Desjardins Securities analyst Pierre Lacroix sees an upside for domestic recycled paper buyers like Cascades Inc. (OTCPK:CADNF) as the global competition to buy old paper, notably with China, is buffered by rising logistical costs. He gave Cascades a "buy" rating with a price target of C$10.75.
The analyst noted that freight rates have increased very rapidly in the last two years, jumping threefold between the end of 2006 and June 2008, making it more costly to ship recovered paper to Asia, in particular to China.
In a note, he wrote:
Thanks to escalating freight rates, recycled paper prices have fallen recently, and North American buyers are currently enjoying the most abundant OCC supply in more than a year.
In the last three months, demand from China had caused a major surge in the price of OCC (Old Corrugated Containers) and SOP (Sorted Office Papers), two major types of used papers that recyclers such as Cascades need to buy. The cost of that raw material had spiked from C$80 to C$150 in three months, and seems to be gradually returning to its historical prices, trading recently in the range C$90 to C$120.
The analyst wrote that the decrease in costs would allow Cascades to build significant inventories "giving them better pricing power whenever the export market recovers."