May/June 1996
In the past two years, Mexico has risen from fourth place to become the second largest importer of U.S. secondary fiber. And with its demand projected to burgeon in the future, Mexico holds promise to become an even larger market for U.S. scrap paper traders.
By Jeff Borsecnik
Jeff Borsecnik, a former associate editor of Scrap, is now a writer based in Seattle.
In late 1994, just as it seemed to be reaching new economic status in the world, Mexico hit a financial crisis and the peso subsequently took a dive. It was a crash that reverberated through American trade circles, but it surprisingly did nothing to curb the Mexican paper industry’s appetite for U.S. recycled fiber.
The explanation is simple: Mexico produces little virgin pulp and its domestic paper recovery is insufficient to meet internal demand. Thus, no matter how weak its currency, if the country is to make paper products, it must import scrap paper (and pulp), and the United States is its most viable market for scrap supplies.
And with its demand for imported fiber expected to continue growing, Mexico promises even greater opportunities for U.S. scrap paper exporters in the future.
A Hunger for Fiber
Among the key reasons for Mexico’s dependence on imported raw material is its limited domestic access to softwood for pulp. Not only are its existing softwood forests in relatively inaccessible terrain, but, as a result of land redistributions early in the century, few large tracts are available for growing pulpwood, explains Oscar Carrillo, market development specialist and author of “Beyond the Border: Accessing Recycling Markets in Mexico,” a report prepared by the Texas Natural Resource Conservation Commission. What’s more, almost half of the pulp that is produced in Mexico is relatively low-quality material made from wood alternatives like wheat and sugar cane.
Thus, Mexico imported 67 percent—or about 603,000 mt—of the 900,000 mt of the pulp it consumed in 1994 (the most recent year for which figures are available), according to the National Chamber of the Pulp and Paper Industries (Mexico City).
As for its domestic secondary supplies, Mexico recoups about 60 percent of its paper overall and 70 percent of its OCC, the grade currently in greatest import demand. Despite such high recovery rates, however, that still leaves Mexico far short of its scrap needs. In addition, the quality of its recovered paper is an issue. Explains Richard B. Garrett, executive vice president and Mexican market specialist for Shamrock Fibres Inc. (Woodstock, Ill.), a scrap paper broker: “The fiber collected in Mexico has in all likelihood been recycled a few times,” and this process shortens and degrades paper fibers, he says. And that, he adds, offers “another reason Mexican mills come to get our fiber.”
And come they do.
In 1994, Mexican mills imported about 1 million mt of U.S. scrap paper, or 40 percent of the 2.5 million mt of secondary fiber they consumed, notes Carrillo. In 1995, Mexico upped its imports of U.S. recovered fiber by 50 percent, to 1.5 million mt, encompassing about 486,000 mt of OCC, 425,000 mt of ONP, 256,000 mt of mixed paper, 192,000 mt of pulp subs, and 152,000 mt of high grade deinking, according to the American Forest & Paper Association (AFPA) (Washington, D.C.).
These numbers made Mexico the second largest consumer of U.S. recovered fiber last year, behind only Canada and ahead of Korea and Taiwan, which it generally trailed in previous years.
Peso No Problem
What makes these numbers especially noteworthy is their timing relative to Mexico’s financial woes. As Garrett puts it, though the devaluation of the peso stomped hard on new paper consumption in Mexico, “that sure hasn’t translated into less demand for secondary fiber.”
How can this market incongruity be?
One reason is that “the devaluation actually helped the paper industry down there,” asserts Albert Alvarez, regional sales manager for the U.S. Southwest, Mexico, and South and Central America for Paper Recycling International (Irving, Texas).
The previously overinflated peso, he explains, had invited in cheap imports of finished paper, pulling market share away from Mexican producers. For example, he points out, “U.S. paper producers could ship boxes down cheaper than Mexican mills could make them.” But when the peso slipped, the mills “gained back the market share they had lost with a vengeance,” Alvarez says. “Overnight, they gained access because competitors’ prices suddenly doubled.” And, hence, scrap needs surged.
Another reason is the overall growth of the Mexican economy, “which translated into increased local business activity, higher consumer spending, more white-collar employment, and greater sales of durable and nondurable goods,” says Carlos Rovelo, director of market development for Rock-Tenn Co.’s recycled fiber division (Dallas), which supplies secondary fiber to its own mills as well as foreign consumers.
Rovelo also points to Mexico’s significant population growth and increased per capita consumption of paper and paperboard, which rose 8.5 and 6.7 percent, respectively, from 1991 to 1994. Another contributing factor, he adds, was “the decline in tariff and non-tariff market access barriers as a result of implementing Nafta in 1993.”
Even with these forces underpinning the market, the bad financial news coming across the border made U.S. suppliers leery, says Tom Lyon, president of Vista Fibers (Dallas), which operates several recycling facilities and a brokerage business. Indeed, while the crisis didn’t stifle demand from the mills, it did “slow payment for a while,” he says. “It made all of us who went through the recession of ’81 and ’82 take another look to make sure we didn’t get extended too far,” he adds, recalling that in the early 1980s, the Mexican government stopped the flow of money out of the country, leaving some U.S. recycled fiber suppliers with bad debts. “We were concerned something like that might happen again,” Lyon explains.
What actually did happen was that business slowed again late last year to the point where “the mills didn’t have the currency to buy,” Rovelo says. But the market has since been rebounding, he says, and “now we’re seeing more aggressive shopping.”
Carrillo agrees, observing, “Internal demand has been stabilizing. Mills are getting over the crisis, but it’s still shaky, they say.”
Trading South of the Border
Even with those residual shaky spots, for U.S. paper traders lacking alternative markets today, Mexico can offer attractive opportunities, say veteran exporters.
By all accounts, they note, Mexican mills are sophisticated, professional operations, and many of their representatives speak English. The Mexican market is also free of some of the hassles of other export markets, such as ocean freight.
In addition, the volume thresholds to make exporting to Mexico worthwhile aren’t high—sometimes only a truckload, various traders say. “Mexico buys virtually any grade of paper, certainly grades any small packer would handle,” says Garrett. “Size doesn’t matter.”
While brokers controlled most of the trade of U.S. secondary paper to Mexico about 10 years ago, that’s no longer the case, Garrett continues. Brokers do still handle many deals, of course, he notes, but they control less volume, particularly from smaller players and those who export irregularly. And even those who don’t fall into those categories are more and more selling direct to mills, with large companies like Paper Recycling International—a joint venture of corporate behemoths Waste Management Inc. and Stone Container Corp.—working with many mills, and smaller regional companies like Vista Fibers selectively doing business with a few.
Though most U.S. scrap paper shipped to Mexico comes from a region stretching from Arizona through Louisiana, “every geographic area of the country, perhaps with the exception of the Northwest, is currently shipping product to Mexico—Florida, the Northeast, Minnesota, California,” says Garrett. “That’s very different than seven or eight years ago.”
High-value grades, in particular, such as coated book stock and preconsumer scrap can sometimes travel a long way to get to Mexican mills. Also, improved rail rates over the last decade have reportedly made longer trips possible.
The mechanics of exporting to Mexico are fairly straightforward, U.S. traders note. The exporter is typically responsible for freight to the border, with most U.S. recovered fiber being shipped by rail.
Trucking is not unheard of, but shipment by water remains rare, primarily because most Mexican mills are inland. Paperwork is not particularly onerous, exporters say, noting that it mainly consists of a commercial invoice, a bill of lading, and a certificate of origin required by Nafta. “It doesn’t take a rocket scientist,” says Alvarez, “but it’s a procedure most are not familiar with, and errors for not doing it properly can be very costly.”
On the Mexican side, the buyer usually employs an agent to handle customs as well as a freight forwarder. Most of these agents are concentrated along the U.S. border, especially in Laredo, a spot through which about 70 percent of Mexican imports—of all types of goods—pass, Alvarez says. Though scrap paper is a duty-free commodity, Mexico imposes a small customs processing fee and a 15-percent value-added tax, which is deductible by the mill, but these are the concern of the buyer.
Export Quirks
While selling to Mexican mills offers promising opportunities for U.S. paper traders, there are a few important caveats. “Keep in mind when doing business with Mexico that you are not doing business with a domestic mill,” Rovelo warns. “The approach changes. It’s not insecure, it’s just different.”
Therein lies the main problem for U.S. paper exporters: unfamiliarity “with language, culture, the nature of the credit involved, and the paper mills themselves—what grades they buy, what quality is required,” Garrett says. “And the only way to learn is by going and seeing for yourself or by lengthy conversation with someone who can accurately describe it. A buying office or broker can provide that.”
When dealing with Mexican consumers, transactions generally don’t require a letter of credit, but traders must factor the cost of money into deals due to the slow payment cycle, which—though typically listed as 60 days—often stretches to 90 days or more, Lyon notes. “A lot of small-to-medium-sized packers are reluctant to do business direct because then they have to wait for payment,” says Garrett. “So the position of the export broker is not just as an intermediary, but also as a banker.” Even when dealing with a Mexican mill rep in the States—which may make things look safer and easier—“it’s still a foreign receivable,” payable from Mexico, he notes.
Then there are the challenges of adjusting to the different business customs in Mexico. Alvarez attributes these differences partly to Mexico’s history of business subsidies and closed markets, which led people to make decisions “based on non-business factors.” He and others note, for example, that it was once common to pay off buyers to secure business, though such practices are apparently long gone today.
Cultural factors are also significant, and primary among them is the importance of relationship-building. As Alvarez puts it, “Here in the United States, people can do business and not know each other. In Mexico, you have to know someone before you do business with him.”
In particular, Rovelo notes that the building of relationships is vital to understanding working conditions for Mexican mills, pointing out that factors like currency fluctuations and political instability have a much more direct effect on business in Mexico than in the States. For example, he says, “if the peso drops or there’s local instability, that doesn’t mean the local mills are going to default. People in Mexico adjust to the conditions and survive. Relationships are vital to understanding that reality.”
A Future of Growing Demand
When asked about Mexican paper opportunities ahead, Alvarez replies by asking, “Do you know that there are about 90 million people in Mexico, and more than half are under the age of 20?” By that, he means that Mexico has a young and growing population that will inevitably boost demand for paper and paperboard products—and, hence, the country’s need for secondary fiber. The National Chamber of the Pulp and Paper Industries, in fact, projects that Mexican demand for secondary fiber will grow 6.7 percent a year through 1999, with domestic recovery not expected to keep pace.
This bodes well for U.S. scrap paper exporters. The best prospects may be for OCC and ONP, suggests Carrillo’s study, which points out that Mexican imports of these grades from the United States grew 86 and 40 percent, respectively, from 1988 to 1994. Lyon, however, believes that ONP growth is “probably very limited—I don’t see any major expansion there.” Pulp substitutes, meanwhile, will continue to grow at a pace similar to overall Mexican paper production, he forecasts, but the big growth, he hazards, will be in deinking and kraft grades, spurred by projected mill expansions.
In a broader trend, Rovelo suggests that “Mexican mills are becoming more creative,” trying to rely less on expensive grades and making do with lower-grade materials.
Taken together, all of Mexico’s trade features make it a prime destination for U.S. recycled fiber, and one that more recyclers may want to check out, say some U.S. traders. In Lyon’s view, U.S. paper recyclers need more than one market for their product, noting that he views his company as a domestic shipper that happens to have a few regular consumers south of the border. “Any time you can position yourself to have an export market in addition to domestic markets, that’s a plus for you,” he says. “I would keep my options open to consider exporting, whether it’s Mexico, the Far East, Europe, whatever.”
Mexico’s Paper Profile
In the world paper-making hierarchy, Mexico qualifies as a major producer. The country is home to 63 mills—five of which also produce pulp—plus one pulp-only mill, according to Oscar Carrillo.
The mills, most of which belong to one of seven large conglomerates, are concentrated in the state of Mexico in the central part of the country, with a handful located in and around the city of Monterrey. Most are domestically owned, though a few are U.S. affiliates and one—Pipsa, a newsprint company—is owned and operated by the Mexican government.
In 1994, Mexico’s mills produced about 2.8 million mt of paper, with the majority of this—about 60 percent—being used in packaging, according to the National Chamber of the Pulp and Paper Industries. The remaining output was tissue, accounting for 16 percent of the total; printing and writing papers other than newsprint, 15 percent; and newsprint, 8 percent. •
In the past two years, Mexico has risen from fourth place to become the second largest importer of U.S. secondary fiber. And with its demand projected to burgeon in the future, Mexico holds promise to become an even larger market for U.S. scrap paper traders.