FMN Supplement -- Export Market – Buyer Beware

Long-term strategies for developing export relationships can be profitable, but there are many pitfalls to watch for when exporting.

The opportunity to sell recovered fiber directly to mills in Asia has never been easier. Fax machines have replaced telexes, overseas calls can cost pennies a minute, and mills are more sophisticated. More mills are part of a larger group or industrial mega-complex. Some have U.S. buying offices; many others have import/export divisions with English speaking personnel.

In some countries, smaller mills don’t fit this profile, but do import recovered fiber. Even then, most have information which advises them of the U.S. downtime, inclement weather conditions, and other factors impacting U.S. collections and transportation.

The days of finding a mill that loves your exceptional quality and will always pay you a higher price than the domestic mill down the street are gone. For anyone looking for that few extra bucks that a direct sale should yield, be warned that without careful management, direct export sales costs may exceed that premium.

Many buyers will support continuity when fiber is needed, but several will change their tune when inventories back up. In short, they hold off buying knowing the longer they wait, the lower the price may go. There are exceptions to this, but it may be difficult to find them. Greater competition from Europe and Asia and increased domestic supply will impact what the competitive price will be for the buyer.

Consumers in Asia generally have a vastly increasing domestic recovered paper and pulp supply, often supplemented with imports from other Asian countries and Europe. These affect demand and pricing for U.S. material. A Wisconsin mill may buy office pack from a huge region at the same FOB (free on board) price. If it ships from New York, its landed cost is more than if shipped from Chicago. Only a handful of export buyers share that philosophy. Fiber characteristics and yield aside, most export mills are primarily concerned with the landed cost. An exporter is at the mercy of the transportation rates and how they compare to other suppliers that furnish that mill.

Even if you have an English speaking mill contact in Asia, retain an agent. Don’t waste time on someone unfamiliar with recovered fiber or importing, regardless of their relationship with the consumer. The risk is too great if you don’t have a pro you can trust to deal with inevitable problems that arise. These agents generally work for $2 to $5 a ton, sometimes more. A good agent is well worth the commission.

Transportation costs often exceed the FOB value of the material shipped. The steamship business is much like the paper stock industry, with volatile pricing and inconsistent container availability. The relationship of an exporter with this industry is critical. The easiest way to get into the flow is to work through a freight forwarder with a thorough knowledge of the paper recycling industry.

Even though steamship lines, through conference agreements, can set freight rates, the actual cost to ship material is greatly impacted by supply and demand. Most larger exporters in a weak transportation market can leverage their volume to negotiate better rates than a smaller exporter. The freight savings can allow a broker to pay the supplier the same net price as that supplier may be able to receive on a direct sale. Steamship lines often set preferential rates in areas where they have excess containers.

Credit issues should always be a major concern. Even if an overseas customer is recommended by the agent, an exporter should take a careful look at selling to that customer on unsecured terms. Some markets will not issue letters of credit (LC) prior to shipment. However, by doing this, you run a risk, especially when the loads get claimed and the buyer has not yet paid. Even letters of credit have potential weaknesses. Some LC’s may have built-in discrepancies which make it nearly impossible to bank the LC with total conformity. If a company name is misspelled in the LC, the documents must be presented to the bank, which sometimes may be the bank in the country where you are shipping. If the documents are delayed due to an absent billing clerk in your office or problems at your presenting bank, the freight forwarders, or even the mail or courier service, you are at the mercy of the customer to amend the LC or accept the documents on discrepancy. If you do not conform with the exact conditions of the LC, it can be a worthless piece of paper.

Banking costs are also an issue. Every shipment will incur about $250 in banking costs, and shipments to some markets can be significantly higher. Normally, good freight forwarders can prepare all the documents. However, their performance is often dependent on the shipper. And their charges are in addition to the banking costs.

There are several Asian mills that have opened offices in the U.S., not only to buy recovered fiber, but also to sell finished product, source chemicals and machinery, and provide the home office a better view of what is happening here. These buyers normally buy on a delivered dock basis, as opposed to CNF (delivered to destination port). They are a safer alternative to the direct sale, while still building the supplier/customer relationship. However, they often will set prices based on competition, which in essence are other export brokers. In this scenario, you may not be selling at any premium price.

The dynamics of global trade have resulted in periods where specific mills, and often entire countries, are uncompetitive with regional prices, even when they are actively buying. Whether that competition is coming from other countries with attractive freight rates or imported domestic supply, fewer exporters focus on one or two countries. Diversification is the key If you are trying to maintain continuity with a specific customer and it is offered thousands of tons at a cheap price from another market or a reckless speculator with distressed tonnage on the water, the buyer may be unwilling to offer a competitive price.

Even with our increasing domestic demand, exporting is a significant alternative, especially for those who have reasonable proximity to port cities and major intermodal locations. The temptation to bridge this distance directly can be rewarding, but if mishandled, can be disastrous. As in anything, you need to be working and associating with good people who know their business, and who can proactively approach the problems which inevitably will arise. – Robes Nelson.

The author works for Pacific Forest Resources, a Corte Madera, Calif., brokerage company. The article is adapted from a presentation given during the International Recovered Paper VIII Conference in Chicago.