Paper Supplement -- Credit Due?

In a perfect world, an order is placed, the shipment is made and payment arrives in a reasonable time period. However, since it is not a perfect world, the current market conditions are creating a host of problems that sidetrack this seemingly simple process.

The business landscape has sprouted growing concerns that the prolonged slump in paper stock markets will continue to create even greater problems for shippers of various grades.

This mood was evident during the summer meeting of the Paper Stock Industries Chapter of ISRI. During an afternoon session, several vendors expressed concern that the slump in markets was creating a growing number of claims and rejections by offshore paper mills, leaving dealers in a jam.

SHIFTING CIRCUMSTANCES

What has created many of the complaints has been a sudden change in acceptance of shipments. Several exporters note that a grade that may have been accepted several months ago is now either seeing a claim filed against it or is being outright rejected by the mill. The reason offered by the mills has been the hard-to-quantify contaminant levels that are being shipped.

When dealers find out that a shipment that was agreed to has been rejected, it creates even greater problems, as the shipper often has to scramble to find another destination for the material. This move usually results in even lower prices for the shipped material.

Finally, some paper stock dealers note that even after shipping material to an end source, receiving payment can become tricky, and in some cases very difficult.

What in the world is going on?

Several long-time paper stock dealers note this activity occurs more frequently when paper stock markets are in a down cycle. Several countries were singled out as becoming more aggressive with the move to downgrade or reject loads. While subjective, a number of exporters say Korea, China, Italy and India are known for filing claims or rejections with shipments.

One of the biggest problems for many exporters who ship overseas is that between the time the mill places the order and the time it receives the shipment, there could have been a major price swing. Because of this, some exporters say that claims that crop up are typically called market claims. One paper stock exporter notes that this gives the mill the opportunity to renegotiate the price of the order.

Scrap paper exporters are afraid they lose out when overseas mills file a claim, because it is too costly to dispute it. “Mills are banking on the possibility that a company won’t fly over to inspect the load. Rather the company would just as soon settle the claim,” one West Coast exporter notes.

At the same time, as markets slide there is a mindset on the part of a number of mills that suppliers are cutting corners on the quality. With prices for many grades low, this reasoning goes, some paper stock dealers may not be spending the extra time and money to sort the material to the exact specifications.

A purchasing manager for a large overseas mill stresses that material used by many mills must fit a certain standard to make the finished product. “We buy from a wide range of suppliers. However, we need to have the material meet a consistent level to make our finished product. We work with all of our suppliers to make sure they understand what we need and what our machines can’t handle,” he notes.

With markets at the present time so difficult, paper stock dealers could have a more difficult time justifying spending the extra time and money to do their most precise sort. With such slender margins, the additional time spent sorting the material to meet an exact standard could be the difference between a profit and a loss.

SEARCHING FOR SOLUTIONS

What can a company do to reduce these issues?

When asked this question, most exporters said the key is to deal only with companies with which they have established a good relationship. Opting to ship to a company where no relationship is established may offer a premium, but the chance of difficulties in receiving the agreed-upon price also grows.

Robes Nelson, with Pacific Forest Resources, a California-based forest products brokerage firm, stresses the importance of dealing with people and companies you have a relationship with.

Having established a history with a particular company may result in losing out on some premiums offered by some mills, but it also reduces the chance of receiving an unexpected claim or rejection, which can wipe out a sizable amount of the profit a company may have earned.

Another issue is the possibility of working through a broker specializing in the export market. Many brokers have personnel or contacts located in harder to reach locales who can prevent the sight-unseen acceptance of a claim.

One large export broker notes that it helps if a company uses a broker with agents in the country where the material is being shipped.

This gives the supplier a voice if quality issues arise. Being able to quickly deal with the problem reduces the chances of a mill looking to issue a claim if a representative can easily inspect the load to ensure the specifications agreed upon have been met.

While problems outside North America capture much of the publicity, the problems with the forest products industry worldwide are hammering paper companies throughout the world, including in North America.

PREVENTIVE MEDICINE

Over the past several years there have been a number of paper companies closing. Other companies have filed for bankruptcy protection while still other companies have been stretching out payments.

This environment has resulted in some suppliers holding notes for large sums of money, often in the six-figure range.

Being owed hundreds of thousands of dollars by a company that may not be fiscally able to pay is adding to the overall woes of the paper stock industry. Several packers say that they still have to pay for most grades of fiber, and have significant fixed costs that need to be paid, regardless of if or when they receive payment from consumers.

Now, with payment not necessarily certain, some companies are being confronted with whether or not they should ship to mills that are not necessarily on solid footing.

The financial woes of American Tissue, Hauppauge, N.Y., are only the most recent that are creating a less certain environment. In the case of American Tissue, the filing of bankruptcy protection casts a shroud of apprehension on many shippers of recovered fiber.

The paper company, one of the largest tissue producers in North America, is a major consumer of recovered fiber. The question being asked now is whether or not the company will be able to pay for the already shipped material. Further, despite its Chapter 11 filing, the mill continues to run. Should a supplier ship or continue to ship material despite its fiscal worries?

Steven Abramowitz, an attorney with the New York offices of the law firm Vinson & Elkins, says there are a number of questions that a supplier needs to ask:

1. Is the company making money on a cash basis?

2. Does the company have a DIP (debtors in possession) facility? Does the company have a financial arrangement with a company to ensure adequate funding?

3. And finally, does the company have a plan in place to solve its fiscal problems, whether that means selling off operations, being acquired by another operation or changing its type of operation?

While there are risks to shipping to a company in Chapter 11, there are some advantages, Abramowitz notes. A key is that the bankruptcy court will be more likely to ensure payment to the shipper, as the court wants to ensure the company in bankruptcy protection will be able to operate.

One point that is hammered home by all suppliers, however, is the importance of establishing and maintaining strict credit limits. This works for any mill, whether domestic or offshore.

By adhering to a hard and fast credit limit, recyclers reduce their chance of being stuck with a large IOU, says the vice president of a large paper recycling company in the Northeast. “We have had to turn down business from a client if they have exceeded the credit limit.”

While strategies can reduce the exposure of an unseen financial hit, the reality is that in a difficult business environment, hits are taken, even by the most astute and careful companies.

The author is the Internet Editor for RecyclingToday.com and senior editor of Recycling Today. He can be contacted at dsandoval@RecyclingToday.com.