An Emerging Market

Editors’ Note: This is an edited transcript of a presentation given by Raul Garcia of Waste Management Recycle America at the 2011 Paper Recycling Conference & Trade Show, which was Oct. 23-25 in Chicago.
 

Mexico is the No. 2 export market globally for recovered fiber, with more than 900,000 tons being exported to the country through the end of July. It is the No. 1 market for deinking grades, with more than 350,000 tons coming into the country. It is the No. 2 market for ONP (old newspaper) and the No. 3 market for OCC (old corrugated containers).

In 2010, the Mexican paper industry had a recovered paper utilization index of about 86 percent. At 86 percent, it is probably one of the top countries in terms of paper utilization. However, on the recovery side, according to the Chamber of Paper in Mexico, the country is at approximately 43 percent, which is nearly the lowest level worldwide.

2010 was a record year for exports from the United States into Mexico, with nearly 2 million tons being exported.

Reducing inflation is probably one of the greatest accomplishments Mexico has made. There was a vicious cycle of high inflation, low growth and devaluation. The average rate of inflation from 1993 to 2002 was 15.6 percent. Since 2003, Mexico has had an average of nearly 4 percent inflation. This seems to be a big accomplishment. However, when your main trading partner, the United States, has an inflation rate of 1 or 2 percent, your terms of trade deteriorate and, therefore, the value of your currency slides.

The big challenge for companies operating in Mexico is the deterioration of the peso. From 1990 to 2000, the value of the peso went declined from 3 pesos per dollar to 9 pesos per dollar—a 200 percent slide or devaluation. From 2003 to 2010, the value declined further from 9 to 12 pesos per U.S. dollar. That was another 30 percent devaluation.

If you look at the first nine months of this year, 11.54 pesos equaled one U.S. dollar in April 29, 2011. By July 25, 2011, 11.63 pesos equaled one U.S. dollar, which declined further to 13.42 pesos per U.S. dollar in September—a 15 percent devaluation in about 45 days.

The increasing costs will come back to you right away as suppliers. Also, some of your customers might slow down payments. It is a big problem to receive payments in 45 days.
 

Mexico's Paper Profile
On the paper side, in 2000, Mexico had 43 companies with 64 plants with a capacity of 4.8 million metric tons and production of 3.89 million metric tons. Comparing that with 2010, we have fewer companies in the market (38), fewer plants (50) and higher capacity (5.8 million metric tons). There is almost 1 million tons more production (4.7 million metric tons).

Taking a look at the pulp side, the view is not very favorable. Mexico has five companies with seven plants. Back in 2000, they were working at a 55 percent capacity. Looking at 2010, the production of pulp was basically 16 percent. The reality is the pulp production in Mexico is dying, in a way. Mexico imports about 1 million tons of pulp every year, out of which 90 percent is chemical pulp, or softwood and hardwood, and about 10 percent is mechanical. The pulp side is in decline in the country.

One of the problems we have in Mexico is that forestry is not really integrated into the production of paper, and that is a big problem on the mill side and a big disadvantage in the marketplace.

2010 was a record year for United States recovered fiber exports to Mexico. Mexico consumed nearly 4.7 million tons of recovered fiber in 2010, out of which 32.5 percent was imported and 67.5 percent was domestic. When we look at the trends, we see that the import of recovered fiber from the U.S. was about 1.5 million metric tons for the last three years and about 1.3 million metric tons previous to that.

When we look at the consumption of recovered fiber by grade, we see that out of the 1.56 million tons that were imported and consumed in Mexico, about 30 percent were OCC, 50 percent were white deinking grades and pulp substitutes together and about 16 percent were ONP. From 2007 to 2008, white ledger imports increased dramatically while ONP declined. Several events changed the balance of the grades that were being imported from 2008 to the present. One of them was a labor dispute at one of the mills for Bio Pappel. Also, there was the startup of a second machine for Kimberly Clark and the startup of a second deinking system. And one of the Bio Pappel mills switched from newsprint production to brown paper.

Of the 3.2 million tons of domestically recovered fiber Mexico consumed in 2010, 74 percent was brown fiber, basically OCC; 17 percent was classified as white paper; and only 6.2 percent was classified as ONP.
 

Domestic Collection
Collection of paper in Mexico is kind of a split in the sense that the well-established businesses control about 50 percent of the total fiber that is collected in Mexico through contracts with printers and generators. The other 50 percent is pulverized by a lot of different smaller businesses. According to Mexico's Chamber of Paper, there has been a new development there where 180,000 tons of recovered brown fiber (OCC) has been exported from Mexico to Asia.

Back in the '90s, the Mexican government came out with a program where what I call "recyclers level 1" and "recyclers level 2" (bodegas) were able to buy from the scavengers, also referred to as cartoneros or pepenadores, with recyclers level 2 selling recovered fiber to the mills. This system allowed the recyclers level 1 and 2 to be able to buy from the scavengers and prove to the Mexican authorities that the paper they received was legal. In order to do that, they created a system where they retained about 5 percent of the total invoice in terms of taxes that they reported to the Mexican authorities. This evolved very well in the 2000s. The collection structure was established and formalized. Many integrated companies put in their own facilities.

Two or three years ago, the Mexican government decided to do away with the system. As a consequence, recyclers offered all of those pepenadores the opportunity to become legalized companies to be part of the system, but it was rejected by the pependadores. They basically said, "No we don't want to do that" and they just went away.

The structure remains, but the point I want to make here is that about one-third of everything that is collected in Mexico is kind of a black market. But in order to sell to the next level of recycler, recyclers level 1 need to present invoices. What happens is these guys cannot present the paperwork. They cannot buy basically because the system in Mexico does not have any way to say, "I don't know where it came from." The collection flourishes and the structure is there, but we don't know what happened on the bottom there in terms of taxation.
 

Domestic Production
In terms of finished product, Mexico produced about 4.7 million metric tons of paper in 2010. The packaging sector made up 60 percent of production; printing and writing, 18 percent; tissue, 20 percent; and specialities, 1 percent. No coated paper production is taking place in Mexico.

The classical equation for apparent consumption is production plus import minus export. Apparent consumption in Mexico in 2010 was about 6.8 million metric tons. That is a historic high. Imports of finished product into Mexico average about 2 million tons per year if you go back all the way to 2001. Production has remained pretty flat at 3.8 to 4.7 million tons. When you look at per-year growth in Mexico, consumption increased about 3 percent. Production has increased at about 2.1 percent per year, and imports have increased 4.3 percent per year.

When we analyzed production versus imports and consumption on the printing and writing side from 2001 to 2010, consumption was about 1.6 percent, production was relatively flat, and imports were very close to production. Imports have grown 4.8 percent on average per year, while production has been basically flat. There have been no developments in printing and writing production in Mexico and new nothing seems to be going on today. It seems that the industry cannot compete with the imported finished product in the printing and writing grades. Imports of printing and writing paper from Chile, Brazil, China, South Korea and lately Venezuela are coming into the Mexican market.

On the packaging side, production has grown 2.5 percent per year on average, while consumption has grown at a higher rate of 3.25 percent. Out of 1 million tons of liner and medium imports, there seems to be a big opportunity to increase capacity.

On the tissue side, it is very interesting. You have production a little bit greater than consumption. There is a fight for market share and reduced margins may be coming for that sector. With the new capacity coming online in Mexico, they basically have built capacity for the next four years. Mexico is growing at 3 percent, and they are going to need Mexico to grow at least 4 percent just to absorb that capacity for the next four years.
 

Looking Ahead
Export of recovered paper from the U.S. to Mexico definitely will be lower in 2011 than in 2010. From the 2 million tons exported last year, I was originally optimistic that 1.8 million tons would be exported from the U.S. to Mexico this year, but now I think it is going to be about 1.6 or 1.7 million tons. I don't think we are going to hit 1.8 million.

Deink/pulp and OCC, with the new expansions coming, will be the leading grades exported into Mexico. One of the questions will be whether Mexico will be importing single-stream OCC. There are some companies doing some testing with single-stream OCC. The results are not quite there, but we believe and hope that by the end of the year, Mexico will be buying single-stream OCC.

With the expansion of capacity for deinking production, demand is expected to remain strong for deinking grades. SOP, coated books and sorted white ledger will be the grades. Coated groundwood and fly leaf shavings, we believe, will be flat and perhaps ONP will increase.

Raul Garcia is director of sales and marketing, Mexico and Latin America, for Houston-based Waste Management Recycle America. More information is available at www.recycleamerica.com.