PPRCE 2018: Risky business

PPRCE 2018: Risky business

Norway-based Norexeco is preparing to offer recyclers and papermakers a chance to lessen their risk exposure to volatile OCC pricing.

November 13, 2018

The value of the old corrugated containers (OCC) scrap paper grade can be as volatile as any currency and other commodity, yet hedging against that volatility has seldom been available. Presenters at the 2018 Paper & Plastics Recycling Conference Europe, held in Prague, Czech Republic, in early November, say that is about to change in 2019.

Price volatility has been the underlying reason for the introduction of risk reduction financial tools, according to presenter Patrick Wahlroos, who works from Finland for the Stockholm-based SEB Group. While currency and metals traders have long used such services, paper recyclers may be overdue to follow suit, said Wahlroos.

Wahlroos said the value of the euro versus the dollar fluctuates an average of 10.3 percent annually, while pulp prices fluctuate by 13.8 percent in an average year. The value of OCC, meanwhile, fluctuates an average of more than 25 percent each year, and in a 14-month period from December 2008 to April 2010, its monthly value fluctuated by 127 percent. “There is a clear case to be made for hedging this risk,” stated Wahlroos.

Sellers and buyers of OCC often have a “if you can’t stand the heat, stay out of the kitchen” mentality toward that risk, Wahlroos commented. He added, however, that corporate managers “are paid to manage financial risks.”

Oslo, Norway-based Norexeco ASA is poised in 2019 to offer a contract that will allow such hedging to occur, according to the firm’s Frederik Husebye. The planned OCC trading contract will be offered in euros and designed initially for paper recyclers, containerboard producers and other buyers and sellers of OCC in Europe.

Norexeco has been offering a pulp trading contract that still has room to grow, according to Husebye. He said while copper is traded on contracts globally at a rate 40 times its actual physical market size, and aluminum at a multiple of 30, activity on pulp contracts amounts to less than 10 percent of the size of the physical global market.

OCC price swings can cause mill owners or recyclers to see their profit margins sliced by €1 million when a large monthly price rise or fall occurs, said Husebye. Norexeco’s OCC contract will mean buyers and sellers will “have the chance to [hedge] your risk in a safe, transparent regulated market.” He added, “I can look people in the eye and tell them it’s a good way to minimize risk.”

Another financial factor in Europe’s recycling sector has been increased merger and acquisition (M&A) activity. Sébastien Ricard of Paris-based Paprec Group said France’s recycling sector continues to include numerous small businesses, but in France and the rest of Europe, companies such as Paprec, Veolia, Suez and DS Smith have grown successfully, partly thanks to acquisitions.

He said companies with larger scale such as these can: cope with and adjust to regulations; meet requests for “one service provider” by large corporate and institutional clients; and fund research into “innovation needed as more complex materials” are created to recycle.

Ricard said in addition to acquisitions, such as that of COVED in 2016, Paprec is developing joint ventures (JVs) to offer services such as milk jug and vinyl flooring recycling. “These JVs are a good solution,” stated Ricard, since they offer a way to “share the risk and the costs, and the profits.” He concluded, “We are moving into the circular economy for real, and it [involves] a chain of actors, not just one company that can find a solution.”

The 2018 Paper & Plastics Recycling Conference Europe event was Nov. 6-7 at the Corinthia Prague Hotel in Prague, Czech Republic. The 2019 conference will be in Barcelona Nov. 5-6, 2019.