Troubled Waters

Now more than ever, it’s a global economy. This 1990s mantra is often used in a positive sense to encourage American companies to explore overseas opportunities.

The flip side of that coin, however, is that economic trouble on one continent will indeed be felt everywhere else. For exporters of scrap paper, the break down of Asian economies that occurred in late 1997 and early 1998 has driven several changes in the way they do business.

The first fear scrap paper exporters faced was that east Asian nations would stop buying altogether as their economies ground to a halt. While some mills in nations such as Indonesia and South Korea did in fact shut down, the majority have tried to work their way through the currency crises and economic slowdowns that have hit that part of the world.

But though mills are still running in east Asia, the region is not necessarily an attractive destination for North American exporters. "It’s tough doing business in Indonesia because of the bank problems and the credit problems," notes Steve Spence, Pacific Rim sales manager with Paper Recycling International (PRI) in Seattle.

The crux of the problem: "Making sure you’re going to get paid," says Spence. "I haven’t experienced any non-payment situations," he adds, "but about this time last year we got hit with a mill bankruptcy in South Korea."

"We’ve found that it has been much more difficult to put business arrangements together than in the past," says Frank Crowley, senior vice president of marketing with K-C International, Lakewood, N.J.

1998 statistics gathered by the U.S. Department of Commerce show that scrap paper exports from the U.S. to east Asian nations have indeed fallen in 1998. Figures from January to June of this year compared to last year show a 30% decrease in tons shipped to Japan, a 29% drop to Thailand, and a 15% decrease in shipments to Taiwan. Shipments to South Korea and Indonesia are flat thus far in 1998, but those figures began declining somewhat in 1997.

Demand from two Asian nations has countered the trend: tons shipped to China are up 25% and India has purchased 71% more scrap paper. "China is engaged in serious modernization," says Pete Grogan, manager-market development, Weyerhaeuser, Tacoma, Wash. "That means tremendous growth in the use of paper products—publication grades and tissue grades in particular," he notes. "They are moving toward the wider use of those grades as their middle class grows.

Grogan’s comments regarding India are similar. "India has been consuming—on a growing trend—recovered paper from the U.S.," he remarks. "We see India in the long-term as a large potential consumer of recovered paper. There are already 100 million people in that nation considered middle class," he adds, noting that the company hosts a growing population at the same time it is modernizing.

The Asian currency devaluations have also represented a buying opportunity for North American paper companies. Several U.S. and Canadian companies have purchased all of or a 50% partnership in paper mills in such nations as South Korea. "You’re hedging your bets," says Crowley. "If your operation in Korea is making $2 million a month but your North American operations are just breaking even, you can deal with that. You take the swing out to some degree," he notes.

In the short term, however, more trouble could lie ahead in Asia. The currency devaluations have already taken their toll on the economies of nations ranging from South Korea and Thailand to Russia and Mexico. But as of yet, the two currencies of the largest of all Asian economies have not been affected. "The recent devaluations that have shaken the world financial markets would be a drop in the bucket compared to China and Hong Kong devaluing," warns Grogan.

While decreased Asian demand pinches American exporters from one side, an increase in recovered European fiber is hitting at the same time. European Union mandates restricting how much can be landfilled on that continent are pumping up paper recovery rates in more than a dozen nations.

"When you have a situation with recycling being a buzzword politically worldwide, nations like Spain and Italy are now picking up collections to match traditional leaders like Germany and Holland," says Crowley of K-C International. Indeed, the Bureau of International Recycling (BIR), Brussels, proclaimed earlier this year that Europe was awash in a flood of scrap paper.

Newspapers, boxes and packaging materials have been among the items collected in increasing amounts for recycling in European nations that are adopting programs identical to or similar to the "green dot" producer responsibility/recycling program established in Germany. Nations joining that roster include Spain, Belgium, Austria, Portugal and Luxembourg with Italy and Ireland considering programs.

"You’re having a commodity flood the market," says Crowley regarding scrap paper. "Europe is now exporting to Asia. There is quite a bit of their paper going to Korea. The paper mills within Asia could stop buying from the U.S. for a month and concentrate on Europe," Crowley says of one method Asian mills have of affecting the markets.

"Asia is very price-sensitive," adds PRI’s Spence. "They’re trying to spend their money for as many tons as they can. I would say they are buying from Europe a lot more than they were in previous years."

If there is one blessing to the Asian crisis, it has been the dramatically reduced shipping rates exporters have been paying for trans-Pacific freight. "The rates have plummeted—it’s incredible," says Spence. "If ship operators can get anything at all to send back over the Pacific, they’re happy," he adds.

But while low rates help exporters maintain a profit margin, some paper exporters are concerned about the long-term health of the shipping lines. "We’re concerned because we’ve never seen freight rates go down this low," says Crowley. "We think they’re making up for their losses on the inbound trip. You don’t want steamship lines to go out of business and lose the competition factor," he adds.

Total scrap paper exports from the U.S. have actually increased 15% compared to last year, despite the declining tonnage to Asia. Rather than being shipped overseas, U.S. recovered paper is instead moving due north or south to Canada and Mexico.

Despite a weak Canadian dollar, Canadian mills have been taking in large quantities of scrap paper from the U.S. In the first half of 1998, nearly 50% more scrap paper was shipped from the U.S. to Canada compared to the same period in 1997. "There are a lot of newsprint mills up there," notes Steve Vento, vice president and general manager of Recycled Fibers International, Sunrise, Fla. "That industry has been running fairly well."

"There is some new capacity in the form of mills that came online late last year," notes Grogan. He believes the year-end difference in exports to Canada will not be as dramatic as the current 49% rate. "I think you’ll find in the later part of the year [the high tonnage shipped] probably won’t be the case, in part because of the Abitibi mills going on strike."

Exports to Mexico have also been up impressively this year, with a first-half increase of 28% over 1997’s tonnage figure. "Over 40% of Mexican raw material is imported—that will always be a factor," notes Carlos Rovelo, director-market development/southwest region with Rock-Tenn Recycling, Dallas.

But from where Mexico buys raw materials such as scrap paper often depends on the value of its currency relative to the U.S. dollar. "One Mexican mill I know of stopped buying in the U.S. One of the main reasons is that the peso has lost about one-fourth of its purchasing power over the last ten months," says Rovelo. "The devaluation of the peso is driven by the ripple effect of Brazil and even Russia," he continues. "Mexican goods are competing with Asian and other economies for exports, but it is hard to do that with a strong peso."

On the positive side, Albert Alvarez, regional sales manager for PRI in Irving, Texas, notes that the recent Mexican fluctuation is not too severe. "The recent 5% or 10% devaluations can’t compare to the 90% overnight change in December of 1994," he notes. "A lot of the mills are a little hesitant to pay if the dollar is perceived to be at a peak," Alvarez adds.

Another reason for the 29% tonnage increase may be related to clogged railroads much of last year, according to Alvarez. Bottle-necking has occurred as Union Pacific continues to try to merge operations with the Southern Pacific railroad, which it acquired in 1997.

"I continue to expect strong demand from Mexico," adds Alvarez concerning that nation’s use of scrap paper. "I think their economy is making tremendous progress. As they develop their middle class, the potential is there over the next couple of generations to develop a bigger market for U.S. goods."