Looking at Latin America

Oct 26, 2020, 16:10 PM
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By Emilie Shumway

Industrial developments and demographic trends in some Latin American economies look promising for recovered paper exporters, but a variety of barriers are likely to keep this a niche market.

Looking at Latin AmericaWhen Joel Litman, president of Texas Recycling (Dallas), traveled to Sao Paulo to speak at the Exposucata MercoApara paper recycling conference in 2012, he thought he might do a little business while there. “I thought I’d scout around and got to thinking, maybe there’s some opportunities there,” Litman says. “But it was really challenging. I learned [Brazil] goes east and west [to trade]; they don’t go north and south.”

Litman is not the only paper recycler to find market opportunities scarce in that region, says Marina Faleiros, managing editor of RISI Fastmarkets’ (Burlington, Mass.) Latin America team, who currently lives in Sao Paulo. “It’s not very common to see imported recovered paper here,” she says. “For the most part, Brazil depends on [its] own collection.”

Latin America—particularly Central America and South America—remains an elusive recovered paper trading partner for the United States, despite its proximity. Analysts who focus on the region note a variety of factors that can hamper U.S. recyclers’ ability to trade south of the border, including local sourcing of pulp, challenging logistics, and difficult trade relationships. Those that have gained a foothold in the region, however, say those relationships have paid dividends as other recovered paper markets are declining.

A Slow-Growing Market

In 2019, Latin American countries purchased just 10.5% of all recovered paper exports from the United States, 1.77 millon mt, while the rest of the world imported more than 17 million mt of the commodity. While low overall, exports have shown a pattern of modest growth in recent years; in 2012 and 2013, respectively, Latin America imported 1.45 million mt and 1.39 million mt of recovered paper from the United States, or a little over 7% of the total those years.

Among the countries of Latin America, Mexico is overwhelmingly the strongest recovered paper partner for U.S. recyclers. Of the 1.77 million mt exported to Latin America in 2019, about three-quarters of the total, or 1.32 million mt, went to Mexico. Colombia was second in imports, at 129,999 mt, or 7% of total exports to the region (less than 1% of total U.S. exports of recovered paper worldwide). Ecuador, Argentina, and Guatemala follow Colombia in volume imported, but no other country individually reaches 100,000 mt. Still, the four countries, taken together, have increased their imports rapidly from prior years. In 2019, they imported 310,913 mt of recovered paper, up from 200,934 mt in 2018 and 132,698 mt in 2017.

The trend reflects what David Jordan of Jordan Trading (Kingston, N.Y.) calls a “significant growth” in the middle class across the entire Latin American region, but particularly Chile, Colombia, and Peru in recent years. Jordan brokers in the region for U.S.-based paper recyclers and has lived in Santiago, Chile, for more than a decade. When he got married in Chile 20 years ago, “Americans that came to the wedding would comment on the low quality of the napkins,” Jordan says. Restaurants only had small paper squares or wax-coated paper for customers, he says. Now, most restaurants supply full-size, thick, quality napkins, he says—an indication of the greater tissue production and consumption that follows a rising middle class.

The vast majority of Latin American recovered paper is going to this tissue sector, Faleiros and Jordan say, along with the containerboard and boxboard markets—a reflection of global paper production trends. Litman, who supplies to some Mexican mills, says they’re interested in old corrugated cardboard, deinking grades, and pulp substitutes. Kerry Getter, CEO of Balcones Resources (Austin, Texas), says his company also sells deinking grades and OCC to its Mexico-based partners, as well as sorted office paper, coated book stock, and other grades that can be used in the production of tissue. (Rusty Getter, Kerry’s brother and president of Balcones’ commodities group, says the company’s OCC sales to Mexico have dropped significantly since Balcones signed a contract with a consumer in the Southeastern United States.)

For paper recyclers interested in exploring the tissue and packaging sectors in Mexico and the slowly developing markets in Central and South America, recyclers already trading in the region and analysts who specialize in it suggest taking time to research the companies, cultures, trade policies and patterns, and logistical opportunities and complications.

The Importance of Relationships

For Balcones Recycling, trade with recovered paper consumers in Mexico has been a long-term goal and strategy, and one the company has been working on for decades. “We have gone to a great deal of effort to build that part of the business,” Kerry Getter says, pointing out that Balcones’ accounting staff is almost entirely bilingual. Rusty Getter, who works directly on contracts with Mexican mills—Balcones rarely uses a broker—also is bilingual. Kerry’s son, who runs an affiliated recycling business, majored in Latin American business in college. “We have a plan,” Kerry says. “It’s gone back a number of years, and it’s benefited us.”

Balcones works mainly with Kimberly-Clark of Mexico (Mexico City), Essity’s (Stockholm) mills in Mexico, and Bio Pappel (Mexico City)—some of the largest paper companies in the country, Rusty Getter says. “We had the first contract with [Kimberly-Clark] that was ever established directly with a processor in the United States,” he says, referring to an agreement going back nearly 30 years. Back then, Balcones would invite Mexican consumers to come to the facility and “see our material, lay hands on it,” Getter says. They would then offer for sale the exact bales the companies inspected. It was a way of standing out from certain bad actors who would send their lower-quality material south of the border. “Mexico was a dumping ground for things,” he says, comparing the situation to how certain recyclers treated China. “So we did the opposite. We courted them.”

The courtship has blossomed into decades-long relationships between the Getters and the Mexican mill executives that are as personal as they are business. “These are people that we entertain in our homes and go to dinner with here in the States,” Kerry explains. “They come to see us, and we go to see them … Rusty is in Dallas, 15 minutes from the airport. He can fly to Mexico City at the drop of a hat.” Over the past 30 years, Balcones was able to develop these relationships until Mexican facilities were buying more than half its recovered paper supply. (Recently, with its new U.S. OCC contracts, that number dropped to 30%.)

The close relationships Balcones has established with these mills is a testament to the importance of the personal element in trade in Latin America. “Bio Pappel is the single largest paper manufacturer in Mexico, producing packaging and printing and writing paper,” says Dan Gee, senior associate of Moore & Associates (Atlanta). The company has five paper mills and many converting facilities across the country, with many near Mexico City and Monterrey; it has even expanded into the United States, acquiring a majority share of U.S. Corrugated (Washington, Pa.) through its subsidiary, McKinley Paper Co. (Dallas), in July 2019. Kimberly-Clark of Mexico, Balcones’ main trade partner, and Essity are two other major tissue producers who consume recovered paper in the region.

“Business in Latin America is built on relationships much more than in North America,” Jordan says. “The mill buyers and owners really want to trust and know who they’re buying from.” When he moved to Santiago 16 years ago to help develop trade relationships across the region, the buyers he worked with at the mills were delighted he made the effort, he says. He traveled to mills across Central America and South America “on a fairly regular basis.” He established a good reputation in the region, he says. “People would tell me no one had ever visited before. Everything was done via telephone and e-mail.” Jordan connected repeatedly with CMPC, a Santiago-based tissue producer with mills across South America, and he worked with the company to begin importing recovered paper from the United States—first to tissue mills and one containerboard mill in Chile, then to branches across the continent. “There was a spike in volume starting at that point,” he says.

Delays and Inconsistencies

If they don’t conduct their due diligence, develop close relationships, and partner with bigger, more secure firms, paper recyclers hoping to expand their trade opportunities in Latin America may be inviting certain risks, say those familiar with the region. “Latin American mills are notorious for being slow payers,” Jordan says. “That’s always been an issue. You really have to know who you’re dealing with.” Many U.S. companies use a factor—an intermediary that will assume financial risk—when working with mills in Latin America, in case the mill goes bankrupt or refuses to pay. “You have to push for payment all the time,” he says, suggesting recyclers and brokers working in the region keep their contracts in order and be willing to use them as pressure. Litman works with brokers to help control for delayed payments from Mexico. The Getter brothers say timely payment has not been an issue in Balcones’ partnerships.

Some Latin American mills also are known for unpredictable orders. “Most American suppliers value consistent orders greatly,” Gee says. “They want to know they have a 500-ton order, and that they have it every month. Mexican mills are a little more cavalier than most American mills on that.” Gee and Jordan say the inconsistency is a function of weak economies in many Latin American countries. Mills are very careful to control their costs, Gee says. A sudden shift in the monetary exchange rate and devaluation in the local currency can leave mills vulnerable. (This vulnerability, and the desire to wait until the exchange rate improves, also helps explain the delayed payments.)

Latin American mills may be inconsistent importers because they prefer to locally source recycled fiber whenever possible. “You always need the local supply,” Faleiros says. “It’s important to have it fast and accessible to your mills. It’s much easier than importing, even in central Mexico, with most imported volumes in the country staying in the cities [near] the U.S. border.” Most of Latin America has a slowly developing formal recycling sector in major cities along with a large informal sector consisting of individual collectors. In Brazil, Faleiros says, major volumes of recycled paper come from cuttings from the country’s packaging manufacturers, which are combined with postconsumer material from the informal sector. Jordan says Central American box producers, who serve a large market of fruit suppliers, among others, also generate high-quality cuttings that are sold inexpensively and consumed by many mills in South America.

Complicating matters even further, recovered paper competes with virgin pulp produced across the region, which mills often buy when the price is low or when they want to invest in more premium products. Brazil, Chile, Argentina, and Uruguay produce a great deal of pulp, Jordan says. In recent years, Kimberly-Clark switched from using recovered paper to pulp in many of its Latin American tissue mills after decision-making power shifted in the company, he says. After Kimberly-Clark made the switch, competitors were suddenly able to buy up more locally sourced recovered paper, reducing the need for imported recovered paper. “Pulp prices also have been down globally for a year, affecting local prices for virgin fiber and enabling several tissue mills to switch from recovered paper to pulp,” Faleiros adds. “White recovered paper availability also has been dropping as printing/writing paper consumption slows down with digitization.”

Logistical barriers also can impede greater trade in the region. Whereas Asian paper companies will often subsidize the rail cost to get recovered paper to the port from inland processors, Jordan says, this isn’t the case for Latin America because “[the region doesn’t] have the imbalance of trade, so they don’t need the containers.” As a result, he says, the extra cost of shipping means the trade is only economical for U.S. recyclers on or near the coasts. With their businesses headquartered in Texas, Texas Recycling and Balcones Resources have easier access to Mexico. They can take advantage of shipping by truck, a method Gee says is limited due to the cost of cross-border shipping. “Once you leave Texas,” he says, “almost everything else comes to [Mexico] by rail.”

Policy Interruptions and Opportunities

A final challenge for U.S. recyclers working with Latin American mills is the sensitivity of the market to political shifts. When Mexico elected a new president who was perceived to be less business-friendly in 2018, many “investors lost confidence” and canceled investments that had been underway, Faleiros says. In October 2019, Kimberly-Clark of Mexico CEO Pablo González Guajardo told investors the company would not be investing any new money in the country due to a slowing economy and government policies “that are not what we would like to see,” according to Mexico News Daily. (Guajardo later recanted, saying the company would invest at least 3 billion pesos, or $157 million, in 2019 and even more the following year.)

Working with Venezuela became too arduous for his company due to increasing governmental involvement, Jordan says. In his last deal there nearly 10 years ago, the Kimberly-Clark mill wanted to pay for the recovered paper shipment, he says, but “the government had to authorize the conversion of their local currency to U.S. dollars in order for the money to leave the country.” The government offered an unfair exchange rate, Jordan says, and the process of getting paid took years and eventually a trip to the Venezuelan embassy with a pile of certified invoices. The difficulty of working with Venezuela, along with years of political upheaval, has dampened the flow of recovered paper to the country. Venezuela imported 39,310 mt and 58,439 mt of recovered paper from the United States in 2013 and 2014, but it has imported well under 1,000 mt every year since 2017.

On the other end of the spectrum, recyclers say the U.S.-Mexico-Canada Agreement, designed to facilitate and ease trade across those borders, has yet to have a major impact on demand from Mexico. The process for trade was already “close to seamless,” Rusty Getter says. “Even before the North American Free Trade Agreement, things moved fine,” he says. In terms of the USMCA, though, “we haven’t really seen any difference,” Litman agrees. Faleiros says she sees more enthusiasm for the deal among Mexican consumers, who expect it to boost their packaging and tissue sales and who see the deal as a way to become more competitive in the U.S. market. She notes that Mexico has followed the example of the United States and Canada in recognizing certain industries as essential during the coronavirus pandemic. “If Canada and the U.S. are boosting certain markets, then Mexico does the same,” she says. “They really see [the trade agreement] as their opportunity to grow.” For recyclers, Mexico is already an excellent trade partner, and the Mexican paper business is “very well-established,” Gee says. “The industry has good relations and transportation,” he says. “It’s really a matter of economics. If mills can source fiber to Mexico less expensively than through other alternatives, then they’ll do it.”

As of now, while the situations in Central America and South America may be harder to predict, Mexico remains reliant on U.S. recovered paper, analysts say. The pandemic has slowed down economies worldwide, and Latin America is no exception, they add. But investments in the pipeline show the region is beginning to recover and new opportunities for some U.S. paper recyclers may be on the horizon. Notably, packaging manufacturer Grupo Gondi, which completed a joint venture of their Mexico paper and packaging operations with WestRock in 2016, will soon be opening a new containerboard mill in Monterrey capable of consuming 400,000 tons of OCC per year. The mill will mainly serve the beer industry, Rusty Getter says.

Many mills south of the U.S. border are also far more sophisticated technologically than U.S.-based recyclers might assume. “The perception may be that the technology in Mexico is somehow inferior,” Rusty Getter says. “But places like Essity and Kimberly-Clark are as technologically advanced as anything in the United States. They compete directly with mills in the Southwest, and they have broadened their menu of what they’re able to receive.” Gee agrees, saying many mills in Latin America are able to handle contamination on par with those in the United States. Essity and Kimberly-Clark have both installed drum pulping systems in their mills, Gee says, allowing them to extract fiber from some poly-coated grades and harder-to-process paper grades.

The paper industry in Latin America may be tough to break into and vulnerable to a variety of regional factors, but putting in the work can open up some potential new markets for recyclers who have the proximity, interest, and patience to pursue it. “I think a lot of people are hesitant to do business in a place where they don’t speak the language and customs are different,” Kerry Getter says. “But these are relationships we’ve worked at, and it’s paid dividends in these choppy markets over the last couple
of years.”

Emilie Shumway is senior editor/reporter for Scrap.

Latin America’s industrial and economic developments could open doors for recovered paper exporters, but newcomers may face barriers.

  • 2020
  • Sep_Oct

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