Pacts on Paper

FutureMark Paper Group, headquartered in Westport, Conn., made news in June of this year when the company announced that it had set up a number of long-term contracts for the purchase of waste paper at fixed prices.

The company also reported that it had sealed a deal like this with none other than Waste Management Recycle America (WMRA), the recycling subsidiary of Waste Management Inc., headquartered in Houston, which acts as the broker in at least one of the deals.

Under its various agreements, including at least one with Waste Management, FutureMark reported, the company is securing about half of the recovered paper needed for its two paper-making facilities.

The company manufacturers recycled glossy printing papers for magazines and catalogs as well as uncoated paper stock for printing and packaging applications. Steve Silver, president and CEO of the company, says FutureMark is currently the only paper mill in North America that manufactures recycled-content coated paper. The amount of recycled content used in FutureMark’s papers is between 90 and 100 percent, he says.

The company operates two manufacturing facilities: Its Manistique, Mich., plant produces uncoated printing and packaging paper from 100-percent-recycled content, while its Alsip, Ill., plant produces coated printing and packaging paper with more than 90 percent recycled content. Together, the facilities are producing around 300,000 tons of recycled paper per year, the company reports on its website.

With such a large percentage of its feedstock being recycled paper, it’s no wonder FutureMark would want to guarantee the price and supply of its No. 1 material cost.

FutureMark initiated the contracts, which Silver says involve three parties: FutureMark, the mill; the commercial generators of waste paper such as printing companies; and the collectors or brokers of the waste paper, which effectively bring the supply and buy sides together.
 

Setting a Precedent

According to Silver, FutureMark holds multiple contracts, with about 10 of them now involving paper collected for both of its mills. Each contract governs a specific generator and grade of paper, while the collectors may be involved in one or more of these deals.

Silver says these kinds of contracts are unusual in the industry. “We are unaware of anyone else who does it, and we’ve been told the same thing by the brokers we’ve made these arrangements with.”

Still, he says, the contracts make sense because they are designed to protect the company against some of the extreme price variability experienced in the market over the last decade or so. He attributes at least some of this volatility to Chinese buyers entering the market aggressively in the last several years, altering the demand and supply situations in unprecedented ways.

“Since the Chinese began being big purchasers of waste paper about a decade ago, the market has been really volatile,” says Silver, “far more volatile than almost any other commodity market is.”

He points out, for example, that in recent years, pricing has doubled or tripled over the course of 12 months for certain grades of recovered fiber.

“In most industries, a spike in commodity pricing might be 10 or 20 percent, not 200 or 300 percent,” he says. These extreme price spikes, he adds, also likely had something to do with the handful of recycled paper mills that filed for bankruptcy or closed their doors in 2011.

“Clearly a business model that’s based upon an incredibly volatile raw material is not a good business model,” Silver says. “We need to know that we can not only make money most years but [also] not go out of business in a year when the pricing spikes,” he adds.
 

Calming Volatility

According to FutureMark, the agreements are worth about $20 million per year and help the company manage its costs for buying recovered fiber by reducing the company’s exposure to volatile paper costs.

The agreements are staggered in terms of timing, Silver says, and each one lasts for two or three years, establishing a stable cost for the paper. The agreements also set the quantity of scrap paper that must be supplied and purchased, and they dictate strict levels of quality, Silver says.

The first of the contracts began about two years ago, Silver says, and they have “take or pay” delivery requirements.

“These aren’t handshake agreements,” Silver explains. “They must produce and deliver the product every month, and we must take and pay for it.”

Silver notes that the company purchases about half of its paper on the open market.

“So we’re playing the market on half of our volume, and we have locked in prices on the other half,” he says. “And the combination of those two things tends to really smooth out the cost curve for us.”

Now that FutureMark is approaching the end of one of the first contracts signed, Silver says the agreements have worked well for the company. “Now our single largest raw material has a price that’s fairly predictable.”
 

Doing the Math

The contract price, Silver explains, is typically based upon a three-year average price for the specific grade, so it is designed to take into account the normal high and low pricing of the grade.

Silver concedes that over the last 18 months or so, the volatility has calmed, and the price of recovered fiber has stabilized. However, that hasn’t made the contracts any less important, even though the current prices are now lower than some of the contracted prices, he says.

“For some of the volume that we’re buying, we’re paying a bit above market,” he says, “but the flip side is when the cycle goes the other way, we will be protected against that.”

Silver says based on his knowledge of market pricing, he believes the three-year term to be the right length of time for achieving a fair price that is favorable to each of the parties when all is said and done. “With a three-year term it’s a much higher probability that the peaks and valleys are going to have a chance to even each other out, and, at the end of the three years, both parties will think it was a fair deal and therefore be more likely to renew.”

He stresses the contracts are not meant to set an unfair advantage for FutureMark; on the contrary, they are meant to shield both parties from volatility.

“Everyone kind of knows what ONP (old newspapers) or OMG (old magazines) should sell for, and the average is very close to those numbers that people are generally comfortable with,” says Silver. “It’s the huge peaks and valleys that we’re all trying to protect against.

“It’s not just about pricing,” Silver continues. “It’s about having a long-term relationship with a vendor. And when you have long-term relationships, both sides work harder to keep the other side happy.”

He says not only has WMRA jumped on board with the idea but so has one of the country’s largest printers.

Being assured of a high-quality supply of recovered paper is another benefit of the contracts, Silver says, as is reducing some of the haggling that goes on every month when it comes to prices.

“A lot of wasted energy goes on in this industry in haggling between the generator, the broker and the mill about what this month’s price is going to be and how many tons you’re going to get,” he says. While the haggling may benefit the brokers, Silver says, “it’s really nonproductive time for businesses, and we don’t have to do that anymore.”
 

Fair and Square

Silver says even though this arrangement is unusual, almost any recycling company and buyer of recovered paper could set one up and there are numerous reasons why parties on all sides of the deal would want to. And for the collector, he says, the contract also can prevent losing money when the price of recovered paper drops below the cost of picking it up.

“With contracts like these, they can be guaranteed of being able to at least cover their costs when the market collapses, and of course they can make money when it rises,” he says.

The agreements aren’t more common, Silver says, in part out of habit, with buyers, sellers and collectors more interested in doing things the way they always have. And, he adds, “People think they can predict the market.”

Assuring sellers that he wasn’t angling to get the upper hand also was a challenge, Silver says. “The hardest part for us was to convince people that we weren’t trying to beat them at all,” he says, explaining that once the parties arrived at the three-year price, those fears went away. “It was clear that there was no gamesmanship going on.”

Don Majka, vice president of sales and marketing for WMRA, oversees the buying and selling of the 11 million tons of commodities either brokered by or processed through the company’s plants. He says in FutureMark’s case, the contracts deal with one or more post-industrial customers and materials such as printer trimmings.

Majka’s role in the deal was convincing the printer to agree to the fixed price over a three-year period.

FutureMark had approached WMRA in search of specific grades of recovered paper they collect. Majka in turn relayed these offers to customers. “We said, ‘Here’s a unique opportunity: Would you be willing to fix a smaller portion of your tons with a price they’ll guarantee?’”

Majka says, if done properly, deals like this can work to the benefit of all parties.

“Over the long haul, hopefully both sides win, and it smooths out fluctuations in the market,” Majka observes. “The process helps you do a better job of forecasting.” He says, if the pricing numbers are tracked and incorporated for the right period of time, “it’s going to come out fairly evenly for both sides.”

However, the contracts also can be tough to put together, Majka concedes, which could be another reason they’re not more common. “You’ve got to get the right buy and sell put together,” he says.

The author is an editor with the Recycling Today Media Group and can be reached at lmckenna@gie.net.