FMN Paper Supplement -- New Markets Change Buying Patterns

A common perception is that a shortage of paper stock grades will occur, especially for post-consumer grades such as old corrugated and sorted office paper. The reasons for this expected shortage range from the host of new paper recycling mills coming on line to the difficulty of collecting more of a certain grade, to uncertain grade specifications. Many mills, while publicly expressing confidence they will have enough material to feed their mills, have been working to protect against possible shortages of supply.

From setting up joint partnerships between suppliers and consumers, to increasing their collection arms, to setting up a cooperative purchasing agreement to ensure enough supply is delivered to each mill, a host of programs are being done. The philosophies may be different, but the goal behind these strategies are the same: protect against expected tightness in the market.

The Big Get Bigger

During the past several years, many of the largest paper collection companies have increased their collection arm through acquisitions, mergers or by opening new facilities. Expansions include the recent acquisitions by WMX Technologies of RRT Empire and New England CRInc., two owner/operators of material recovery facilities.

Other high-profile growth sectors include Weyerhaeuser Recycling either building or acquiring independent paper stock operations throughout the country. Additionally, Weyerhaeuser formed a joint agreement with Paper Stock Dealers to improve its market share in the South.

While the biggest companies appear to have cornered the market, many smaller paper stock operations grew their operations to compete in the evolving marketplace. These came through mergers, acquisitions or the building of new plants.

While both large and small operations look to grow, the mantra that is continually expressed is maintaining quality with the customers.

Ed Sparks, a consultant located in Glen Mills, Pa., lists a number of strategies that can occur for a successful paper recycling operation:

A monthly purchase order is a commonly used move. "I know of many monthly purchase agreements that have been based on a handshake," Sparks notes.

While successful, this is becoming more difficult, according to many vendors. The changing of the paper recycling industry is bringing in new purchasing agents who lack the background or expertise for the position. At the same time, corporate decision makers often fail to comprehend the dynamics involved in the day-to-day relationship between the buyer and seller, Sparks points out. A bottom-line decision may benefit the mill in the short term, but longer term it could create greater stress on the supply/demand relationship.

A more recent trend is the long-term contract. This is popular as new deinking facilities require signed contracts for both the supplier of paper stock and the buyer of the finished product before receiving bond financing.

Alliances between mills and collectors, according to Sparks, are the best strategy to ensure an adequate supply of material for the mill. An example of an efficient recycling alliance was implemented between Stone Container and Waste Management Inc., several years ago, which created Paper Recycling International.

While the creation of this paper stock operation combines two companies with more than one billion in annual sales, alliances are not limited to the largest companies, but can be used throughout the paper recycling chain.

An advantage to an alliance is having an integrated paper mill help an independent paper stock operation expand its business. Helping a company buy equipment or assisting in expanding the facility itself could be reciprocated as the packer could then supply the mill with more tonnage.

Henry Brothers, an independent consultant working for Georgia-Pacific Corp., agrees. By working closely with independents, mills can enhance their supply line, as well as strengthen paper stock dealers. G-P, running counter to many newer trends, is more comfortable working with independent paper stock operations than setting up its own collection arm, Brothers says.

Many larger paper stock operations also have established programs with smaller recycling companies which allow the smaller company to put in capital equipment to allow them to handle more material. Diane Lord, vice president of Ideal Paper, Seattle, points out this is not a new phenomena, but one that has been done for many years.

The strategy causing the most interest recently has been the flourishing of integrated paper companies either starting or increasing their network of collection facilities. The list of companies having collection facilities include: Sonoco Products, Fort Howard, The Newark Group, Southeast Paper, Jefferson Smurfit, Caraustar Industries and Rock-Tenn.

One advantage to mills owning and operating their own paper stock collection arm is the ability to have a mechanism in place to handle the required material for the mills. Russell Curry, senior vice president of marketing and planning for Rock-Tenn, sees this as a major advantage for his company. With nine collection centers and eight mills, Rock-Tenn is a major handler of various scrap paper grades. "The most obvious point is the continuity, as well as quality of the supply," Curry notes.

With acute shortages anticipated, building up a company’s infrastructure could allow for secure tonnage.

Marty Shaw, a spokesman for Rock-Tenn, says that while a paper mill owning and operating its own paper stock plant provides some protection against shortages, the cost of operating a center is significant. The major benefit for Rock Tenn, Shaw notes is , "The mills provide continuous supply of quality material to our mills. Our processing centers get immediate feedback from the mills."

While running both ends of the operations, Curry makes it clear the collection side operates strictly on the open market, and is not obligated to sell all its material to its mills. This strategy meshes with Rock-Tenn’s move to have each segment of their business operate as an individual profit center.

Another advantage, Curry says, is that Rock Tenn is not "in and out of the market. By supplying our own mills, we stay in at all times." This is especially important as the market tightens and demand intensifies.

While this may be the case, Sparks feels that often this setup creates a situation where the mill receives the poorest quality material at the highest price. Additionally, Sparks says, "No one can control their supply. However, there are techniques to solidify their supply."

Brothers stresses paper companies must stay in their own market, and allow independent dealers remain in their own market. He points out that paper companies getting involved in the collection could cause a drain on corporate management. Additionally, "Independents can make decisions much quicker than an integrated paper company’s recycling plant. No doubt, independents can process the material cheaper and cleaner."

While this is a problem, there are some apparent benefits. By having a well run collection arm, the chances of running out of fiber are greatly reduced. At the same time, a division of a mill can rely on the company to outbid independents for the material, especially when markets tighten and demands grow.

Going On-line

One of the most hotly contested issues has been the introduction of the Chicago Board of Trade putting recyclables on its cash bulletin board (see CBOT article). Although only now starting, CBOT has generated a tremendous amount of interest. Whether this will be the answer to many mills who need to develop a supply network is still to be seen. At the present time, many paper stock dealers, as well as mills, have taken a wait-and-see approach to the electronic service.

Several paper stock dealers question why a recycling exchange is being created when a traditional market for the material exists. Further, markets for recovered fiber presently operate very efficiently. Bringing a new source of information, some claim, will not improve the market as much as it will complicate an already successful collection/supply network. Further, some note the program could be successful for spot orders, and wouldn’t be as successful for companies looking for a steady supply of material.

Cooperatives have been a successful way for many groups to pool their recyclables to obtain a better price. This notion is being duplicated with the formation of a group of deinking pulp facilities. Called the Joint Purchasing Association, Inc., the group aims to purchase sorted office paper for member companies.

Carl Landegger, chairman of the JPA and president of Black Clawson, says this strategy aims to encourage packers to go into the market and collect additional tonnage. Not just empty offers, Landegger says the JPA is offering a solid floor price of $150 a ton for mixed office paper, with market prices being paid. Further, Landegger points out the combined purchasing power of the group could initially be 2.5 million tons. And, based on looking to purchase 25 percent of this required need through the JPA, this could be a sizable end market for paper stock dealers.

The JPA offers a two-pronged approach to sourcing office paper. On the one hand, by combining the purchasing power of the paper deinking facilities, the companies could become more competitive with larger deinking facilities. A second reason is by allowing a larger buying pool would keep prices more stable.

A second advantage is that by combining purchases, suppliers do not have to worry as much about the idiosyncratic nature of each mill. "If one mill closes down, there may be nine other mills that will still need the paper," Landegger adds.

Various paper stock dealers have been cautiously watching this situation. While a floor price of $150 a ton could encourage dealers to go out into the market for material, there is more of a wait-and-see approach being taken.

John Gold, vice president of North Shore Recycled Fibers, Salem, Mass., sees the JPA as taking an idea that has been around for a long time in the paper recycling industry. "Cooperatives have been going on for longer than 20 years," Gold points out.

Gold notes there has been a return of interest in this type of arrangement. He points out that if a mill is looking at bonds or project financing, they typically need contracts to show who will be supplying the raw material, as well as the offtake.

This strategy, Gold adds, is typically limited to non-integrated mills that need to go outside the corporate structure seen at larger mills.

While the paper recycling industry comes into bloom, waste management companies continue to become a more active force in the industry. "There is an opportunity (for mills) to work with waste haulers. Develop alliances. Help finance their expansions," Sparks stresses.

A cautionary note is expressed by Sparks: "These markets will not last forever. They will get down to more reasonable levels." Despite the recent downturn, Sparks, as well as many others, feel the next several years will be uncertain. Shortages of some grades will become the norm. "Capacity comes on in stair steps. At the same time, supply comes on more slowly," Sparks says. This scenario will likely create "pinch points" when not enough supply meets strong demand.

This will force more innovation by mills. Mills which used OCC may have to blend more mixed paper, including material collected from residential curbside collection programs. Cedar River Paper, Cedar Rapids, Iowa, recognized this possibility, and designed its system to use a mix of OCC and mixed paper.

Regardless of the approach mills and paper stock dealers take, it is safe to assume changes in the paper recycling industry will force greater innovation on all parties, as the goal of sourcing, processing, and consuming more recovered fiber intensifies.

The author is editor of Fibre Market News.