Soaring shipping costs hit cardboard import! How China's Waste Ban impact on global paper packaging industry?

Global trade trends and interactions between economies are one of the factors that have led to some structural market changes occurring on a global scale, and China is at the center of this topic in many respects. In the past few decades, China's influence as a global trading partner has been unparalleled. Specifically, China's waste paper import ban has structurally completely changed the global flow of waste corrugated cardboard boxes OCC, and has formed a new global investment "hot spot" in the cardboard industry.

Waste paper import ban reshapes the global paper industry chain

In 2020, China's paper and paperboard output will reach 127MM MT, an increase of 0.8% over 2019. This capacity expansion was mainly driven by the demand of the containerboard market and accounted for more than 60% of the newly added capacity in Asia. China, India, and Malaysia are the top three countries for investment in paper and paperboard capacity in 2020, and their new capacity will be 8MM MT, 1.8MM MT and 0.5MM MT, respectively, as shown in the figure below.

China's New Investments in Paper/Paperboard

 

In 2017, China implemented the policy of a waste paper import ban, which began to affect the global waste paper import and export market. This new policy has also begun to reshape the entire paper industry chain from waste paper recyclers to paper manufacturers in Asia, America and Europe. China implemented this ban to protect environmental resources and citizens' health from high pollution caused by poor quality waste paper.

As a result, the OCC (the main type of waste paper used in the production of cardboard paper) was severely affected, and the import licenses of many Chinese factories did not meet environmental standards and were eventually revoked, which greatly reduced the number of waste corrugated boxes from the United States and the European Union. OCC imports. At the beginning of 2021, China's OCC import of waste corrugated boxes was completely banned, which affected the total import volume of various grades of paper. The reduction in waste paper imports has increased imports of other grades of paper.

With the issuance of the waste paper ban, China has also begun to take measures to eliminate unnecessary and harmful plastic waste.

The anti-single-use plastics policy and the 2021 total ban on waste paper imports have caused manufacturers to scramble to use alternative raw materials—although their long-term supply and quantity remain doubtful. For example, Nine Dragons announced the addition of two new BCTMP production lines supplied by ANDRITZ, including the P-RC APMP (pretreatment refined chemical alkaline peroxide mechanical pulp) technology used in the production of FBB at its Hubei base, and one The CTMP production line provided by Valmet. Lee & Man also announced that ANDRITZ will provide two chemical mechanical fiber production lines with capacities of 1,000 admt/d and 670 admt/d for its Dongguan and Jiujiang plants, and Valmet will provide a semi-chemical pulp production line for its Chongqing plant.

Due to China's OCC ban and the continuous relocation of China's manufacturing industry, U.S. exports of used corrugated cardboard boxes have shifted from China to Southeast Asia, as shown in the figure below. Fisher believes that after the total ban on the import of waste paper, with the continued impact of the plastic restriction order and the rise of wood fiber packaging, China's demand for wood pulp and other paper products in the market will create stable growth opportunities for the industry.

Transportation costs soared by more than 400%, impacting the import of cardboard paper

In addition, a very serious problem at present is that rising transportation costs continue to affect China's cardboard paper imports. Since the fourth quarter of 2020, transportation costs have soared in the fierce competition of sea containers. However, data from the World Baltic Dry Index shows that the price of January-April 2021 has soared by more than 400%. According to a recent study, ING stated: “With the slow commissioning of new capacity, freight rates are expected to continue to hit new highs this year and remain above pre-epidemic levels in the long term.”

One of the main factors leading to the substantial increase in freight rates is the imbalance caused by different countries experiencing different demand recovery patterns after the 2020 epidemic. In addition, China’s total ban on the import of waste paper has further exacerbated this imbalance, as hundreds of thousands of return containers per month are no longer required. The huge export demand unsatisfied by China's supply eventually pushed freight costs to the highest level in history.

For the import and export of China's paper industry, especially the containerboard industry, what impact will this challenge have and how long will it last? China is the world's largest producer of paper and cardboard. Except for box board, all paper and cardboard grades are basically self-sufficient. Last year, China imported about 7 million tons of cardboard, as shown in the figure below. With the comprehensive ban on waste paper imports, China needs these imports as an alternative to continue to drive growing domestic demand, which creates opportunities for containerboard producers in Western countries. However, with record high freight rates now the norm, is this opportunity really profitable?

China's Paper/Paperboard Imports in 2020

Compared with its Asian counterparts, in the fourth quarter of 2020, the United States is in a leading position in terms of transportation costs in Shanghai, with a cost advantage of approximately US$100-150/ton. However, given that the recent increase in freight rates between the US and China may be as high as 200%, the cost advantage has been eroded to a large extent. When studying the details of the export of containerboard paper to the Chinese market, we can see that the United States lost its status as the second largest supplier to other countries in the second quarter of 2021, and its exports to China have been somewhat different since 2020. Decline (picture below). However, we can safely assume that if freight costs continue to remain high for a long time, as mentioned by ING, the profit opportunities for US manufacturers to ship containerboard to China will decrease.

Major Cardboard Exporters to China in 2020 Q2 and 2021 Q2

2020-2021 U.S. Quarterly Cardboard Exports to China

For Chinese manufacturers who have facilities in the United States for the cardboard industry, more sales efforts in the US market may be needed, because the cost of shipping to China is not as profitable as it used to be. It is expected that high freight rates will continue in the short term, and alternative sales strategies need to be found, and this strategy does not involve exporting materials to China. It is also worth noting that if the final product is targeted at the export market, the continued high freight rates may limit potential overseas investment in the U.S. containerboard industry.