Soaring Shipping Costs Hit Containerboard Imports: What China's Waste Import Ban Means for the Global Paper Packaging Industry

Import and export trends and the evolving trade interplay between economies are among the factors behind some of the structural market changes taking place globally, and China is at the center of this topic in many respects. Over the past few decades, China's influence as a global trading partner has been unmatched. Specifically,

China's ban on waste paper imports has structurally and fundamentally changed the global flow of old corrugated containers (OCC) and created new global investment "hot spots" in the containerboard industry.

The waste paper import ban reshapes the global paper industry chain

In 2020, China's paper and paperboard output reached 127MMMT, up 0.8% from 2019. This capacity expansion was mainly driven by demand in the containerboard market and accounted for more than 60% of Asia's new capacity.

China, India and Malaysia were the top three countries for paper and paperboard capacity investment in 2020, with new capacity of 8MMMT, 1.8MMMT and 0.5MMMT respectively,

as shown in the figure below.

▲New paper and paperboard capacity investment

In 2017, China implemented a policy banning waste paper imports, which began to affect the global waste paper import and export market.

This new policy also began to reshape the entire paper industry chain from waste paper recyclers to papermakers across Asia, the Americas and Europe.

China implemented this ban to protect environmental resources and public health from the high pollution caused by poor-quality waste paper.

As a result, old corrugated containers (OCC), the main type of waste paper used in containerboard production, were severely affected. The import licenses of many Chinese mills failed to meet environmental standards and were ultimately revoked, greatly reducing OCC imports from the United States and the European Union. In early 2021, China's OCC imports were completely banned, affecting the total import volume of various paper grades. The decline in waste paper imports increased the import volume of other paper grades.

Along with the waste paper ban, China also began to take measures to eliminate unnecessary and harmful plastic waste.

The anti-single-use plastics policy and the full ban on waste paper imports in 2021 have sent producers scrambling to use alternative raw materials, although their long-term supply and volume remain in doubt. For example,

Nine Dragons announced two new BCTMP lines supplied by ANDRITZ, including P-RCAPMP (pre-treatment refining chemical alkaline peroxide mechanical pulp) technology for FBB production at its Hubei base, as well as a CTMP line provided by Valmet. Lee & Man also announced that ANDRITZ will supply two chemi-mechanical fiber lines with capacities of 1,000admt/d and 670admt/d for its Dongguan and Jiujiang mills, and that Valmet will supply a semi-chemical pulp line for its Chongqing mill.

Another example is

which also ordered a BCTMP line from Valmet. All these new fiber lines will be used to supply pulp for various packaging and graphic paper production lines.

Its main raw materials come from eucalyptus, acacia and poplar wood chips as well as wood waste. Sun Paper has already used wood waste in its corrugated paper production.

Due to China's OCC ban and the ongoing relocation of Chinese manufacturing,

US OCC exports have shifted from China to Southeast Asia

as shown in the figure below. Fischer believes that after the full ban on waste paper imports, combined with the ongoing impact of the plastics restriction order and the rise of wood fiber packaging, China's demand for market wood pulp and other paper products will create stable growth opportunities for the industry.

Transport costs soar more than 400%, hitting containerboard imports

In addition, a very serious current issue is that

rising transport costs continue to affect China's containerboard imports.

Since the fourth quarter of 2020, transport costs have soared amid fierce competition for shipping containers. However, data from the world's Baltic Dry Index show that

prices soared by more than 400% from January to April 2021.

According to a recent study, ING said: "With new capacity slowly coming on stream, freight rates are expected to continue setting new highs this year and to remain above pre-pandemic levels over the long term."

One of the main factors behind the sharp rise in freight rates is the imbalance caused by different countries experiencing different patterns of demand recovery after the 2020 pandemic. In addition, China's full ban on waste paper imports further aggravated this imbalance, as hundreds of thousands of returning containers are no longer needed each month.

The huge export demand that Chinese supply failed to meet ultimately pushed freight costs to historic highs.

What impact will this challenge have on China's paper industry imports and exports, especially the containerboard industry, and how long will it last? China is the world's largest producer of paper and paperboard and is basically self-sufficient in all paper and paperboard grades except containerboard. Last year, China imported about 7 million tonnes of containerboard, as shown in the figure below. With the full ban on waste paper imports, China needs these imports as an alternative to continue driving 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 and paperboard imports and exports in 2020

Compared with its Asian peers,

in the fourth quarter of 2020 the United States held a cost leadership position in terms of shipping costs to Shanghai, with a cost advantage of about USD 100-150 per tonne.

The recent increase in freight rates between the United States and China may be as high as 200%, eroding this cost advantage to a large extent.

When we look in detail at exports of containerboard to the Chinese market, we can see that the United States lost its position as the second-largest supplier to China in the second quarter of 2021, with exports to China declining since 2020 (figure below). However, we can safely assume that

if freight costs remain high over the long term, as ING mentioned, the profit opportunities for US producers shipping containerboard to China will diminish.

▲Main containerboard exporting countries to China in Q2 2020 and Q2 2021

▲US quarterly containerboard exports to China, 2020-2021

For Chinese producers with containerboard industry facilities in the United States, more sales efforts in the US market may be needed, because the higher cost of shipping to China is no longer as profitable as before. High freight rates are expected to persist in the short term, and alternative sales strategies need to be found that do not involve exporting materials to China. It is also worth noting that if the end products are aimed at export markets, persistently high freight rates may limit potential overseas investment in the US containerboard sector.

——This article is reprinted from China Packaging Network (pack.cn). Original link: http://news.pack.cn/show-378096.html