FMN Paper Supplement -- Accessing Mexican Markets Poses Advantages

Mexican markets for U.S. recovered fiber are stable and are growing rapidly, as Mexico is highly dependent on secondary fiber from other countries. Mexican forests contain mostly hardwood trees. Softwood, used as a primary input for pulp production, is much rarer and generally grows in high, rugged mountainous terrain. To access timber in these locations would require building new mills and expensive infrastructure.

Mexico’s lack of natural softwood forests make it a fiber-poor country with little promise of satisfying its growing demands for wood pulp internally. Mexico imports large quantities of paper stock and significant amounts of virgin wood pulp to meet its demand. Thus, strong markets for U.S. paper stock into Mexico will continue.

The Mexican paper industry is composed of 65 companies. Broken out by market segments, there are 58 paper mills, one pulp mill and five paper and pulp mills. In 1994, the Mexican paper industry’s total output was 2.8 million metric tons , produced from about 2.5 million metric tons of secondary fiber and 847,195 tons of pulp, according to the Mexican National Chamber of Pulp & Paper Industries.

The largest segment is packaging, producing close to 60 percent of the total output or 1.72 million metric tons last year, and is concentrated in medium and linerboard.

The next largest sector is printing and writing paper, and is responsible for 23 percent of the total paper output, or 653,264 metric tons.

Mexico has a shortage of pulp. The Mexican paper industry used a total of 847,195 metric tons of pulp last year. Mexico produced only 276,320 metric tons of pulp and imported the rest, 570,875 metric tons. Of Mexico’s total pulp production, pulp made from wood represented only 159,581 metric tons, 19 percent. Pulp from wheat, sugar cane/bagasse or similar fibers, constituted 116,739 metric tons, 14 percent of the total. Pulp made from these fibers, however, is not as desirable as wood pulp. Of the total recovered paper supply, 1.02 million metric tons, 40 percent, was imported from the U.S. Of the paper stock imported, OCC represented 46 percent; ONP, 33 percent,;CPO and white ledger, 17 percent; and mixed paper, 4 percent or 40,404 tons.

Of the total recovered domestically, OCC represented 1.1 million metric tons or 72 percent, CPO and WL 300,000 tons or 20 percent, mixed paper, 69,273 tons or 5 percent and ONP was 53,717 tons or 3 percent.

Domestic recovery data indicate Mexico is recovering secondary fiber at significantly high rates and still not meeting its domestic demand. The Mexican National Chamber of Pulp & Paper Industries expects Mexico’s secondary fiber demand to increase by 6.7 percent a year from 1995 through 1999.

Mexico has seven large paper conglomerates. The largest companies in the boxboard sector are Smurfit Carton y Paper de Mexico, Grupo Durango, and Grupo Gondi. The largest groups in the printing and writing sector are Kimberly Clark de Mexico and Grupo Crisoba. Grupo COPAMEX is a large diversified paper group with a large market in both packaging and printing and writing paper. Producer and Importer of Paper Inc., is the only Mexican newsprint producer.

Despite the recent economic instability in Mexico due to the devaluation of the peso, Mexican demand for recovered paper is expected to grow steadily. The best prospect for increased exports to Mexico is OCC. Mexican OCC imports have grown 86 percent, from 254,120 metric tons in 1988 to 472,768 metric tons last year. The size of the packaging sector in Mexico increased from 43 percent of the total Mexican paper production in 1984 to 60 percent in 1994. Currently, U.S. exports of OCC represent 46 percent of the total paper stock exports to Mexico. With expected strong growth in the Mexican packaging industry, OCC exports have an excellent opportunity to increase market share.

The second best sales prospect is ONP, which represents 33 percent of Mexican paper stock imports. Mexican ONP imports increased from 240,332 metric tons in 1988 to 336,899 tons in 1994, 40 percent. The third best sales prospect is "white paper" or white ledger and computer print out, which represented 17 percent of Mexican paper imports last year. Mexican imports of white paper increased 9 percent, from 162,994 metric tons in 1988 to 178,107 tons last year.

The Mexican paper industry is expected to continue growing despite slower growth for the Mexican economy as a whole. The Mexican CNICP estimates Mexico’s paper stock demand will grow 6.7 percent a year from 1995 to 1999. The prediction of continued growth in Mexican paper production and its accompanying need for recovered fiber is based on two trends stemming from the devaluation of the peso.

First, the importation of finished papers into Mexico declined, giving Mexican paper mills a larger share of the Mexican domestic paper market. Secondly, the peso’s devaluation improved the competitive position of Mexican paper exports internationally. Thus, despite Mexico’s financial crisis, domestic paper production should equal or exceed last year’s levels, fueled by rising domestic use of Mexican paper and increased exports.

The first half of 1995 showed signs of increased exports. A representative from Grupo Durango says their group’s exports have increased substantially. Other Mexican mills are also taking advantage of the weak peso to compete in the international market.

Since Mexican paper mills buy U.S. paper in dollars, and since 40 percent of the Mexican paper stock demand is being met by U.S. suppliers, the pressure to export finished products and get dollars in return is strong.

Domestic paper stock dealers are likely to be selling increasingly to a few large paper producers. Large mills with high export capacity are buying small mills that have been hit hard by Mexico’s financial crisis and did not have developed export markets. For example, Heda Paper Co., Kraft Paper Co., and Corrugados Tehuacan Paper Co., merged with Grupo Durango earlier this year. Mergers like this are expected to continue until the financial crisis subsides.

Mexico’s total recovery rate is about 60 percent. The local recovery rates for OCC and ONP are estimated at between 60 and 70 percent. In 1994, Mexico recovered 1.5 million metric tons of paper. Studies indicate Mexico may not be able to increase its recovery rate beyond the levels currently achieved due to high recovery costs. Thus, Mexico is not expected to substantially increase its paper stock recovery rate in the near future and will continue to depend on high quality U.S. exports.

Dealers looking to export to Mexico face few impediments to trade. Lack of information is one problem. A key concern is the instability of the Mexican peso, but this is not a problem for many exporters because the weak peso forced Mexican mills to buy U.S. fiber in U.S. dollars.

All pulp and secondary fiber imports are duty free. This status has existed since the Tariff Act of 1922. It was also granted in a concession by the U.S. in the General Agreement on Tariffs and Trade, effective Jan. 1, 1948. U.S. imports of pulp and paper stock are not subject to quotas, embargoes, or other non-tariff measures.

Exporting paper stock requires detailed planning. Transportation logistics, customs and payment procedures are integral parts of successful exporting. It is important to realize an exporting party has options that can transfer the cost of transportation, insurance and customs fees to the buyer. Exporters can choose to export FOB status or Cost, Insurance and Freight status.

Exporters have the option of exporting either "FOB their processing facility," meaning the Mexican buyer has to pay for freight cost and insurance from the facility to the mill location. "FOB the border," means the exporter is responsible for delivering the shipment to the border. Once it reaches the border, it is the importers' responsibility to pay custom processing fees and transportation costs to the mill. CIF status means the exporter pays the full cost, freight and insurance of the shipment. CIF may also be CIF processing plant or CIF border.

Transportation is a key element to making a successful export transaction. Most Mexican paper mills use rail to transport secondary fiber purchased in the U.S. Boxcars are the preferred way to transport paper stock to Mexico because they are less expensive and more efficient. Railroad fees are about $25 per ton from Dallas to Laredo, Tex., and $20 per ton from Laredo to Mexico City.

Trucks are more common for short trips. The average cost per ton of paper stock by truck from Dallas to Laredo is about $30; from Laredo to Mexico City, $35. Trucks also have the ability to transport paper stock to Mexico without unloading to a Mexican trailer. Many U.S. truck companies are affiliated with Mexican trucking companies who change drivers and switch trailers to a Mexican truck when the vehicle reaches the border.

Railroad boxcars carry about 50 tons of baled OCC, while trucks can carry about 20 tons. Therefore, a full boxcar from Dallas to Laredo would cost about $1,250 and from Laredo to Mexico City another $1,750. A full truckload from Dallas to Laredo averages about $400 and from Dallas to Mexico City about $700. Transportation costs from Laredo to Monterrey by rail are about $8 per ton and $20 per ton by truck.

Recyclers interested in exporting paper stock to Mexico need to develop a close business relationship with the direct end-user or mill. Once the relationship is established, a visit has been made to the mill, and the mill representative has seen the processing facility, it is time to negotiate price and paper grades.

Custom procedures are critical to successful exporting transactions. An important aspect of exporting is using the correct Harmonized Commodity System Code. This code informs the exporter if there are any tariffs on the material.

Custom procedures for exporting paper stock to Mexico can be difficult. Despite NAFTA opening lines of trade, export procedures have changed little. In some instances, it has become more complex. Exporters must still use custom brokers and freight forwarders to ship merchandise to final destinations. Standard customs documentation includes a commercial invoice, bill of lading, certificate of origin, and a shipper’s export declaration form, explained below:

•Commercial invoice is a bill for the goods from the buyer to the seller. It should include basic information about the transaction, including a description of the goods, address of the shipper and seller, delivery and payment terms. The buyer needs the invoice to prove ownership and arrange payment.

•Bill of lading is a contract between the owner of the goods and the carrier. The bill contains a packing list verifying weight and type of paper exported.

•Certificate of origin serves to prove the material meets NAFTA’s content rules of origin. There must be an assurance the fiber exported to Mexico originated in the U.S. or Canada. The certificate protects the U.S., Canada and Mexico from nations wishing to take advantage of the low tariff privilege among the NAFTA nations.

•Insurance Certificate. If the seller provides insurance, the insurance certificate states the type and amount of coverage. This instrument is negotiable.

•Shipper’s export declaration is used to control exports and compile trade statistics and must be prepared and submitted to the customs agent for shipments valued at more than $2,500.

Once documents are in order and fees are paid, the broker arranges for freight to cross the bridge. All crossings are subject to inspection by Mexican customs on a red light/green light basis spot check. Red light means complete inspection. Green light means there is no need for checking.

The cost is billed to the title-owning side. Once goods are cleared they are delivered to the Mexican buyer. Tariffs, taxes and customs fees should be left to the mill importing the material. Mexican mills usually have their own custom brokers and freight forwarders’ contacts.

Secondary fiber is a duty-free commodity. However, Mexico has a 0.8 percent customs processing fee added to the transaction value of the shipment. In addition, there is a deductible 15 percent Value Added Tax, assessed on the sum of the transaction value and the customs processing fee. The VAT applies equally to most products sold in Mexico. The VAT should be paid by the Mexican mill and is deductible to the Mexican mill at year's end.

Financing high-value sales in Mexico is usually made through letters of credit. Small value sales are either made with cash or a 50 percent payment on delivery. However, terms of payment vary according to the firm, previous relationship or suppliers’ size.

Letters of Credit add a bank’s promise of paying the exporter to that of the foreign buyer when the exporter has complied with all terms and conditions of the letter of credit. The foreign buyer applies for issuance of a letter of credit to the exporter and is called the applicant; the exporter is called the beneficiary.

Cash in advance before shipment could be the most desirable method of all, since a paper stock shipper is relieved of collection problems and has immediate use of the money if a wire transfer is used.

In summary, there is a great demand for secondary fiber in the Mexican paper industry. The prospects for secure markets are good. A high rate of paper stock use will continue, and a dependency on imported secondary fiber will persist.

U.S. paper stock dealers interested in exporting to Mexico need to become familiar with different Mexican information resources. The first step is to locate and make an initial call to a paper mill. The secondary fiber purchasing agent will be the point of contact. The purchasing agent may want to see a sample of the material.

To gain access to Mexican paper stock markets, dealers should participate in trade shows; prepare brochures targeting Mexican mills; prepare promotional materials in Spanish for large Mexican paper manufacturing mills; and advertise in specialized trade publications.