After the Fall

The export market has certainly become a significant part of our professional lives. I’m sure we have all been through some bad markets in our days in this business, but I don’t think anybody could have expected what we went through in the fall of ’08 in terms of unprecedented declines and volatility.

In October and November of 2008, we saw some very dramatic and volatile changes in the marketplace that we hadn’t experienced before. We had, through curbside and mandatory programs, a significant amount of involuntary generation coming in, and clearly there was an imbalance between supply and demand: Material kept coming, and there was nowhere to ship it.

The other thing we experienced was that the transaction price, especially in the export market, was falling at such a rapid rate that you really couldn’t keep up with it and there was no correlation between the transaction price and a lot of prices here in the United States.

BOTTOMS UP
A lot of formula-based accounts, whether they be municipal or commercial, were very quickly upside-down with our dependence on the export market. The month-over-month change in the volume of shipments through the Canusa-Hershman family of companies, including our Newport International affiliate, declined by nearly 35 percent. There was nowhere to go, with material stacking up. Most of that material stacking up across the country was unprofitable tonnage.

We also saw a sudden drop in freight pricing because, despite the fall-off in imports to the United States, there were no containers going back to China as the transaction price at the mills, with duty, did not support the high freight rates.

We have certainly seen an improvement since the fall of 2008 in terms of pricing and movement. Much of that improvement we attribute to the lack of supply as a result of many factors. Mills are maintaining lower inventory levels and have become much more disciplined because of the costs associated with maintaining higher inventories. Global economic conditions have caused weak finished product demand. Mills aren’t selling; we have less recovered paper to move there.

The four things I want to discuss are the financial ramifications of this recent change, some issues with credit related to the industry, the market response related to these changes—good and bad—and the relationship between ocean lines and fiber supply.

A TOUGH SPOT
Most of us shipping to the export market don’t have any contractual obligations, but we may have contractual obligations for supply. The losses on accounts with index pricing that you couldn’t change have been pretty significant for a lot of people. We also saw overseas buyers decide not to honor orders. I talked to a number of people who have experienced that same issue, whether by letter of credit or confirmed purchase order. We saw how some overseas buyers reacted to these changes, and that left some people in some tough financial positions.

CONSTRICTED CREDIT
There is a lack of credit in the overall economy and that has created a significant number of refinancing challenges, especially for some large mills. We have seen that refinancing challenge push several mills into Chapter 11 bankruptcy, which is not good for the industry as a whole. In some ways those organizations going into Chapter 11 are in a better situation, and we as suppliers are in a better situation to sell to them with their DIP (debtor in possession) financing. This lack of credit is going to continue to be a challenge to recovery in the overall economy.

At Canusa-Hersmna we use credit insurance to cover our receivables, and this helps reduce the risk for us and our suppliers. But this industry has come under tremendous scrutiny from the credit insurance industry, and we have seen coverage canceled or curtailed. We have seen, related to the export market, countries where we had credit insurance and now we don’t just by virtue of economic and political factors that have caused underwriters to decide it is not prudent to insure those receivables. Where we do have coverage both domestically and with export, we have seen lower levels of coverage in place because they want less risk specific to this industry. That lack of coverage continues to create a challenge, even with mills that have good order books and decent credit.

A SECOND LOOK
The market responded in the fall in some interesting ways. We had generators of material who didn’t understand how they could go from getting significant amounts of money for their commodities to getting nothing or potentially being charged. It has taken a while for people to understand what has happened, but a good thing that has come out of this is people are more realistic about commodity values now and what the actual costs are to collect and process material. Part of that has been from more mainstream media outlets such as the Wall Street Journal or the New York Times running front-page news about changes in our industry, which has brought some credibility to what we are telling people.

At the same time, we have seen people evaluate the economics of some of their programs now that the dollars and cents associated with them have changed. In terms of supply, we have seen—not just because people have less business running through their factories—people on the commercial side stopping the recovery of materials. That supply is falling not just for economic reasons but because people decide it is not worth recycling.

ON THE OPEN SEAS
The weak market hit the ocean lines as well. They did not have product because their rates did not support the transaction price. We shared a lot of market information with the steamship lines, which allowed us to put transactions in place with rates that made the transaction possible. But those falling rates bottomed out in late spring. We saw rates increase because of restricted equipment and space availability. The excess capacity has been laid up, there are fewer containers available because of the imbalance between what is being imported and exported, and the carriers cannot sustain the losses that they have incurred, and so they are getting more disciplined in curtailing the capacity and the in the rates they charge.

We are all waiting for a global economic improvement to help demand. We see a lot of demand challenges for the remainder of the year, with generally weak global conditions. Lower levels of pricing will continue to sustain themselves in the market, but also we are beginning to see more and more supply challenges, less available tonnage for processors, brokers and consumers is out in the market. We see generation falling pretty significantly because of general economic conditions or because people have decided they are not going to recover material right now because it is not in their best interest. That material we see going back into the waste stream.

As material volumes fall, it also creates a challenge for the processing community because there are fewer and fewer tons to cover the fixed costs. The fixed capital costs required for processing these days are pretty significant.  

The author is president of Canusa-Hershman Recycling Co., with corporate offices in Baltimore and Branford, Conn. He can be reached at JSloan@chrecycling.com.