Paper export with opportunities and risks: The financial crisis leads to market adjustment in the paper industry

The global financial crisis has also reached the German recycling industry. But as opposed to the banking and automotive industries, the recycling industry has not responded with panic or predictions of Armageddon. Admittedly, there are some problems with exporting wastepaper to China, but in Germany the industry sees more opportunities than risks. In any case, there will be some form of market adjustment. An important representative of the German disposal industry and an expert in the area of wastepaper expresses his views on the situation in the global market. Lutz Siewek is Managing Director of Nehlsen GmbH & CO. KG in Bremen (Germany), where he is also responsible for the company's entire raw materials business.

Foto: M. Boeckh(01.06.2010)
ENTSORGA-China: Has the financial crisis now also reached the recycling industry?
Lutz Siewek: I believe it already reached the recycling industry last November. The raw materials area was the first to notice the extent to which the markets are intertwined with each other. Pricing in Germany is very dependent on the Asian markets. Demand for exports largely determines the prices in Germany. But there are two reasons why the German paper industry is now under so much pressure: on the one hand, it is due to the falling demand in the product area, but on the other hand, the industry simply produced too much here in Germany.
ENTSORGA-China: How can this surplus production be explained?
Siewek: We know the phenomenon from the automotive industry. There are simply too many products on the market. This allows consumers to drive down the price. To a large extent, the paper industry only has itself to blame. On the other hand, surplus production of new products does not reduce the amount of wastepaper that is needed, but it does lose market value – prices start to tumble. Of course, the fact that it has not been possible to export as much wastepaper as in the past also plays a major part. And this export had spurred raw material prices artificially and unnaturally.
ENTSORGA-China: The loss of the Chinese market seems a little sudden. Are there no long-term agreements in this area?
Siewek: The sharp decline came so suddenly that ships carrying recycling material from Germany were even turned away from the Chinese ports in Hong Kong and Shanghai. The dealers were faced with the alternatives of either turning around or accepting much lower market prices.
ENTSORGA-China: To what extent is Nehlsen affected by this development?
Siewek: We are one of the smaller dealers. I estimate we occupy seventh or eighth place in the German market. We turn over about 300,000 tons per annum. But we not only deal in wastepaper, we also collect, sort and prepare. We also buy in material from other sources. And we market worldwide. But – and this is the important thing – in general, we have long-term fixed price contracts and strive for intensive, long-term business relationships.
ENTSORGA-China: Are there no price adjustment clauses in the industry as there are in the fuel industry?
Siewek: Yes, but we have many transactions in which we finance the entire logistics chain with the income from our paper – and in these areas we have not allowed ourselves to get involved in speculative marketing strategies. Consequently, in the high price phase we could not profit from the inflated prices for wastepaper, but on the other hand, now we do not have to worry about the fall in prices or subsidise our logistics.
ENTSORGA-China: In other words, you are completely unconcerned about the drop in secondary raw material prices?
Siewek: Not entirely. Of course, we have some floating contracts that are dependent either on the EUWID index or the German Federal Statistical Office indices. Here, at present the prices are rock bottom but there are some courageous market players who believe that the market has bottomed out. I would prefer not to comment on this. But you have to know that the terms and conditions are still acceptable for the good grades, even if the prices are below what they were in 2007.
ENTSORGA-China: Who is suffering most in the industry due to this fall in prices?
Siewek: The companies that only collect material from the municipal collection points. All the companies that took part in tenders last year during the high price phase and who won these tenders would be the worst affected. They had to guarantee German municipalities fixed acceptance prices and now face the daunting task of maintaining these prices even though they have no fixed price guarantees with the paper factories. The companies that promised the local governments 100 euros and are now getting only 10 or 20 euros from the paper factory have serious problems.
ENTSORGA-China: What would you advise these companies to do?
Siewek: Just as the banking industry has its black sheep who have caused problems in the entire system with their shady speculations, in the paper industry we also have certain elements who want to make a killing at the expense of the rest. They are now meeting with their municipal employers and attempting to get out of their contracts. I know of some specific cases where the companies are invoking Section 313 of the German Civil Code – in other words a fundamental change of circumstances underlying the contract. Our lawyers say that this cannot be used as an argument in the current economic situation. I believe that you have to be firm. If you compete and cannot keep your promises, you should get out of the competition. At Nehlsen we calculate our prices for a very long time and also hedge these prices accordingly. Ten years are not uncommon.
ENTSORGA-China: Last year there was, in some cases, fierce competition for the blue recycling paper bin. Now things have quietened down somewhat. Did you also have to learn the hard way?
Siewek: I don't know if you could call it the hard way. Of course, we earned good money in the high price phase. But we are not so short-sighted that it affects us. Besides, we have created suitable storage capacity for wastepaper and are waiting until prices rise again. We do not export when it is not worthwhile.
Regarding the blue bin and the privatisation discussions, I believe that wastepaper is a valuable raw material that will become even more important and will be traded throughout the world in the long term. Private companies are much better positioned for this. Because of the high market entry barriers there have been no major changes where effective collections near households have been established.
ENTSORGA-China: Back to the subject of China. The country is also regarded as Mecca for German environmental technology and was, at the same time, extremely attractive for German secondary raw materials. Do we have to say goodbye to this idea?
Siewek: The Asian market is still very important for paper trading in Europe. Nevertheless, the wastepaper industry has many trading contracts in Germany itself and the paper industry will still have to import in future because many, perhaps too many, paper capacities have been created.
In this respect, I see a lot of responsibility and a big market in Germany. We also have to watch that we do not lose the raw materials in future.
ENTSORGA-China: But wasn't it the case that in China completely different prices were being paid for wastepaper than here in Germany? Containers full of wastepaper bales were being sent to the East – by air freight even – because of the attractive prices that were being paid.
Siewek: There was and still is a significant price difference between Asia and Germany. But you have to consider that apart from the attractions the Asian market also harbours some major risks. There is little security. And trust has been shaken to the very foundations: Imagine a dealer sends a ship full of high-quality plastics to China, where recently a ton of plastic here in Germany fetched 400 to 450 euros. Let's say the ship takes four to six weeks before it docks in China and then when it arrives the Chinese dealer offers only half the original price because prices have dropped in the meantime – the German dealer has a real problem.
ENTSORGA-China: Does what you described also have consequences for Nehlsen?
Siewek: We were affected by a case just like this, but were fortunate that we delivered "free alongside ship". The follow-up deal with the transport risk did not affect us. Basically, we try and conclude price guarantees with our Asian dealers, but letters of credit offer no guarantee. It is a difficult business and you really have to consider whether it is worthwhile taking legal action.
ENTSORGA-China: Will wastepaper flow along different channels in future?
Siewek: No, I don't think so. Exports will pick up again, by the second half of 2009 at the latest. I assume that Chinese trading partners have been able to obtain fresh cash and that the demand is still there; after all, surely production has not been cut back just because Chinese traders have no more money. But the crisis also has a healing effect: dealers will reconsider their portfolios, will look for more trading partners and will basically safeguard their transactions. Trust will slowly return and the rescue packages will start to take effect.
Martin Boeckh, Managing Editor of ENTSORGA-China, spoke with Lutz Siewek.


 Foto: M. Boeckh
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Copyright: © Deutscher Fachverlag (DFV)
Source: Entsorga China 01_2010 (Juni 2010)
Pages: 3
Price: € 0,00
Autor: Martin Boeckh

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