The Paper-Hungry Dragon

U.S. scrap paper traders are heading for their third straight record-year of recovered fiber exports, thanks largely to China’s growing paper industry.

By Robert L. Reid

In an uneven year in which the overall U.S. economy has teetered between recovery and recession, recovered paper exports are heading toward their third straight record year.
   As of May (the latest figures available at presstime), American scrap paper firms had exported some 4.22 million mt of recovered paper, up more than 140,000 mt from 4.08 million mt in the first five months of 2001. If the current pace holds, U.S. scrap paper exports could reach 9.9 million mt this year, surpassing 2001’s 9.6 million mt and nearing 2000’s record of nearly 10.3 million mt, according to an analysis of U.S. government export figures.
   Overall, exported tonnage accounts for about 20 percent of the total U.S. recovered paper market, with the numbers running a bit higher so far this year, reports analyst Bill Moore of Moore & Associates (Atlanta). And the future looks even brighter for scrap exporters, says the American Forest & Paper Association (AFPA) (Washing-ton, D.C.), which is projecting a 50-percent increase in U.S. recovered fiber exports between 2000 and 2006.
   The leading foreign buyers behind this booming export trend have been China, Canada, South Korea, and Mexico, which together last year consumed more than 7 million mt of U.S. recovered paper—73 percent of the total exported tonnage. But while these four have been the primary export destinations for U.S. scrap paper since the mid-1990s, only one country—China—has had uninterrupted growth. Indeed, China has been on a scrap paper buying binge since at least 1995, the first year its purchases of U.S. recovered fiber topped 500,000 mt. Since then, China’s demand for U.S. fiber has grown consistently each year, surpassing 1 million mt for the first time in 1998, falling just short of 2 million mt in 2000, and skyrocketing to 3.3 million mt in 2001—more than 34 percent of total U.S. scrap paper exports that year.
   By contrast, Canada’s purchases declined last year from their peak in 2000, knocking it from its position as America’s No. 1 scrap paper export market—a position Canada had held since 1994. Mexico and South Korea also posted declines last year. While those countries were consistently large buyers throughout the 1990s, their totals rose and fell during that period while China rose steadily from 1993 onward (see table on page 52).
   China’s growing appetite for nearly all grades of scrap paper shows no sign of abating (see “What China Wants” on page 53). Indeed, it may even accelerate now that China has joined the World Trade Organization, industry sources note.
   This year, China’s purchases of U.S. secondary fiber in the first five months were more than 7 percent higher than the same period last year, U.S. figures show. If this trend continues, China could end up buying a record 3.5 million mt or more of U.S. fiber in 2002. At least one scrap broker—Jimmy Yang, president of Bayside International Industries (Los Angeles)—thinks it could go even higher. He points to China Customs Administration figures that estimate the country will buy as much as 5 million mt of U.S. scrap paper this year.
   Overall, China imported some 6.4 million mt of recovered fiber from all sources in 2001 and could buy as much as 7.8 million mt this year, says Yang. By 2006, he adds, China could be importing 15 million mt of recovered fiber annually.
   The country needs all this scrap to feed a hungry dragon—namely its rapidly growing paper industry. Currently the world’s second-largest paper consumer at 36.8 million mt annually, China is expected to consume as much as 80 million mt by 2015, says Yang. Already, it has announced plans for 6.7 million mt of additional recycling capacity by 2005, with even more investments anticipated, say industry watchers. 

New World Order?
For one British analyst, all this scrap paper heading to the Far East means that a “new world order” is being established in the global trade of recovered fiber. That’s how Edward Walker of Edward Walker Consulting (Godalming, England) explained things in a speech at the Bureau of Inter-national Recycling’s meeting in Monte-Carlo this past May.
   While growth in paper and paperboard consumption over the next few years is expected to slow in North America, Japan, and—to a lesser extent—Western Europe, “strong growth will be a continuing feature of markets in China and Asia Far East,” Walker said. Compared with China’s 6.7 million mt of additional recycling capacity already in the works, Walker noted, North America has only 2.1 million mt of new capacity planned. Moreover, North American investments will increasingly be made just “in updating existing lines rather than constructing new capacities,” he predicted.
   By contrast, China is investing in new capacity for packaging grades of recovered fiber and in deinking ONP and OMG.
Western Europe is likewise adding deinking capacity—for instance, some 1.5 million mt of new ONP deinking capacity is coming in Europe in the next two years, says analyst Bill Moore. But slower growth in Western Europe’s scrap paper usage means it will experience a rapidly growing surplus of recovered fiber just like the United States and Japan (which has shifted from being a net importer of scrap paper to a “significant” net exporter, Walker said).
   As a result, “China and other Asian importing countries will have a wider choice of suppliers than formerly,” Walker stated, noting that “the old order is changing and a new world order beckons.” As a result, he concluded, “China and the Far East will increasingly dictate developments in the global recovered fiber business.”

Competition and Quality Questions
Walker’s observations have special significance for U.S. paper processors and brokers, who for years enjoyed such a dominant role in global trade—especially in the Far East—that they represented practically an OPEC of recovered fiber, says broker James Maher III, president of Morgan Price & Co. Inc. (Miami). At last year’s Paper Recycling Conference & Trade Show in Chicago, Maher called the rise of Europe as a competitor to U.S. scrap paper “the most important development in trade for secondary fiber over the past five or six years.”
   This development was, at least partly, an unintended consequence of Europe’s aggressive environmental measures, he adds, which “required so much recycling that they simply had to do something with the material they were accumulating.”
   As a region, Europe’s recovered paper exports have indeed been increasing—from approximately 2.5 million mt in 1998 to more than 3.7 million mt in 1999, then dipping slightly to 3.5 million mt in 2000—with Asia and especially China accounting for nearly three-fourths of that trade. These numbers represent recovered paper shipped outside the 18 countries represented by the Brussels-based Confederation of European Paper Industries (CEPI). In 2001, such exports outside CEPI “increased again a bit,” notes Esa Hyvärinen, CEPI’s director of recycling, though exact figures weren’t available at presstime.
   Japan has also been “aggressively gaining market share” in China, Jimmy Yang told attendees at this year’s Paper Recycling Conference & Trade Show in New Orleans. Dow Jones Commodities Service, for instance, recently reported that Japanese exports of recovered fiber nearly tripled between 2000 and 2001 from 550,000 to 1.47 million mt, largely to meet Asian and especially Chinese demand. The same report estimated that Japan’s exports this year could reach 2 million mt. Other sources, however, question whether Japan intends to be a long-term player in the export market, suggesting that its current export boom resulted from factors such as the attractive prices offered by Chinese buyers and/or the current slowdown in Japan’s own paper industry.
   Price—at least on the selling side—is certainly one reason for Japan’s and Europe’s growing exports. Historically, U.S. fiber tends to be the most expensive, followed by European recovered paper, then Japanese fiber. The differential between American and European OCC, for instance, is about $10 to $15 a mt, reports Greg Rudder, executive editor of Pulp & Paper Week. But there are other factors at work as well. 
   Though U.S. recovered paper is often described as the best material—because of the length and number of fibers—scrap paper from Japan and Europe has a better reputation for being free of contaminants. “Ever since the U.S. got into single-stream recycling, the quality has dropped tremendously—you’ve got glass and plastic and all kinds of stuff in there,” Yang reports. By contrast, he says, the Japanese bales he’s seen are so clean that “I wouldn’t mind eating my lunch on them.” Europe also produces cleaner bales because it avoids single-stream recycling, notes CEPI’s Hyvärinen.
   AFPA isn’t certain if single-stream collection is at fault for the declining cleanliness of U.S. fiber, though the group is examining the issue, says Remy Esquinet, AFPA’s director of fiber recovery and utilization. AFPA says, however, that it has received complaints from Chinese sources about problems with American fiber. 
   “Their labor is less expensive, so they can hand sort more than we can—but they can’t get all the contaminants out,” Esquinet notes. “If they’re paying a certain amount per ton and they’re getting a lot of garbage in there, then it’s really increasing the cost that they’re paying per ton of fiber. That’s one of the reasons I’ve been told that they’re going to Japan and Europe.”

Far Eastern Fears
Ironically, the growing potential of European fiber exports isn’t necessarily pleasing to some Europeans—at least not to European paper mills. 
  The European paper industry “is rather worried about the increased imports of the Asian producers” combined with “the fact that collection in Asia isn’t expected to grow too rapidly and that Americans don’t expect their collection rate to increase too much in the future,” says CEPI’s Hyvärinen. That’s because Europe plans to increase its recovered paper utilization by at least 5 million mt in the next few years, especially in higher grades, ONP, and OMG, he explains. 
   One project involves a major OCC capacity increase—Papierfabrik Palm GmbH & Co. KG is installing what many have called the world’s largest paper machine in Wörth am Rhein, Germany, which will consume an estimated 600,000 mt of recovered fiber a year.
   Will such projects keep more European fiber close to home? It’s hard to say. “The markets are going to watch [Papierfabrik Palm’s new OCC project] very carefully to see how it affects Germany’s exporting of recovered fiber,” says Greg Rudder, who notes that Germany leads Europe in both recovering and exporting scrap paper. Others stress that fiber goes to the consumer who pays the best price for it—which currently means China. 
   Fears about Far Eastern demand aren’t restricted to Europe, though. Slowing paper production in the United States—which hinders collection—coupled with the export boom could “hurt the ability of U.S. mills to get the fiber they need,” notes AFPA’s Esquinet. As a result, AFPA is working to increase America’s fiber-recovery rate, which currently stands at an overall 48.3 percent. This includes efforts to boost collection of certain grades—such as mixed and office papers—that have faced utilization problems in the past and so haven’t peaked yet in terms of collection. But if exports do stress the market, “we wouldn’t be surprised to see some mixed papers and office papers substituted for some of the more traditional grades,” Esquinet says.
   Domestic supply problems probably won’t appear fully until the 2004-2006 time frame, he adds, “but if we don’t plan for it now, it will be much more of an issue.”

More Trade—or Troubles?
China has long inspired somewhat exaggerated ideas in the West. Remember the apocryphal prediction that if everyone in China jumped at the same time it would cause an earthquake? Well, China’s recovered paper purchases may not have made the earth shake, but they do seem to be making the patterns of paper buying in the United States shift somewhat. These shifts, reported by various brokers and analysts, take many forms, including a rippling effect across the North American continent (as Chinese demand leads West Coast shippers to reach farther into the American heartland to find enough paper to export, which in turn requires Midwestern consumers or processors to pull more paper from the East Coast); an increase in East Coast paper moving directly to Asia; and even anecdotal reports that some European mills have slightly increased their traditionally small purchases of U.S. fiber to compensate for the increasing tonnages being shipped to the Far East by European dealers.
   Whatever the reality, China’s role as the dominant destination for recovered paper exports seems likely to continue so long as the country’s overall dominance in global trade remains unchanged. In other words, while China continues to export so much electronics, clothing, toys, and other consumer products to the United States and other Western markets, it will need recovered paper to package those goods—and the shipping lines that bring all those packaged products to the West will likely continue to offer good rates on returning containers to Asia, which means relatively inexpensive freight for backhauling loads of recovered fiber. 
   That’s certainly what a lot of people are banking on—including the ocean freight lines that are investing in gigantic new ships to carry all this China trade back and forth across the Pacific, notes Jimmy Yang.
   But remember: The prospects for the overall global economy remain uncertain, and any slowdown that hinders China’s own exports could, in turn, reduce its demand for American, European, or Japanese recovered fiber. 
   Moreover, while China’s economy is the fastest growing in Asia, if not the world—and is expected to increase at 7 to 9 percent annually into the near future—the country faces a host of potential problems. These include social instability from the fact that some 15 percent of China’s population of 1.3 billion is currently unemployed—which adds up to approximately 195 million people out of work—plus the possibility that China’s economic clout will also “fuel its growing military and regional ambitions,” potentially provoking a conflict with the United States over, say, Taiwan, notes Yang.
   On the nonmilitary side, a trade war is never completely out of the question. This spring, for instance, China threatened to impose a 24-percent tariff on certain U.S. recovered paper shipments in retaliation against the United States’ tariffs on steel imports from China and other nations.
   While some brokers and processors believe that China won’t impose its scrap paper tariff, the threat alone sent unsettling tremors through the U.S. recovered paper industry. If nothing else, it was a reminder that China’s market can’t be taken for granted. 

U.S. Exports of Scrap Paper to China (metric tons)
1993 189,740
1994 291,320
1995 521,296
1996 646,431
1997 787,815
1998 1,007,478
1999 1,232,722
2000 1,978,099
2001 3,305,901
2002 (Jan.-May) 1,450,482

Source: U.S. International Trade Commission DataWeb.
Figures do not include Hong Kong.

What China Wants
Though at times it seems as if China will buy almost anything made from fiber, it has shown a definite preference for certain grades of recovered paper, most notably OCC, ONP, and more recently mixed paper. Calling China “a real market-maker,” Greg Rudder of Pulp & Paper Week says China’s paper manufacturers expect to double their capacity for containerboard and newsprint between 1996 and 2004. Based on current projections, China could add another 1.6 million mt of U.S. OCC to its annual purchases by 2004, Rudder says. 
   Even more dramatic is the growth in China’s purchases of mixed paper, which more than doubled between 1999 and 2000 and rocketed again from 2000 to 2001. This mixed paper boomlet in the country’s overall recovered paper buying boom was fueled in part by the fact that China’s low labor costs enable it to economically hand sort such material. But China is also much more willing to use both OCC and mixed paper in its containerboard production than are U.S. paper mills, notes Bill Moore of Moore & Associates.
   For China’s recent purchases of OCC, ONP, and mixed paper, see the adjacent table. 
   Keep in mind, though, that some brokers familiar with the China trade think the official U.S. export numbers are too low.

U.S. Exports of Select Scrap paper Grades to China (metric tons) OCC ONP Mixed
1998 386,001 289,547 267,713
1999 300,723 336,024 450,097
2000 495,013 284,257 1,003,741
2001 840,821 393,933 1,817,970
2002 (Jan.-May) 323,761 197,001 780,649

Source: U.S. International Trade Commission DataWeb.
Figures do not include Hong Kong. • 

Robert L. Reid is managing editor of Scrap.