An Economist's Perspective - Oregon.gov

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An Economist's Perspective - Oregon.gov
An Economist’s Perspective
An Economist's Perspective - Oregon.gov
   Use economic theory to understand why
    recycling isn’t broken

   Use economic theory to explain why a
    rebound in pricing for recycled paper grades
    is all but inevitable.
An Economist's Perspective - Oregon.gov
An Economist's Perspective - Oregon.gov
   China was > 50% of world demand for
    recyclables

   Now, China is < 25% of world demand

   That’s a demand shift!
   Recycled Paper hit the hardest
    ◦ Paper represents about 75% of ResMix Yield
    ◦ “Where paper goes so goes the value of ResMix”

   Low End Plastics also hit hard
    ◦ #3-#7, Mixed Rigids, Film
    ◦ (There never was much volume or value here)
   If demand drops (shifts) by >25% and supply
    is inelastic (vertical) what happens to price?
Supply
$                        Residential Market
                           Demand Shift
P1

                    D1
P2

               D2

     Q1             Quantity
   What is the name of the point where the
    demand and supply curve cross?
   The Equilibrium Point or Price
    ◦ The price where sellers can sell all they choose to
      and buyers can purchase all they want to.
      In different words, the equilibrium price is where our
       bales move to a consuming mill without delay!
   Virtually all MRF paper on the West Coast
    moved in 2018 despite a huge leftward shift
    in demand
    ◦ Textbook example of a free market quickly
      adjusting to changing circumstances

    ◦ Clear example that the market for recycled paper is
      not broken but rather, is working just as predicted
   Yes, I understand that we do not like the
    current price for paper recyclables

   With a > 25% drop in total demand, what did
    we expect price to do?
   What can economic theory tell us about the
    future for recycled paper pricing?

   Answer- A lot!
   Supply- We know supply
    ◦ It’s vertical
       It’s fixed in the near to mid-term
         (subject to general economic activity )
   Demand- We know demand as well

    ◦ In North America, the paper industry announces
      most major capacity additions or investments
      publically.
   In 2018 & 1st Qtr. of 2019, there were 16
    announced paper mill investments in US &
    Mexico alone!

   Wow!
Company          Location           Grades        Type         Capacity       Est Start
                                                               Increase/Yr.

Midwest Paper    Combined           OCC           Conversion   350,000        Summer 2018
Group            Locks, WI

Packaging Corp   Wallula, WA        OCC & Straw   Conversion   400,000        Late 2018
of America

Packaging Corp   DeRidder, LO       OCC           Conversion   150,000        2018
of America

Hood Container   St Francisville,   OCC           New          120,000        2018
                 LO

International    Riverdale, AL      OCC           Conversion   450,000        Summer 2019
Paper

Grupo Gondi      Monterey, Mex      OCC           New          441,000        2019
Copamex          Anahuac, Mex       OCC,MIX       Conversion   220,000        2019
Bio Pappel       Port Angeles,      OCC           Conversion   250,000        Early 2020
                 WA
Company            Location         Grades    Type          Capacity       Est Start
                                                            Increase/Yr.

Pratt Industries   Wapakoneta,OH    OCC,MIX   New           425,000        Late 2019

Nine Dragons       Biron, WI        OCC,MIX   Conversion,   360,000        Late 2019
                                              New

Nine Dragons       Rumford, Maine   OCC,MIX   New           343,000        Early 2020

Green Bay          Green Bay, WI    OCC,MIX   New           685,000        Spring 2021
Packaging

Cascades           Hanover,VA       OCC,MIX   Conversion    400,000        2021
Nine Dragons       Fairmont,WV      OCC       Conversion    ?              2019
Shanying           Ballard                    Conversion
                   County,KY

Port Townsend      Port Townsend,   OCC       Upgrade       128,000        Late 2019
Paper              WA
Company        Location   Grades   Type   Capacity   Est Start
                                          Increase
CorrVentures   Albany,    OCC      New    300K/Yr.   2021
               NY
Company     Location   Grades      Type       Capacity       Est
                                              Add/Yr.        Start
Shanying    Malaysia   MIX         New        2 Mill/Yr.     2023
Interna’l
Lee &       Malaysia   MIX & OCC   New        1.2 Mill/Yr.
Mann
Zhejian   Malaysia     MIX         New        700K/Yr.
Xinshedgd
Zhejiang    Malaysia   MIX & OCC   New        1.4 Mill/Yr.
Jingxing
Lee &       Vietnam    MIX & OCC   Addition   400K/Yr.
Mann
Thuan An    Vietnam    OCC         Addition   250K/Yr.
Paper
Dong Hai    Vietnam    OCC         Addition   200K/Yr.       2019
Marubeni    Vietnam    OCC         Addition   350K/Yr.       2020-1
Supply
$                        Residential Market
                           Demand Shift
P1

                    D1
P2

               D2

     Q1             Quantity
Supply

$                           Residential Market
                              Demand Shift

P1

                             D8
                            D7
                           D6
                       D1
P2                    D5
                    D4
                   D3
              D2

        Q1           Quantity
Supply

$

                                       D18
                                   D17
                                 D16
                             D15
                           D14
                       D13
                     D12
                    D11
                   D10
                  D9
             Q1                    Quantity
◦ #3-7 Plastics
  (Yes, you read that correctly!)

◦ Two established recycled plastic processors have
  announced capacity expansions in Canada
  Merlin Plastics in Vancouver BC
  EFS Plastics in Ontario Canada
  Both vertically integrated producers
   Canadian plastic processors see an
    opportunity to make money.

   Why?
    ◦ Competitors, China & SE Asia countries have left the
      market place
      Almost total absence of demand
      Supply of material in US remains constant
   Why?
    ◦ Canada subsidizes the construction of plastic
      processing facilities with grants and loans
      Think “free” money

    ◦ Lack of competition means Canadians can price for
      extra margin
      Think negative pricing
   Canadians sensed an opportunity to make
    money. They responded with major new
    investments.

   While the market for #3-7 is in adjustment, it
    remains strong and responsive to market
    conditions
    ◦ Not broken
   Pacific Northwest MRFs are responding to
    new quality demands from buyers by
    investing
    ◦ Spend to play
Company    Location    Improvement        When
Pioneer    Clackamas   Plastic Opticals   Dec 2018
                       & Robots
WM         Tacoma      Paper Opticals &   April 2019
                       Screens
Republic   Seattle     Paper Opticals &   April 2019
                       Screens
EFI        Portland    Baler, Post Sort   June 2018
                       & Screens
Garten     Salem       Feed Drum,
                       Screens & Glass
                       Cleaning
   Markets for recycled materials are pricing at
    appropriate and predictable levels.

   Market participants are responding to current
    pricing and margins with appropriate new
    investments

   When the investments come online, pricing
    will inevitably improve. (ceteris paribus)
   What is the difference between an Economist
    and a confused grey haired old man ?
   The Economist is the guy with a calculator!
   Thank you for your interest and participation!
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