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Claim game

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Preventing claims completely may be an unattainable goal, but certain steps can decrease the extent of the damage.

Dan Sandoval March 5, 2014

Having claims filed against shipments is an inevitable part of doing business for recyclers. Even the most careful shipper will occasionally receive the unwelcome message that a claim is being made. Whether it is a moisture-content downgrade, a difference of opinion on the quality of the shipment or the discovery of an unacceptable material, such as medical waste, a shipper needs to be prepared to deal with the issue.

The cost of rejections has been rising, according to some recyclers, with some reporting costs of $50,000 or more.

China’s Operation Green Fence, enacted in early 2013, has made the claims climate even more challenging, especially for shippers of recovered fiber and plastic scrap. China reportedly implemented operation Green Fence when one particular shipment of recyclables out of Europe was found to be of especially poor quality.
 

Market aspects

Patricia Norris of Federal International Inc., St. Louis, says the claims process can be managed without great difficulty, but she adds that claims can vary based on current market conditions. “Claims come more often in low or slow markets,” says Norris, who has worked for several of the largest paper recycling companies in the United States.

Norris says shippers are in a weaker position to take back possession of downgraded or rejected material when prices decline, adding that it will be difficult for them to get their former price for the material on the open market. As for buyers in that same declining market, “if they reject the material, they can get something cheaper,” Norris says.

When China enacted Operation Green Fence, she says, “it destroyed the price of mixed paper and plastics.” Referring in particular to mixed No. 1 through No. 7 plastic containers, Norris says, “The whole market collapsed on that grade.”

While a declining market may increase the number of claims, quality issues are likely to lead to claims in any market and from a buyer in any part of the world. A shipment containing hazardous material or medical waste is one such red flag, but the presence of these materials is not the only reason a claim is filed.

While bulk grades most often elicit claims, high-grade shipments also can be downgraded or rejected. For instance, a shipper sells a load of the pulp substitute solid bleached sulfate (SBS), but when the shipment is delivered to the mill it contains a significant amount of lower value coated book stock. “[The mill] could still use it,” she says of the coated book stock, “but the SBS is more expensive, so they would seek a lower price.”

While downgrades result in a loss of expected revenue for a recycler, they are better than an outright rejection, where the costs can exceed a shipment’s possible revenue.

“On a rejection, the mill says, ‘I can’t use it at all,’ and that is much more severe,” says Norris. The costs incurred after a rejection can vary between a domestic or offshore shipment, Norris says. “On domestic shipments, you have to pay the trucker [and] transport the material back to your place or somewhere else. It will then be resorted at your plant or resold as a different grade.”

Norris continues, “If you sold OCC (old corrugated containers) to a containerboard mill, but when the load showed up it was full of ONP (old newspapers), the mill would have no use for it—they would reject it. If you intended to ship hard white cuttings and instead [shipped] printed envelopes to a mill that doesn’t have a deinking system, the material would be rejected. They simply can’t use it.”

While rejections of domestic shipments are challenging, a rejected offshore shipment can be much more problematic.

“Overseas it is a disaster,” Norris says bluntly. “When you get a rejection for an offshore shipment, a lot of local regulations come into play,” she continues. “If you get a rejection in China, you can’t just go around and sell it to someone else. You need an import permit, and authorities are already involved. They won’t let you move it to other customers.”

Not-so-secret agents

Recyclers who trade internationally may soon learn the value of having a sales agent to represent them in nations where they most commonly ship materials, according to Patricia Norris, Federal International Inc., St. Louis.

Norris says these sales agents can play a key role in preventing claims from growing in significance. “You need someone on the ground [who has] day-to-day contact,” she says.

When a claim is received, the shipper can send his or her sales agent to the consumer who has made the claim to request digital photographs of the material. “I want them personally on site. I have to document this,” Norris says.

Many problems can be solved simply by having someone on site, Norris adds. “It shows the buyer you are serious.”

She adds that the shipper must have faith in its overseas sales agent for the relationship to be successful.

The best scenario is to have the agent on site as the buyer unloads containers, Norris says. From there, “it is about breaking bales and taking photos and understanding what the buyer is saying and what they want as compensation,” she says. “Then the agent sends you a complete claim report.”

She continues, “If the mill contracted for OCC (old corrugated containers), and they get 20 percent news and 10 percent junk mail, it is then up to the broker to contact the supplier and start talking to them.”

Thus, if a shipment to China is rejected, a shipper may have to bring it back to a domestic facility or find an alternative overseas destination. However, when shipping material back to the U.S. from China, “You are not paying the cheap ocean freight rate—all of a sudden it becomes a lot more expensive,” cautions Norris. “You may have paid $1,000 to ship from the United States to China. However, from China to the United States it could be around $4,000.”

Other alternatives are equally unpleasant, she adds, noting that if an AQSIQ (General Administration of Quality Supervision, Inspection and Quarantine) inspector rejects a load, it often goes into a holding pen. “I haven’t had too much experience, but they may have to pay to incinerate, which is very expensive. Plus you have lots of fines,” Norris says.

If the container has medical waste, “you will never get it back,” Norris says. “It will be incinerated, and you will probably lose your AQSIQ license.”

Norris says the creation of AQSIQ and the CCIC (China Certification & Inspection Group) in the late 1990s arose in part after a large company shipped several containers of medical waste to China.

Geographically, China may have captured the lion’s share of the focus on claims issues, but that may be in part because of the sheer volume of tons being sent to that nation. Norris says she has learned how the claims process works in South Korea, Italy, India and any number of additional nations.

Summing up the headaches caused by rejected shipments overseas, Norris says, “If you have a rejection, it is a disaster.”
 

Proper first steps

Shipping material to China requires certification from AQSIQ, which has to be renewed every two years. The process can be costly and entails considerable paperwork. Norris says an initial AQSIQ certification costs roughly $20,000 while a renewal costs approximately $15,000.

Being AQSIQ certified puts U.S. recyclers in the game, but it is only a first step to exporting. Each shipment then needs to be inspected by CCIC, which serves as AQSIQ’s on-the-ground inspection arm in the United States and Europe.

Shippers also can become self-inspectors through AQSIQ. Companies seeking the right to self-inspect must select an individual from within the company to take a test given by CCIC. Once he or she passes this test, the individual essentially becomes an agent of CCIC, Norris says.

“Having self-inspection is huge—you don’t have to wait around for inspectors,” she says.

In addition to forestalling such delays, self-inspection can provide other benefits. Recyclers who are going to ship only a few containers on a bill of lading “need 60 percent of the material on the floor for the inspector to look at,” Norris says. “Most smaller places can’t hold that much material.”

Buyers and government inspectors alike seek access to photos of shipped materials as a way to reduce claims. Depending on where the material is headed, a varying numbers of photos are required. For shipments to China, Norris says three photos are required: one of the half-loaded container, one of it fully loaded and one of the closed and sealed container door that clearly shows the container number and seal. The supplier should keep these photos on file.

By viewing these photos ahead of time, the shipper may catch a claim before it actually happens. “You can stop a container before it is loaded [onto a container ship] and dray it back from the port,” says Norris.

Buyers who file a claim will likewise take photos that will be a key part of the negotiating process. “You can look at the digital photos,” says Norris. “If it is supposed to be OCC and there is news, it can get downgraded or rejected. If there is just a little bit, you can make an argument, and that is when negotiations kick in.”

The use of photos could be evolving, at least with shipments to China. The CCIC is considering requiring shippers to upload videos of material to be shipped to its website, according to reports.
 

Rising water levels

For paper recyclers, a claim issue that transcends destinations and that also may be difficult to prove or disprove with photos involves moisture levels in bales.

“Except for moisture claims, I think a lot of [other] quality claims have diminished,” Norris says. She credits this to the “rigid” inspections taking place in the U.S.

Excess moisture can still lead downgrades, though the problems may not be as severe. “A lot of times your [overseas sales] agent can smooth things out for you, or a stronger mill can help you out,” Norris says regarding moisture in overseas shipments.

Veteran recyclers in some parts of the United States recognize that the seasonal aspects of outdoor paper collection can affect the moisture content of recovered fiber bales. “You can’t have curbside programs in the spring without moisture,” Norris says.

With this in mind, a shipper can alert an overseas buyer of an upcoming shipment that might contain more moisture than is typical. The shipper also can offer to take a deduction upfront on the material. This can eliminate a future claim on the shipment.

There are no guaranteed methods to avoiding claims, especially when dealing with baled secondary commodities. “I can look at something and say less than 1 percent [contaminants], and you can look at it and say 5 percent,“ Norris says. “There is always going to be a difference in perception,” she adds.

High-grade shipments involving material that is always under roof receive fewer claims, particularly for moisture. “You shouldn’t have moisture in envelopes,” says Norris. “They are a preconsumer grade for the most part that should come from a printing house. They should never see the light of day. If you get moisture claims for envelopes, that is easy to prove and hard to fight. It means someone probably stored material outside or did something they shouldn’t do.”

If recyclers choose to take such chances, then they should be ready for the claims process, Norris says.

 


The author is senior editor of Recycling Today and can be emailed at dsandoval@gie.net.

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