September/October 2001
Mounted on excavators or other machines mobile shears give scrap processors
the cutting edge they need when processing ferrous and nonferrous material.
By Robert L. Reid
Robert L. Reid is managing editor of Scrap.
Plummeting commodity prices, the skyrocketing dollar, and a virtually unstoppable supply of curbside-collected material have taken the paper industry—and especially the scrap sector—on a wild, unpleasant ride for the past year.
That was the consensus of speakers at the 2001 Paper Recycling Conference and Trade Show, held in June at Chicago’s Fairmont Hotel.
The event led off with a discussion on the delicate balance between supply and demand. After asserting that “pricing of recovered paper is our market’s judge and jury,” Richard Mason, vice president of secondary fiber for the Neenah, Wis., office of Perry H. Koplik & Sons Inc. (New York City), noted that the industry has suffered 13 months of declining prices for major grades such as OCC, ONP, and mixed office, with few industry sources expecting prices to rise much before spring 2002.
For example, OCC that sold for $113 a ton in June 2000 was going for $38 a year later, while No. 8 ONP’s average price of $104 a ton last June had fallen to $49 by June 2001, Mason reported. Also, hard white envelope that had sold for $409 a ton a year ago was now fetching $217.
The market’s lower demand should have resulted in lower supplies of recovered fiber, but that hasn’t happened. The main reason is government-mandated curbside collection programs that “continue to generate a consistent flow of recovered paper, week after week, regardless of market conditions,” Mason said.
Similarly, many of the deinking projects in recent years were launched without strong enough demand, he said, calling the roughly $2.4 billion venture in deinking “largely a disaster” because it added some 2 million tons of unneeded capacity to the industry but has not consistently produced fiber at a lower cost than virgin pulp.
Mason also noted that consolidation in the paper industry is moving ahead. Currently, the top-five linerboard producers in North America control 62 percent of industry capacity, up from 46 percent in 1995. Even so, the industry remains too fragmented, with the North American containerboard sector alone having some 40 producers, Mason said.
The need to further rationalize the paper industry was also stressed by David Stevens, vice president and general manager of Smurfit-Stone Recycling Co.’s recycling division (St. Louis). Though major producers are idling “nonperforming” assets—Smurfit-Stone alone recently trimmed 1.6 million tons of containerboard production—there remains roughly 4 million tons of excess containerboard capacity in the United States, Stevens said.
Last year’s 1.1-million-ton decline in domestic containerboard consumption didn’t help matters, he noted, adding that this drop-off is expected to continue.
While the strong U.S. dollar—which hit 15-year highs against certain currencies during the conference—is hurting U.S. scrap paper exports overall, China remains a major market for U.S. OCC and is well on its way to importing a million tons this year, if current rates continue, Stevens said. But even heavy buying overseas won’t necessarily boost OCC prices, he warned. Though such exports normally are believed to drive up OCC prices, that’s only true when domestic mill operating rates are 95 percent or higher. Last year, U.S. mills ran at only 90 percent, while this year the rate had fallen to just 83 percent by May, Stevens reported.
At a time when the recovered paper industry is suffering from both falling prices and excess capacity, Solvay Paperboard L.L.C. (Syracuse, N.Y.) knew that its plans to commission a third containerboard machine by July 2002 would not be popular. “Some may blame us for adding to overcapacity,” said James Porter, president of Solvay. But Porter sees his highly automated, ISO 9001-certified plants leading the way to higher-quality and lower-cost papermaking, which is “the drumbeat our industry’s got to have.”
Besides, Porter stressed, Solvay is not a market mill. “We’re able to place all of our volume, if necessary, within our partnership group,” he said. “That produces tremendous stability for us and for our suppliers—we’re a very reliable market for their output.”
While Porter conceded that the current market is bad and likely to stay that way for some time—box demand was down 10 percent in the first half of 2001—he also believes there are better times ahead. “Maybe not tomorrow,” he said, “but out there on the horizon, not too far away.”
What to Expect With Exports
Though U.S. exports of scrap paper increased about 27 percent in the first half of 2001, those figures mostly represent a recovery from last year’s big decline, noted James Maher III, president of Morgan Price & Co. Inc. (Miami) and moderator of the conference’s “Offshore Odyssey” session. Actually, Maher asserted, the current export picture is “pretty murky, if not terrifying.”
To adopt a more positive outlook, therefore, Maher and his fellow speakers focused on two parts of the world that offer opportunities for growth—Latin America and Asia.
Maher examined the markets south of Mexico, which he described as “not all that good.” Venezuela, a leading importer of U.S. recovered fiber in the region, has been suffering from both political and economic turmoil. Especially damaging has been the recent troubles at Venezuela’s big paper operation Venapal, which reduced its output about 200,000 tons a year, a move that “substantially” cut U.S. recovered paper exports to Venezuela, Maher noted.
Overall, though, Maher expressed some optimism about business in Latin America, describing the region as one that’s “been sleeping for a very long time and now seems to be waking up.” At the same time, he reminded attendees that Latin America—with one notable exception—doesn’t have a good history of free trade.
A Mexican Exception. That exception is Mexico, which was the focus of a talk by Raul Garcia, who handles export sales for Waste Management’s Recycle America from the firm’s office in Irving, Texas.
Quoting figures from Mexico’s Camara Nacional de la Industria de la Celulosa y Papel (CNICP), Garcia noted that the Mexican paper industry includes some 57 mills that produced roughly 4 million mt of paper and paperboard last year. Mexico’s paper sector, which has been growing 4 to 4.5 percent in recent years, uses about 80 percent recovered fiber in its processes. All told, Mexico consumed an estimated 3.8 million mt of recovered paper last year—up from 3.2 million in 1996. Roughly 40 percent of that total—1.5 million mt—was imported, with OCC being the leading imported grade last year at 543,000 mt, followed by ONP at 428,000.
Mexico’s scrap-paper imports have been following a somewhat zigzag pattern in the past five years, rising from 1996 to 1998, then falling in 1999 before rising again last year. Garcia expressed concern that rising imports are beginning to hurt the domestic industry. While several Mexican paper mills have launched expansions and upgrades in recent years, various problems have plagued most of them, he noted. Moreover, several U.S. manufacturers have opened corrugated box plants in Mexico that Garcia said are hurting the local producers.
The Asian Situation. Though the United States once considered itself practically an OPEC of secondary fiber, James Maher said, reality struck home in recent years as Europe became a credible competitor, especially to Asian mills. Describing Europe’s export rise as the “most important development in trade for secondary fiber over the past five or six years,” Maher then turned to Wade Schuetzeberg, marketing manager for ACN (Europe)(Rotterdam, the Netherlands), to help attendees understand what happened.
While North American recovered fiber had been a staple of the Asian paper industry since the early 1970s, the economic downturn that hit the Far East in 1997 created new opportunities for European exporters, explained Schuetzeberg. The devaluation of various Asian currencies made it difficult for many Asian mills to afford the “highly priced and dollar-denominated raw materials from North America,” while many North American exporters focused on only the most stable buyers such as China or turned inward to domestic consumers, he said.
As a result, European scrap paper exporters began to grow their market share in countries such as India, Indonesia, Thailand, and Taiwan, even though European fiber faced limiting factors such as short fiber length and lower yields. But at the time, many Asian buyers were forced to choose recovered paper solely on a delivered-cost basis, Schuetzeberg said.
Other factors that affect U.S./European competition in Asia include the still-strong U.S. dollar, which can make North American exports more expensive, plus the fact that European restrictions on landfilling paper virtually force many countries to seek export outlets. Germany, for instance, reportedly must export as much as 20 percent of its supply to the Far East to avoid excess supply in its domestic markets, Schuetzeberg noted.
Schuetzeberg also focused on the recovered fiber needs of one Asian mill—the Nine Dragons Paper Industries in Dongguan, China. Nine Dragons is owned by American Chung Nam (Pomona, Calif.), the parent company of ACN (Europe).
Already producing 650,000 mt of kraft liner, mottled white, and medium paper on two machines, Nine Dragons intends to add a third line next year that should boost its annual output to more than 1 million mt of containerboard. At that rate, Nine Dragons will become the largest of China’s 11,000 paper mills, with plans to eventually add a fourth production line, Schuetzeberg reported.
North American fiber has played a dominant role in supplying Nine Dragons’ first two paper lines and likely will continue to do so, though there are “no plans to use American OCC as the main fiber furnish” for the third machine, Schuetzeberg said. While the exact fiber furnish for the new line remains undecided, “European supplies of recovered paper are making their way into a meaningful share” of Nine Dragons’ overall supply, he noted.
Procurement and Marketing Trends
Leading off the session on “Trends in Procurement and Marketing of Secondary Fiber” was moderator and presenter Pete Grogan, manager-market development, containerboard packaging and recycling for Weyerhaeuser Co. (Federal Way, Wash.).
Grogan focused on several trends, ranging from long-term growth in demand for recovered paper—which is increasing at roughly 6 million mt a year—to what he sees as a shrinking supply of U.S. secondary fiber. With ONP and OCC recovery rates nearing 70 percent, “the low-hanging fruit is gone so it will be difficult for us to supply the world as we have in the past,” he observed.
Grogan and others also focused on consolidation as a major trend. For instance, Bruce Fleming, president of Canusa Corp. (Baltimore), said that scrap paper processors face mainly a Hobson’s Choice—that is, no good solution—when it comes to mill consolidations.
Take your best mill customer, Fleming offered. Consolidation means that your best customer might be bought by a firm with its own recycling operations and thus won’t need to buy from you anymore. Or it might be bought and shut down. Or it might be bought by a company that’s unreliable in making payments, which could add uncertainty to your cash flow.
Canusa’s response to consolidation has been to form partnerships ranging from one with the Washington Post to recycle ONP collected curbside around the nation’s capital to one with Encore Paper Co. in New York state that enabled that towel and tissue mill to import key grades of recovered fiber from the United Kingdom when prices spiked along the Eastern seaboard, Fleming said. Canusa also works closely with Boston-based Bay State Paper Co. in a partnership that earns Canusa extra if it can procure fiber at a “total head box value” better than the kraft paper firm can do on its own.
Consolidation also means working harder to nurture business relationships. That’s because, as the number of players in an industry shrinks, there aren’t as many new suppliers or customers to turn to if a relationship sours, noted David Niessner, manager-recycled fiber procurement for International Paper (Memphis, Tenn.). Conversely, it can mean having greater internal resources for resolving problems. For instance, the broad range of mills consolidated under the International Paper banner makes it easier for the corporation to use more of its own recovered fiber internally, thus reducing its need for brokers, Niessner said.
He also warned that the paper industry’s falling utilization rates could force producers to idle certain machines or even entire plants. This could hit recovered paper mills especially hard given the greater volatility of secondary fiber prices compared with wood pulp, he said.
Ben Harvey, vice president-recycling of E.L. Harvey & Sons Inc. (Westborough, Mass.), explained how a small, regional paper packer can survive these days, when companies must deal not only with consolidation but also rising energy and labor costs while “selling our paper at prices we got back in ’75.”
His answer? Create and work hard to keep one-to-one relationships with both suppliers and consumers. Customers want good service such as reliable pickups, consistently good quality shipments, and fast resolution of any problems that crop up, Harvey explained. Familiarity is also key—and that’s one area where small firms have an advantage over the big, heavily consolidated national corporations, he said.
“When customers call in, they want to talk to someone they know,” Harvey stressed, and that’s what E.L. Harvey offers—consistency and familiarity. But with so much consolidation mixing one company into another, followed by layoffs or new appointments, customers who call a consolidated firm “don’t know who they’re talking to anymore,” he said.
Hitting the Quality Target
Controlling quality in scrap paper means dealing with variability—variability in material, volume, employee knowledge, and mill specifications, said Michael Finn, president of Recycling Services Inc. (Chicago).
Addressing the session on “Scrap Paper Specifications,” Finn explained how his firm first audits potential generators and then establishes a system of economic incentives to elicit good, clean material in the desired quantities. The firm puts special emphasis on training the generator’s office cleaning staff and tries to offer timely feedback. Recycling Services used to take several days to comment about problems in loads, but the company now faxes a report to the generator on the same day that the poor material is received, Finn noted.
Don’t kid yourself that quality is cheap, warned Roy Geigel, vice president of Fox River Fiber Co. (De Pere, Wis.). “Assurance of quality secondary fiber does require significant time and expense—and a lot of effort,” he said. Investing in quality adds at least 3 percent to labor costs, roughly 7 percent in equipment expenditures, and about 10 percent for making a “commitment” to quality that includes efforts ranging from raw material inspection to employee education to preventive maintenance. All told, the quality investment adds roughly 20 percent to the cost of a ton of scrap paper, which must then be reflected in your sales price, Geigel said. “If your selling price does not include all of your costs, you’re in trouble,” he stated.
David Powelson, president of Tri-R Recycling (Denver), asserted that attention to quality does not get processors higher prices for their scrap paper. But it does help generate higher profits because “your material moves easily” whereas lesser-quality paper will have a harder time finding a buyer.
Investing in good managers is one way to promote quality, he said, because good managers who treat employees with dignity and maintain high morale will be better able to coax out that extra bit of “discretionary effort” that’s key to getting employees to give their best every day.
Selecting good suppliers and making sure they understand your quality expectations is the first step to ensuring scrap paper with high consistency and low variability, explained Michael Milak, team leader, corporate purchasing, for Kimberly-Clark Corp. (Roswell, Ga.). Technological investments also help. Kimberly-Clark, for instance, has made capital improvements to upgrade its waste-handling capability, screen design and capacity, bleaching systems, barrier chemistries, and lift-truck weight capacity, Milak explained.
Moreover, during a question-and-answer session, most of the panelists agreed that doubling their equipment budgets would probably have a greater impact on quality than, say, doubling the amount spent on employees. •
E-Commerce Update
The hyperfast gyrations of the e-commerce world—in which last year’s dot-coms are this year’s dot-bombs—were explored by John Robb, sales manager for RecycleNet Corp. (Guelph, Ontario), Jan Marrs, vice president-recycling for ForestExpress (Atlanta), and John Daniel, manager, Enron Industrial Markets (Houston). Robb predicted that e-commerce will expand throughout the scrap industry only when all employees have access to the Internet right on their desk—just like they have a telephone. “If it’s hard to do e-commerce,” Robb said, “it’s not going to happen.”
Need Fiber?
Though most of the scrap paper industry is trying to cope with overcapacity now, the time will come when currently unrecovered tonnages will need to be found, predicted Betsy Dorn, senior associate with Moore & Associates (Apex, N.C.). Dorn moderated a session on finding such extra fiber that featured the perspectives of a collection and processing firm, a recycled paper mill, and a local government agency. Dorn (second from left) is shown here with Steven Ragiel, vice president-recycling for Waste Management’s Recycle America service (Houston), Bob Rickman, vice president of Southeast Paper Manufacturing Co., and Gina Hawkins, recycling coordinator for the public works department in Gainesville, Fla.