September/October 2011
Paper’s Next Small Thing
Despite growing economies and greater demand for scrap paper, Central and South America are likely to remain only a niche market for U.S. recovered paper, traders say.
By Ken McEntee
On the surface, Central and South America might appear attractive markets to exporters of U.S. scrap paper. The Latin American economy (including Mexico) is expected to grow 4.4 percent in 2011 and 3.6 percent in 2012, according to an Aug. 23 report from Morgan Stanley (New York). In contrast with stagnating economies in North America and Europe, countries “are still growing down here,” says Kevin Baker, the Peru-based Latin American agent for CellMark Recycling (Corte Madera, Calif.). “Peru has [had] huge growth, at a 7 to 8 percent average over the past 10 years. Chile’s economy has grown 2 to 3 percent a year, which is still better than the U.S.” Brokers expect the strong economic growth in the region to continue, which could boost its demand for recovered paper, and the United States has a geographic advantage over some other, more distant sources of imported paper stock.
U.S. recovered paper exports to Central and South American countries have increased over the past decade, but the region still takes in only about 3 percent of the total, according to U.S. government data. Significant further growth is unlikely for two reasons, say traders with knowledge of these markets. First, the conditions under which the mills want to buy are a challenge for U.S. exporters. Orders are inconsistent, and payments are generally slow. “You have to be patient to do business down here,” says David Jordan, the Santiago, Chile-based Latin American agent for Jordan Trading (Kingston, N.Y). Second, the region’s mills expect to meet much of their future need with domestic supply. With a significant price difference between the two—“imported tonnage is generally $50 to $100 a ton higher than locally collected tonnage due to the added costs of overseas shipment, customs, and banking charges,” notes Jason Lavelle, export director for American Fiber Services (Atlanta)—and the predominantly hand-sorted domestic supply providing higher quality than imported material, the region’s mills have a big incentive to invest in expanding domestic collection as much as possible.
Despite these barriers to Central and South America becoming a major market for U.S. recovered paper, traders have established successful ongoing relationships in the region. Here’s a look at these niche markets and their prospects going forward.
Trading by the Numbers
Central and South American countries were the destinations for just 637,000 short tons—or about 3 percent—of the 20.7 million tons of U.S. recovered fiber exports in 2010, according to data from the U.S. Department of Commerce, Bureau of the Census (Washington, D.C.). And that’s after strong growth in demand there for U.S. recovered fiber in recent years. Last year’s exports were up more than 16 percent from 2009; U.S. scrap paper exports to Asia, in comparison, fell 6.4 percent in that period. Through April 2011, however, U.S. exports to Central and South America were down 19 percent compared with the same period in 2010.
The bulk of U.S. scrap paper shipments to Central and South America are OCC and mixed paper, according to Commerce Department data. In 2010, OCC was about 44 percent of the total (283,000 tons), while mixed paper was 25 percent (157,000 tons). Pulp substitutes, the third-largest segment, were 13 percent of total U.S. exports (85,000 tons), followed closely by chemical deinking grades, at 12 percent (78,000 tons). Exports of groundwood grades, including ONP, in 2010 reached 34,000 tons, or 5 percent of the total. Notably, those percentages varied little from 2000 to 2010. During that 11-year period, OCC was 45 percent of all U.S. exports to South and Central America; mixed paper, 23 percent; and chemical deinking grades, 8 percent.
By country, Ecuador was the largest buyer of U.S. scrap paper in the region in 2010, importing more than 120,000 tons. The other top five buyers were Chile, which purchased 92,000 tons; El Salva-dor, 89,000 tons; Venezuela, 77,000 tons; and Colombia, 73,000 tons.
By grade, Ecuador was the top consumer of U.S. OCC, taking in 103,000 tons, followed by Venezuela, 54,000 tons, and Chile, 48,000 tons. In the deinking market, El Salvador was the top buyer, purchasing 16,500 tons, with Chile a close second at 16,100 tons. El Salvador also was the leading importer of U.S. pulp substitutes, at 34,100 tons, with Colombia a distant second at 13,200 tons. Colombia, however, was the largest market for mixed paper, at 31,000 tons, followed by Chile, 24,000 tons, and Peru, 22,000 tons.
U.S. scrap paper exporters ship the majority of their tonnage to Central and South America from the East Coast. Between 2000 and 2010, more than 26 percent of those shipments moved from New York, with Miami and Puerto Rico accounting for 15 percent and 11 percent, respectively. Another 11 percent came from Los Angeles, the only significant West Coast port, with most of the balance moving through the ports of Baltimore; Tampa, Fla.; Philadelphia; Mobile, Ala.; Norfolk, Va.; and Charleston, S.C.
An Up-and-Down Market
When U.S. scrap paper traders list the challenges of the Central and South American markets, inconsistent buying is at the top. Month-to-month U.S. scrap paper shipments to markets such as El Salvador, Ecuador, and Chile show a dramatic pattern of peaks and valleys. For example, Ecuador’s demand for U.S. OCC ranged from 10,587 tons in October 2010 to 601 tons in March 2011, then demand went back up to 7,552 tons in April 2011. Similarly, U.S. OCC exports to Chile jumped from 4,816 tons in October 2010 to 7,830 tons in December 2010, then they plummeted to 975 tons in April 2011. “Nothing is steady,” Jordan says. “That’s a big challenge down here. All of the mills tend to be in and out of the market all the time.” Valerie Roquefort, Latin American agent for Ekman Trading (Lyndhurst, N.J.), says most of her company’s customers in Central and South America buy eight months out of 12. “Some other mills may buy three or four months, then you don’t see them for another year,” she says. “I can’t think of a customer who buys every month.”
One explanation for these dramatic buying swings is that Central and South American mills tend to buy first from local sources that deliver less expensive and cleaner fiber. “The wastepaper collected locally is all hand-sorted, so it’s much cleaner than the wastepaper that comes from the United States,” Jordan says. In Chile, for example, there’s no government-supported residential recycling program, but informal-sector workers have long collected and sold scrap paper. “We put our trash on the streets, and the cartoneros come with push carts and pull the cardboard, newspaper, and other recyclables out of the trash,” Jordan says. “What they take to the mills is pure OCC. It’s very clean, double-sort quality.” Roquefort concurs. “The local supply is beautiful. It’s much cleaner than U.S. paper, so the U.S. is the last resort for these mills. They import only what they have to, when they have a lack of local supply.” In fact, she says, the quality of U.S. exported fiber has declined progressively over the past 10 years. “Our customers can see the difference. They expect the paper they import to meet the same quality as what they get from the local furnish, and I don’t think that’s possible.”
The demand for high-quality paper is not just a preference, Lavelle says. Latin American mills are designed to consume extremely clean recovered paper. Though the large mill groups have invested in the latest technology, which allows them to use paper with higher contaminant levels, smaller mills in the region might not have that option. That’s one reason why brokers expect Central and South American mills to focus heavily on increasing local collection systems in the coming years.
When local sources cannot meet the mills’ supply needs, they turn first to neighboring countries, largely because “they can get it cheaper from other countries in the region than they can from the United States,” Jordan says. That usually puts U.S. suppliers in the position of filling in the gaps. As a result, U.S. brokers often find themselves waiting to hear whether they will get an order for the month.
In addition to facing inconsistent markets, brokers who sell to Central and South America say they face long payment terms at virtually all mills—and many mills are high credit risks as well. “Mills down here want a minimum of 60 days; most want 90 days, and it is rare to receive timely payments,” Jordan says.
In fairness, traders attribute some of the payment issues to the individual Central and South American governments rather than the buyers. “Venezuela, for example, is horrible to deal with because the government controls every aspect of foreign exchange,” Baker says. “The terms might be 90 days, but by the time the government releases the funds, you don’t get paid before 180 [days]. The customers are willing and wanting to pay, but it’s out of their control.” Venezuela also poses other challenges, such as strict import regulations, Roquefort says. “Every single import has to be pre-approved,” she notes. “Venezuela and Argentina come to mind as [countries that are] very difficult to do business in. It isn’t a reflection of the customers. It’s just a very difficult political situation.”
In light of such financial and trade risks, it’s important to know your customer, Baker says. “You have to know whom you’re dealing with. Like everything else, it’s all relationship-based.” Living in the region is an advantage, he says—he moved to Peru in November 2010. “Most of the traders are U.S.-based and focus mainly on the supply side of the market,” he explains. “Being here gives me a chance to focus on the customer side. If I want to go down to Chile to see a customer, I can easily fly down for a day and come back. From the U.S., it would take 12 hours to fly down.”
The Players and the Process
A few large, multinational mill groups dominate the paper and paperboard industry in South and Central America, including
--Empresas CMPC, a Santiago-based company with a variety of subsidiaries in forestry, pulp, tissue, paper,
and paperboard. The company and its subsidiaries operate mills in Chile, Argentina, Peru, Uruguay, Colombia, Ecuador, Brazil, and Mexico. CMPC also operates Sorepa (Santiago), a paper recycling business.
--Kimberly-Clark (Dallas), which has tissue mills in eight countries in Central and South America.
--Svenska Cellulosa Aktiebolaget (Stockholm), which has joint-venture tissue manufacturing operations in Argentina, Bolivia, Chile, Colombia, the Dominican Republic, Ecuador, Peru, and Venezuela. The joint ventures operate under the names Familia Group (Medellin, Colombia) and Pisa Group (Santiago).
--The Smurfit Kappa Group (Dublin), the largest corrugated producer in Latin America and the only pan-regional producer of corrugated and containerboard in the region, with operations in nine countries.
--Kruger, based in Montréal, which operates two tissue manufacturing operations—Papeles Nacionales (Bogotá, Colombia) and Papeles Venezolanos (Paveca, Venezuela).
“There also are some smaller mills that have their own niches,” Baker adds.
To illustrate how the Central and South American market works, brokers describe the fiber procurement process at two of the largest mill groups in the region. At CMPC, for instance, individual mill buyers purchased fiber until about a year ago; today the company has a central purchasing department in Santiago. As Jordan explains, the company sends an e-mail to suppliers each month that breaks down the projected fiber needs for its operations in various countries, and it sets a deadline for suppliers to submit offers. CMPC reserves the right to take up to five business days after the deadline to inform suppliers if it plans to buy any fiber from them. The problem, Jordan says, is that the company doesn’t send any kind of communication if it doesn’t plan to buy from a specific supplier, “so you’re waiting, not knowing whether you’re going to hear from them or not.” The issue, traders explain, is that CMPC’s purchasing agents are in the central office, and they don’t work directly with scrap paper. They’re looking for the best prices, and there’s no negotiation.
Another broker agrees that mills’ lack of communication makes it difficult for their suppliers to plan. “You quote something, and a week later you can still be waiting for an answer. We hold a certain amount of the grades the mills buy in reserve for them. At some point, we just can’t hold on anymore because the market is moving, and we have to move those tons.”
The buying process for Kimberly-Clark, though similar, is typically faster, exporters say. The company has a central purchasing officer in Costa Rica who buys for South and Central America. As with CMPC, he sends a list of the company’s projected fiber needs to its suppliers, but “he tries to confirm his orders a few days after the deadline,” Jordan says.
The Outlook Ahead
The up-and-down nature of the Central and South American markets continues in 2011. At the start of summer, for instance, with the United States seeing strong prices for the deinking grades that are of interest to tissue mills there, U.S. scrap paper export volumes to the region were down significantly compared with 2010. “According to some of our contacts,” Roquefort says, “the low activity during the first part of this year was due in part to higher than expected imports during the previous quarter and an increase in local collections. We started to see a little more activity in June, and we expect to see more normal activity going forward.”
The high prices for U.S. recovered paper entice some mills to adjust their feedstock, Baker says, using less scrap fiber and more wood pulp. Pulp is plentiful in Central and South America, with Chile and Brazil among the world’s largest pulp producers. “By using more wood pulp, they’ll get a better product and a better yield,” he says.
Jordan counters that replacing recovered paper with virgin pulp is not preferable to integrated mills. “Depending on worldwide demand for pulp, South American pulp-producing mills often would rather export their pulp for a higher price, to achieve an increase in overall profitability, and use [scrap] paper for their own furnish,” he says. There are differences in the products, too. Mills that produce white, soft tissue for more affluent buyers are more likely to use pulp, while mills that produce lower-grade tissue often will use more scrap paper as furnish, he notes.
Mills’ environmental considerations are another factor that can affect their purchasing decisions, Jordan notes. “Mills need to utilize an amount of recycled fiber, particularly postconsumer fiber, to obtain or maintain recognition for sound environmental practices, such as FSC [Forest Stewardship Council] certification,” he says.
Even if the mills end up buying more recovered paper, none of these market participants expects U.S. recovered paper exports to Central and South America to increase substantially.
“I see South America growing but not becoming a major factor in the near future,” Lavelle says. Citing the abovementioned price and quality issues, Jordan expects the region’s producers
to remain focused on developing their local supplies of recovered paper. “I think there’s going to be less and less demand for imported fiber from the United States as Central and South American mills cultivate domestic collection,” he says.
Still, a small market is enough to keep these brokers in business. “I’ve been doing this for 15 years,” Baker says. “It’s a nice little niche market to have.”
Ken McEntee is editor and publisher of The Paper Stock Report and Paper Recycling Online (www.recycle.cc).