Paper Supplement -- Electronic Trading

In many industries, trading between buyers and sellers is performed with complicated contracts. Forms are filled out, contracts are negotiated and drawn up, and precise volume and sales issues are determined. However, for many paper stock dealers and mill buyers, trading is done more often with a handshake agreement in the context of relationships that have been developed and nurtured for years.

Vendors place great stock in the long-standing relationship they have developed with consumers. Some sellers point out that in tough markets, mills that they have strong relationships with will hold prices, help them expand their collection programs, and protect them when supply declines.

Mill officials relate a similar experience, with preferred vendors not forgoing them when prices are higher on the spot or export market.

But recently there have been rumblings about the repercussions of sudden swings in market conditions on long-standing business relationships. Price swings of more than 100 percent in a matter of months have been common over the past year and a half. As prices soared and then plummeted, both buyers and sellers have pointed a finger at the other side as the culprit.

These fissures are only some of the issues that have made trading recyclable materials through alternative methods look increasingly attractive. Electronic trading, whereby companies buy or sell material without the established relationship between buyer and seller, has popped up in a number of venues. One is SEFEX, a system operated out of Paterson, N.J., which allows brokers to trade among brokers. Another, more heavily publicized program, is the Chicago Board of Trade’s Recyclables Exchange, which is attempting to bring recyclables into the commodity exchange system.

These two electronic trading avenues, to varying degrees, are attempting to treat recyclables as commodities with consistent quality standards. So far, these systems have yet to fully take hold. For one, there are a number of reservations on the part of many recyclers about changing from a proven method. And for paper-stock-using mills, the issue could be of even greater importance. Working closely with a cadre of suppliers, many of these mills have been able to work out their own quality standards, as well as secondary issues such as supply frequency, prices, and delivery times. Forgoing this well-established network for a new system opens up a serious possible downside.

The SEFEX Secondary Fiber Exchange is geared to broker-to-broker trading. All orders to buy or sell are placed with the SEFEX trading desk and monitored. Traders, operating as neutral agents, negotiate completed transactions for the buy and sell orders generated each day. However, anyone in the paper industry can log on to the SEFEX Internet address (see sidebar) and view a range of paper-related information.

According to Peter McLachlan, president of SEFEX, advantages to the system are the improved ability to efficiently balance market needs by offsetting short-term shortages and surpluses; reduced reaction time needed to implement changes in purchase, sale and inventory strategy decisions; reduced reliance on fixed- or long-term contracts as spot or cash market volume increases; and broad access to actual trading prices and buy/sell order levels that reduce the effect of rumors and other misinformation.

McLachlan says one of the major benefits to the SEFEX process is the company is an absolutely independent agent. "It doesn’t matter to us at what price the material is sold," he says. "The company receives a $1 a metric ton charge from each sale." Further, only after SEFEX does the negotiating with the two parties for the material are the buyer and seller put together to negotiate quality specifications.

Some question whether the system would allow buyers to get the quality material required. "There isn’t enough money to make up for a rejected load," says McLachlan. "Agents with the company work closely between buyers and sellers, helping negotiate prices. Also, since the service records the actual price, it can show the real price of the material, which helps negotiating prices between brokers."

The system operates on is spot or cash market, he adds. The key is that all the information is in the SEFEX databases. If there is a buy or sell order for a material not on the exchange, the company taps into the database to see what companies handle the material and then contacts them.

More attention has been paid to the Chicago Board of Trade’s move to put recyclables on the exchange than any other system. During the past two years the exchange – in partnership with the Clean Washington Center, the New York State Department of Economic Development and the United States Environmental Protection Agency – has funded the project, which acts as a bulletin board to match suppliers and consumers of various recyclables, including paper.

Despite heavy publicity, the initial results, according to most, have been somewhat disappointing. Complaints range from the steep initial subscription cost, $1,000, to the lack of an acceptable arbitration group to monitor disputes and the lack of transactions carried.

Recognizing these problems, the CBOT recently revamped its Recyclables Exchange. The new system, introduced last month at the National Recycling Coalition Congress in Pittsburgh, has been redesigned as an Internet-partnership with the Global Recycling Network (see sidebar for Internet addresses). The system has expanded its commodity coverage to include grades specified by the Institute of Scrap Recycling Industries (ISRI), and non-ISRI paper grades; PET and HDPE plastic – open plastic grade, commercial grades; glass; and rubber – shredded, whole, and crumbed tires, and tire-derived fuel. There is also a general catchall category for hard-to-market recyclables.

The CBOT has also changed its pricing. There is now a one-time registration fee of $10. In addition, it costs $2 a month for a company to place a sell order, with volume discounts available. Buyers list buying parameters for free, and matches are delivered immediately to them via e-mail, with a cost of 50 cents per each lead delivered. The computer constantly searches for matches based on specification parameters set by buyers and sellers.

Other changes include easy viewing of commodities listed for non-registrants, and overall point-and-click ease of use to navigate the exchange.

William Ferretti, director of the New York State Office of Recycling Market Development, Albany, N.Y., says the CBOT’s changes make the service more appealing.

The changes have come during a period in which the Recyclables Exchange has seen a steady drop in participants. At the time of the revamping, there were only 50 listings for recyclables posted on the old exchange, although this is partly because participants knew the revamping was underway.

While the CBOT has made a number of significant changes to make its program more enticing and easier to use, the reception from many paper recycling officials is still cool. Ed Hurley, manager of legislative affairs for Jefferson Smurfit Corp., St. Louis, says that while Smurfit Recycling was consulted at the beginning of the development of the CBOT’s Recyclables Exchange, company officials do not feel an electronic trading system holds any advantages for the paper recycling industry. One problem, says Hurley, is the opening up of the prices companies pay and charge for materials.

He does see advantages to the service for hard-to-move materials. Typically, these materials would not be fibrous products, but more obscure materials.

Several critics say one of the biggest reasons why they do not use the service is because there is little need to find other end sources for the material. "We have our supply lines set up," says one paper stock dealer. "They know what we have, and we know their specifications."

In fact, many large and small paper recyclers we contacted report little interest in using the service. The majority of the respondents feel the paper recycling industry already is a well-developed network. "Everyone knows who is buying and who is selling. It’s no secret," says one Northeast broker. Also, several handlers point out that often pricing is a reflection on the quality of the material, and would be more difficult to quantify through an electronic trading system.

Other paper stock dealers feel that while these new services offer some opportunities, the nature of the business is to develop long-term relationships with a handful of suppliers and establish a contract index price. The electronic network trading method is more of a spot market situation.

Skeptics of these new electronic trading services is not limited to those who have never used them. Weyerhaeuser Recycling, which kicked off the Recyclables Exchange last year with the first trade, has yet to make any additional trades with the CBOT. Pete Grogan, a spokesman for Weyerhaeuser, says that the company already has a firmly established network of buyers throughout the world. The company now only places sell orders on the exchange for more obscure grades such as trading cards.

In addition, although it would be useful for paper stocks to be treated as a standardized commodity – a condition needed for effective trading on a commodity exchange – many point out that its characteristics make that difficult.

But regardless of the current viability of electronic trading for paper stock, the general consensus is that some type of electronic trading – electronic bulletin boards, passive bulletin boards or interactive trading scenarios – will continue to exist. The jury is still out onwhether these systems will bring the paper recycling industry into the electronic age, or be only be a small part of the package.