Demand, geographic proximity, and the benefits of NAFTA are making Mexico a promising market for scrap paper.
BY KIM FERNANDEZ
For years, U.S. paper manufacturing has been on the decline: Production capacity is down, domestic paper usage is down for many grades, mills have consolidated or closed, and international competition is increasingly fierce. Though the market seems to have stabilized in recent years, no one is predicting a dramatic upswing in the future.
South of the border, conditions look much sunnier. As the Mexican economy strengthens and per capita income rises, demand for some grades of paper is increasing, and demand for recycled fiber is growing right along with it. With recently revitalized payment systems and schedules, the country’s paper producers have established themselves as reliable customers of American and other large-scale recycled paper sellers.
Those who sell recycled fiber to Mexico have quietly enjoyed a stable, competitively priced market for years—and it’s been something of a best-kept secret.
So long as it’s geographically feasible, these recyclers say, selling to Mexican mills can be relatively simple and provide a reliable long-term revenue stream.
The Mexican Market
The Mexican scrap paper market is growing. The country’s scrap paper consumption rose 45 percent from 1996 to 2005, from 2.9 million mt to 4.2 million mt. In that same period, its imports of secondary fiber increased about 23 percent, from 1.3 million mt to 1.6 million mt.
Analysts point to the country’s changing demographics to explain the increased demand. “The population is growing, the per capita income is growing, and the demand for paper products has been increasing,” says Bill Moore, principal of Moore & Associates (Atlanta). He likens Mexico to China in that the country has few areas of forest left to harvest for virgin pulp, so it relies heavily on recycled fiber to produce its paper—and a good proportion of that material is imported.
“The Mexican economy is very small,” explains Rogelio Silva, procurement manager for Fiber Management of Texas (Arlington, Texas), a subsidiary of Durango-McKinley Paper Co. (Albuquerque, N.M.), which he says is one of the largest companies buying secondary fiber in the United States for Mexican mills.
The scrap paper that Mexico generates “doesn’t satisfy the needs of the domestic mills,” Silva says. Currently, 60 percent of the country’s secondary fiber demand is met by domestic sources, and most of the balance is imported from the United States. Mexico’s imports of U.S. scrap paper totaled 1.1 million mt in 2006, down slightly from a 10-year peak of 1.2 million in 2002, when Mexico surpassed South Korea to become the third-largest buyer of U.S. recovered fiber, according to U.S. Inter-national Trade Commission data.
Why does Mexico buy almost all of its imported scrap paper from the United States? “We’re not buying in Central America because [those countries’] economies are even worse than ours,” Silva says, and “with the freight costs as high as they are these days, the only market close enough to us is the U.S.” Freight is up to 40 percent of the fiber cost delivered to the border, he notes.
Grade by Grade
Brown grades of paper such as OCC and DLK account for more than half (59 percent) of the secondary fiber Mexico consumes annually. The country is meeting an increasing proportion of its needs in those grades domestically, however.
“It used to be that there was a premium on OCC to Mexico,” says Scott Windels of Omni-sphere Corp. (Dallas), a scrap paper supplier and paper converter that works with U.S. and Mexican companies, “but brown grades have fallen off over the last five to 10 years as Mexican mills are getting more and more OCC domestically. They don’t have to pull from as far into the U.S. as they used to.” U.S. exports of OCC to Mexico have fallen in the past few years—from 516,000 mt in 2002 to 126,000 mt in 2006.
Windels attributes that change to the boom in Mexican retail, particularly big-box stores, which sell larger individual products or products sold in bulk and packaged in corrugated cartons. “There’s a Wal-Mart, Sam’s Club, or Home Depot going up on every corner now,” he says. “There’s a lot more product being generated in the country.”
And more of that OCC is getting recycled, thanks to greater interest in recycling among Mexican residents and government promotion of recycling. (Mexico currently collects for recycling 46 percent of the 6.16 million mt of paper its population consumes annually. It hopes to reach a paper recycling rate of 52 percent by 2010, when consumption should reach 8.1 million mt.) The result is that 78 percent of the country’s brown-grade stock comes from domestic sources; 22 percent comes from imports, and Windels expects the imported proportion to fall over time.
Even so, brown grades constituted the largest segment of Mexico’s scrap paper imports in 2005—550,000 mt out of 1.6 million mt total imports, or 34 percent.
Imports are a larger proportion of the secondary newsprint market in Mexico. The 520,000 mt of ONP the country imported in 2005 constituted 58 percent of its ONP market. When interviewed this past June, Windels characterized the Mexican ONP market as “a little soft right now—one of the Mexican mills is on strike, so that’s a little slow.” Mexico is the third-largest importer of ONP from the United States (after Canada and China), receiving 193,000 mt of ONP in 2006, down from 386,000 mt in 2005.
Imports also are a majority of Mexico’s deinking supply. The country imported 432,000 mt of deinking in 2005, which was 71 percent of its market that year. About 242,000 mt of that supply came from the United States that year, and in 2006 that export volume reached 245,000 mt. Mexico has been the number-one destination of U.S. deinking for the past six years.
Those three segments—brown grades, ONP, and deinking—constituted 94 percent of Mexico’s recovered fiber imports in 2005, with small quantities of pulp substitutes, magazines, mixed paper, and other grades making up the remaining 6 percent. This summer, “the strongest demand was in office waste and white ledger,” Windels says. The country is also the primary destination for U.S. chemical pulp, taking in 413,000 mt in 2006, the fourth straight year of growth in demand for that grade.
Selling to Mexico
Experts estimate that about a dozen Mexican mills—some owned by American conglomerates—buy scrap paper from the United States. With the country supplying about 60 percent of its needs domestically, and with the established relationships between some Mexican mills and American plants, buyers can afford to be picky about from whom they buy and how much they pay.
“They pay the market price,” consultant Moore says. “For the most part, their prices go whichever way the market has gone. That’s moderated a bit—they used to pay more of a premium. Their terms were longer, and they were known to pay on very long payment terms. They were known as more erratic buyers, but their buying habits have improved.”
Buyers are looking, first, to minimize transportation costs. “We select suppliers based on how close to the border they are,” says Fiber Management’s Silva. “The closer they are, the lower the freight is going to be. That’s something we really take into consideration.”
But, he adds, “the geographical area to be considered for a grade depends on that grade. For OCC, we look mostly in Texas. But when you think about coated sections, there aren’t many in Texas. For those, we go to the Midwest or the eastern side of the country, where there are lots
of printing and writing companies and publishers.” Fiber Management buys from about 30 U.S. suppliers on behalf of Durango-McKinley, he says.
Of course, brokers often are willing to take on the logistics burden of purchasing materials from around the country, consolidating them, and exporting them to Mexico. City Carton Recycling—based in Iowa City, Iowa—has been selling to Mexican brokers for more than 20 years. The brokers “get to deal with the payment, freight charges, and logistics,” says City Carton President Andy Ockenfels. “They quote us pricing and send us purchase orders each month.”
Without the brokers, Ockenfels says he doubts he’d sell much, if anything, south of the border. “Being landlocked up here in the middle of corn country, shipping to Mexico or overseas has a pretty high freight cost,” he says. “The rail costs going to Mexico are pretty high.”
No problems with NAFTA
One factor giving U.S. scrap processors the edge over most other exporters to Mexico is the North American Free Trade Agreement, which phased out most taxes on goods—including motor vehicles, computers, and textiles—traded among the United States, Mexico, and Canada starting in 1994.
The agreement was a boon for Mexican mills and American recyclers, who found they could more easily trade across the border. In effect, NAFTA reduced prices and slashed through walls of red tape that stood between them.
Silva says NAFTA simplified agreements between his company and its suppliers and allowed Mexican companies to become more competitive on the recycled paper market. “NAFTA dropped the importation access taxes Mexican mills used to pay,” he says. They went “from 7 percent down to 4 percent, and now to zero. The only taxes they pay on U.S. imports are federal taxes. The duties and all of that went down to nothing.” Countries not a party to NAFTA still pay such duties, giving the United States and Canada definite cost advantages.
Lower taxes led to more exports: U.S. exports of paper and pulp to Mexico increased 85 percent from 1992 to 2002, according to U.S. Department of Commerce data. (More recent data were not available.) By 2002, U.S. firms had captured 78 percent of Mexico’s pulp and paper import market, largely thanks to NAFTA.
NAFTA and Mexico’s increased demand for paper spell good news for U.S. recyclers. Expect growth and stability over the long term, experts say. “Politically, things look pretty stable,” Moore says. “Mexican companies will recover more of their own material. They’ll generate more of their own product and recover more, but they’ll also need to produce more.”
Silva concurs. “With the market being so strong right now, it’s not that Mexican companies are banging on the door,” he explains, “but it’s very stable. We’ve been doing this for the last 14 or 15 years, and we’ve been through difficult times and easy times. Right now, it’s a very stable market.”
From his perspective in Iowa, Ockenfels says the outlook appears good. “They’re looking for more tonnage,” he says. “We get called on a weekly basis wanting us to ship more tonnage into Mexico.”
Kim Fernandez is a writer based in Bethesda, Md.