March/April 2013

Illuminating China’s Paper Industry

Paper industry experts gathered in Beijing last winter to review the state of China’s recovered fiber industry at a new international conference.

By Adam Minter

In the past decade, China has played host to dozens of international conferences devoted to its booming recycling sectors. The vast majority of those conferences have focused on the high-profile nonferrous recycling trade, while other commodities, such as plastics and paper, have received almost no attention. For the latter commodity in particular, the absence of attention was puzzling, given the importance and significant growth of China’s recovered paper industry. According to the China Paper Association (Beijing), China’s consumption of recycled paper increased 249 percent from 2002 to 2011, reaching 70.75 million mt of consumption in 2011. Of the 90.44 million mt of pulp China consumed in 2011, 62 percent was recycled material, up 332 percent from 2001. For U.S. scrap paper traders, China’s paper recycling industry is of particular interest and importance: For more than a decade, recovered fiber has been the top U.S. export to China by volume. Thus, a conference examining the data, developments, and future prospects of China’s paper industry was long overdue.

The China International Recycled Fiber Conference, held Dec. 6-7 in Beijing, aimed to fill that void. RISI (Bedford, Mass.), a global information provider for the forest products industry, and UMPaper (Beijing), a paper products market intelligence service, organized the event with support from the China National Resources Recycling Association (Beijing). The conference attracted roughly 400 delegates, including government and trade association officials, brokers, packers, and mill representatives. Though billed as an international conference, most attendees came from within China. That said, the 30 or so foreign delegates included several of the global scrap paper industry’s best-known traders, analysts, and spokespeople, several of whom also participated in
panel discussions.

Unlike most Chinese conferences, the forum’s sessions were interactive: All presenters took questions from the audience, and two panel discussions generated genuine dialogue between panelists and attendees. The liveliest sessions touched on trade policy and China’s lack of a standard classification system for recovered fiber. Many of the presentations were eye-openers, providing valuable statistics and other information on the growth and current state of China’s secondary fiber industry and its top trading partners.

From Trees to Tablets

On the event’s opening morning, speakers from North America, the European Union, and Japan—China’s three largest sources of imported secondary fiber—took the stage. According to Chinese customs data, China imported 27.28 million mt of secondary fiber in 2011, up 12 percent from 2010 and 337 percent from the 6.24 million mt the country imported in 2001, several speakers noted. In 2011, the United States was China’s leading international scrap paper supplier, shipping 11.78 million mt, up 16.2 percent from 2010. Europe was second, providing 5.33 million mt (with the United Kingdom supplying 2.92 million mt of that total), up 9.2 percent from 2010, and Japan was third, at 3.38 million mt, down 3.8 percent from 2010.

Though China’s imports of recovered fiber continue to increase, the rate of growth has slowed considerably. Imports grew 34 percent from 2004 to 2005 but just 4.3 percent from 2010 to 2011, reported Sarah Feng, a senior analyst for recovered fiber at UMPaper. Conference presenters most often attributed this decline to the development of electronic readers and other high-tech paper replacements.

Masatsune Ogura, a counselor with the Japan Paper Association (Tokyo), attributed the decrease in Japanese scrap paper exports to China to the 2008 global financial crisis and the 2011 earthquake in Fukushima, which reduced Japanese consumption of paper products and its supply of scrap paper for recycling. He emphasized, though, that e-readers and other digital technologies are hurting Japan’s newsprint and writing paper sectors. In the medium to long term, he said, those technologies will further shrink the amount of Japanese secondary fiber available for export to China.

These technologies also are beginning to affect U.S. paper demand, recovered paper supply, and the availability of secondary fiber for export, said Bill Moore, president of Moore & Associates (Atlanta), an international recovered fiber consultancy. North American paper and paperboard consumption declined from 100.3 million mt in 2004 to 77.5 million mt in 2012, he reported. Those consumption numbers don’t include imported boxes—corrugated containers imported from other countries (usually China) as packaging for finished goods, he noted, “but even adding in the boxes from Asia, you’d be down.”

The U.S. declines are particularly “staggering” in newsprint and writing and printing papers—the grades most affected by such technologies as the iPad and Kindle, Moore said. The U.S. supply of recoverable ONP declined from 17.54 million mt in 2004 to 9.19 million mt in 2011, he said. Significantly, the U.S. paper recovery rate in that period increased from 62 percent to 72 percent, but the tonnage recovered declined from 11.13 million mt to 6.62 million mt. Given that dwindling supply, the “fairly steady consumption” of U.S. mills has only made matters more difficult and markets tighter, he said.

The shift to e-readers and corresponding shrinkage of the North American scrap paper base are pressing China to seek new sources of recovered fiber. Melissa Chen, a packaging paper associate analyst with UMPaper, said China’s volume of domestic fiber recovery surpassed its imported tonnage in 2008 and hasn’t slipped below imports since then. Several factors drove that shift, including growing Chinese domestic scrap paper collections and tighter supplies in markets that traditionally export to China.

On the same topic, Moore said North American mixed paper also is on the decline as an export item after years of being one of the leading grades into China, in part due to the reduction in bulk mail. Meanwhile, higher U.S. recovery rates are driving down quality—“the last ton is the hardest to get, and always dirty,” he said—and Chinese interest in the grade. Nonetheless, record Chinese demand for fiber of almost any type continues to support high prices for mixed paper. Before Chinese demand commoditized mixed paper in the 1990s, Moore explained, the price of the material usually hovered around 20 percent of that of high-quality OCC. “Nobody wanted to take mixed paper,” he said. “Then China started using it, and the price went up.” From 2007 until the global economic crisis hit in mid-2008, mixed paper prices were about 70 percent of OCC prices, almost entirely due to Chinese demand. Even during the depths of the commodity crash in early 2009, the mixed paper price remained at 45 percent of the OCC price. It approached 80 percent in late 2011 but has since fallen.

Moore declined to provide data on U.S. mixed paper volumes due to questions about the numbers. “Mixed paper usage and export stats are wrong,” he asserted. “Whether it’s mislabeling for inspection purposes, I don’t know. The statistics are wrong.” He did note, however, that 54 percent of U.S. mixed paper grades in 2011 were exported, and 59 percent of those exports went
to China.

Ranjit Baxi, founder and chairman of J&H Sales International (London) and president of the Paper Division of the Bureau of International Recycling (Brussels), offered a view from the EU—China’s second-largest supplier of recovered paper. Though Europe also faces declining paper consumption, Baxi sees opportunities for higher recovery in certain areas. According to his data, the European paper recycling rate was 70.4 percent in 2011, but 12 countries fell below a 60-percent rate, he said, suggesting the potential to increase recovery in those nations.

Demand from the developing world will consume any additional tonnage Europe collects, Baxi said, noting that paper consumption rates per person in developing countries fall far below those in the industrialized world. For example, he gave a U.S. per capita paper consumption rate of 654 pounds compared with 98 pounds in China. Chinese consumers might never reach the U.S. per capita level, but there’s no doubt they will demand more and more fiber, Baxi said. He believes the fiber will have to come from developing economies in South America and Southeast Asia that are starting to seek markets for their excess fiber.

Homegrown Recycling Success

Ultimately, Baxi and other speakers agreed that China needs to generate more supply on its own. Niu Qingmin, vice president of the China Paper Association and president of the Jiangsu Papermaking Association (Nanjing, China), told delegates, “From the beginning of this century, the domestic recovered paper recycling ratio has increased substantially, complemented by imported recovered paper. As a result, the use of recycled paper has fundamentally changed the raw material structure of the Chinese paper industry.” The statistics are stunning: From 2001 to 2011, China’s recovered fiber volume increased from 10.13 million mt to 43.48 million mt and its paper recovery rate grew from 27.5 percent to 44.6 percent. He attributed the higher recovery rate to increased demand, higher prices, and better infrastructure. That rate still is far below the recovery rates in more developed economies, which average around 57 percent, said Hannah Zhao, an economist on recovered paper for RISI. If the calculation includes the fiber exported to other countries as packaging containers and later returned to China for recycling, however, its recovery rate is closer to 58 percent. Moore also noted that the return of exported fiber drives up China’s recovery rate, though he didn’t provide a percentage.

China’s growth in paper collection and improvements in pulp-making technology have turned domestically sourced pulp from recycled materials into the leading raw material in its paper production, at 38 percent of all pulp used in 2011, Niu said. Another 24 percent was imported pulp from recycled sources; 15 percent was imported wood pulp, and 9 percent was domestic wood pulp. Nonwood pulp—including pulp from straw, traditionally an important raw material in Chinese paper—was another 14 percent of the country’s papermaking raw material, but that category is shrinking and will continue to do so as Chinese paper and paperboard makers upgrade their capacity, technology, and quality. On the first count, Chen said that Chinese mills will commission 8.1 million mt of new recovered paperboard capacity in 2012 and 2013, requiring an additional 9.3 million mt of recovered paper annually.

Technological upgrades are an essential part of these capacity increases because they have given Chinese paper producers the ability to process low-quality imported mixed paper and much lower quality domestic fiber. This dramatic, necessary shift to low-quality domestic paper has had a profound effect on the Chinese domestic paper market, with domestic recovered paper prices now in line with imported prices, Feng said. China’s paper market still is not a national one, but rather a set of regional and even mill-specific markets. She reported, for instance, that since mid-2010, OCC prices have been consistently higher in south China than in north China, often by as much as 10 percent, in part due to the large capacity increases in south China’s mills.

According to Wang Xubin of the Department of Circular Industry Development at the Chinese Ministry of Commerce (Beijing), China has 3,500 paper and paperboard producers. He did not give the proportion of producers that use recovered fiber, but Niu said two-thirds of China’s “top 30 papermaking enterprises” do so. The emphasis on scale is important: Niu, Wang, and other government speakers indicated that Chinese government policy favors large paper makers over small and midsized ones. The theory is that large enterprises are better capitalized to implement improvements in technology and environmental protection—and they are much more likely to pay their taxes.

UMPaper’s Chen pointed out that government efforts to reduce the number of paper producers have had a significant effect in Fuyang in Zhejiang province, a major boxboard manufacturing zone. The number of boxboard manufacturers has declined from “more than 400 a few years ago” to 200 today. Even with fewer producers, however, China’s boxboard production rose from 4.6 million mt in 2002 to 13.4 million mt in 2011, Chen said. Other paper products subject to the same regulatory pressures show similar growth. Chen reported that testliner production grew from 6 million mt in 2002 to 19.9 million mt in 2011, while corrugating medium increased from 6 million mt to 19.8 million mt in the same period. Boxboard and containerboard production were 44 percent of China’s paper and paperboard production in 2002 and 54 percent in 2011, Chen said.

Perhaps the most interesting and important development in the evolution of China’s containerboard industry is the measurable improvement in product quality. In the past decade, the basis weight of Chinese testliner and corrugating medium has fallen, forcing an improvement in fiber quality and manufacturing technology, Chen said. Contributing to these improvements are a reduction in straw-pulp-based paper in China’s recovered supply and the general improvement of China’s domestic recovered paper supply. Chen and other speakers agreed, however, that quality problems will persist until China has a consistent classification system for scrap paper.

The Specification Question

The topic of grade classification and standardization stirred the hottest debate at the RISI conference. Currently, China relies on a variety of specifications, including those from ISRI, the EU, and the Japanese paper industry, as well as a hodgepodge of mill standards. Feng surveyed coastal mills in some of China’s paper recycling hubs to determine how greatly the specifications differ from mill to mill, coming up with a few “common standards” for OCC from her results. What she labeled Grade A consists of “boxes and offcuts from converting plants, as well as some imported boxes made from kraftliner and collected in industrial areas” with a moisture level of 12 percent or less, no more than 3 percent non-OCC paper, and no other impurities. In contrast, Grade D OCC is “mainly collected from households in residential areas.” It, too, contains 12 percent or less moisture, though it can have 50 to 70 percent non-OCC paper and 10 to 12 percent impurities. These specifications represent only a rough consensus of what her survey discovered, Feng noted, and they might not suit the specific needs of individual mills. She reported finding the highest standards in the Pearl and Yangtze river deltas and lower standards in the north and inland.

“I think the major challenge now is that there is no standard,” said Ross Li, deputy general manager of Lee & Man Paper Manufacturing (Hong Kong), one of China’s largest paper manufacturers, summarizing mills’ frustrations. “We [each] have standards; the issue is that there’s no alignment of standards. If we want to unify the standards, we have to ask the government or an association to do it.” Zhang Zengguo, executive director of China Sunshine Paper Holdings Co. (Shandong, China), one of China’s biggest paperboard manufacturers, urged the industry to develop its own standards before the government does it. “We need a rudimentary standard,” he said. “If there’s no standard, it’s not a product. If you run a business and you have no standard for the product, you won’t have a mature product. We don’t need a national standardization committee of the government to do it; we can do it ourselves.” (Reportedly, some conference participants made efforts while there to organize an association, with the initial primary task of creating mill specifications.)

The industry’s aversion to government involvement in its specification process doesn’t mean a total aversion to government assistance. The audience warmly received Wang Xubin of the Ministry of Commerce (Beijing), along with his comments that the government would encourage and “support” a trend toward replacing hand-packing of paper with automatic baling. That support presumably would come in the form of government subsidies.

Wang also noted that the State Council, China’s highest administrative arm, has ordered his agency to coordinate with other ministries, including finance, housing and urban-rural development, and the National Development and Reform Commission (Beijing), “to fund the development of a national collection and recycling system.” Such a system would encompass more than recovered fiber, improving the quality of all collected secondary materials, he said. Currently the ministry is overseeing pilot recycling programs in 35 cities, and it plans to expand those programs to 80 cities, “thereby increasing the market for recovered paper.” Support for large companies will continue, with the government planning to create collection and sorting centers that take advantage of existing large collection networks.

After two days of workshops and panel discussions, it was clear that the issues raised at the inaugural China International Recycled Fiber Conference won’t be resolved by the time the all-but-inevitable second conference convenes in 2013. Discussing those issues in an open forum in Beijing, however, is a giant step for China’s paper recycling sector and the international industry that has evolved with it.

Adam Minter is a journalist based in Shanghai, where he writes about business and culture for a range of publications. Bloomsbury Press is publishing his book about the scrap industry in fall 2013.