs more funding for the UK environment agencies to ensure illegal exports do not damage us as an industry. At The Recycling Association, we have been working on a technological solution, called Traca. This uses blockchain technology to provide everyone from traders, mills, shippers and regulators with essential information about each load. It means each part of the chain can securely see compliance documentation giving confidence about legitimate UK material.
The Resources and Waste Strategy that was developed by the last Government needs to be implemented too, as this will ensure more recycled content is used by manufacturers. This should increase demand. There might also now be a case for more investment in UK mill capacity and we will need to work with the Government on that. However, UK mills must also avoid introducing restrictive practices when there is a buyer’s market and should think about the longer-term needs of the whole industry that supplies them.
We also need to consider whether the PRN/PERN system is working for fibre. Despite the low prices for physical material, the PRN/PERN hasn’t responded by increasing as you would expect it to. Perhaps we need higher paper packaging recycling targets to help support the paper industry.
In the short- to medium-term, the recovered fibre industry will continue to face these challenges. There are a lot of unknowns that will continue to impact on our businesses from how long China will stay open to when new mill capacity will come on board. We also don’t know what restrictions will be imposed by other export destinations and whether anywhere will eventually take mixed paper.
But what I do know is that we have faced challenging times before and come through them. The outlook in the near future does not look great for our industry. But I’m confident this also gives us the opportunity to prepare so that when the sun eventually does shine, we’ll be ready to make hay.
