Mexico Is of Growing Strategic Importance for US Containerboard Exports

Historically, Mexico has been the third largest buyer of recovered paper (RCP) around the world, behind China and India. High-grade deinked paper, for production of printing paper, writing paper, or tissue production makes up the largest share of imported RCP (40% to 45%), followed by old corrugated containerboard (OCC), old newspaper, and mixed paper (see Figure 1).

Mexico’s containerboard production is composed of almost purely recycled capacity, and the same goes for its cartonboard production. Secure and reliable OCC and mixed paper supply therefore is essential to the industry. OCC supply has been healthy thanks to sufficient domestic collection and imports. The majority of OCC is collected domestically and around 15% (450,000 tonnes) of OCC is complemented by imports. These are almost exclusively sourced from the US. While the US is a crucial trading partner for Mexico, Mexico has traditionally only accounted for around 5% of US OCC annual exports.

The price of US imported OCC has continued to decline since mid-2017 due to the oversupply of lower-grade OCC created by China’s stricter RCP import policies (see our recent report China’s Changing Paper Trail). It negatively affected the Mexican market, dragging down domestic OCC prices by 31% between August 2017 and May 2018. However, despite the price decline and capacity expansion, both testliner and kraftliner prices continue to move upward in the opposite direction, as a result of tight market conditions and healthy demand from downstream industries (see Figure 2).

Mexico produced 3.2m tonnes of containerboard in 2017 and capacity has been growing at a healthy 4.0% CAGR from 2012 to 2017. The growth rate outpaced the containerboard capacity expansion rate of US and surpassed Mexico’s total GDP growth (0% at current USD prices) during the same period. In the next two years, through 2020, we will see accelerated capacity expansion due to favourable macro-economic conditions, rapidly growing e-commerce sales, and growing value of agriculture and beer exports at 7.4% and 10.7% CAGR respectively between 2012 and 2017, both of which require corrugated packaging for transportation. Both local and multinational players, such as Grupo Gondi and Smurfit Kappa Group, are working to secure their share of the pie in this land of opportunities.

322,000 tonnes of containerboard capacity has been added since Q4 2017 until the end of 2018. An additional 400,000 tonnes are planned for 2018 to 2020. This will create an additional 850,000 tonnes of demand for OCC through 2020. Assuming that the level of domestic recycling expands simultaneously with the increase in demand, and that US imports of OCC maintain at least a 15% share, the additional demand for US imports could reach 160,000 tonnes by 2020, a 35% growth compared to the current level.

Mexico has been stocking up on US OCC this year already due to the favourable import prices and capacity expansion. Imports grew by 7.2% through April this year versus the same period last year. As this continues, Mexico could help absorb some of the oversupply from the US in the short term, although an additional 160,000 tonnes of OCC exports in no way makes up for the US market loss in China. In the long term, should we see a successful re-negotiation of the NAFTA agreement, Mexico presents strategic importance to the global RCP demand and US should further strengthen the logistical infrastructure by shifting some of the export volumes to Mexico.