Paper money

Paper money

For ocean carriers, the recent rise in freight rates has added some luster to the U.S. wastepaper export market, which two years ago was so dim that ship lines sometimes preferred to move empty containers than to carry cargo for as little as $100 per FEU.

Freight rates for wastepaper have increased an average of 35 percent since April, according to several shipping-industry and wastepaper-market sources. On the West Coast, where ships typically leave for Asia only half full, rates rose to about $450 per FEU. On the East Coast, where ship space is tighter, rates to Asia rose to about $650 per FEU, including surcharges.

"The market has reached a more comfortable level recently," said Howard Finkel, senior vice president of trade for China Ocean Shipping Co., which relies on wastepaper for 20 to 30 percent of its cargo volume to China. "The shippers and carriers have reached some kind of agreement that they need to keep moving the cargo. We need to get better than repositioning (of empty containers) out of this cargo."

Wastepaper is a low-value, high-volume backhaul cargo that carriers use to fill ships on their weaker export routes, primarily to China. Last year, wastepaper exports totaled 644,141 TEUs - 9.6 percent of all U.S. containerized exports, according to PIERS, the Port Import/Export Reporting Service, a sister company of The Journal of Commerce. Wastepaper was the dominant commodity shipped by 18 companies on the JoC Top 100 Exporters for 2002. America Chung Nam, a wastepaper exporter based in Pomona, Calif., was the No. 1 U.S. exporter in number of containers shipper, at 155,500 TEUs last year.

Most U.S. wastepaper shipments are destined for China. Because imports from Asia are dominated by higher-paying consumer goods, carriers are eager to reposition empty containers from the U.S. as quickly as possible so that the boxes can be filled with remunerative cargo. Sometimes that causes problems for wastepaper exporters.

Carriers must balance the revenue they get from carrying wastepaper against the possible delays that their containers might encounter when they reach Asia. Some carriers have complained that containers sit too long on Asian docks. Carrying wastepaper can tie up a container weeks longer than a simple and direct repositioning of an empty box. The problem becomes more acute during peak import seasons, when carriers need every container they can find to carry import cargo.

For many carriers, wastepaper is an on-again, off-again cargo that they pursue when they need additional revenue or when rates and container availability make it worthwhile to carry. A few lines, because of the location of their dominant trade lanes or other factors, choose not to pursue it at all.

"What wastepaper companies count on a lot is that shipping companies would take something rather than nothing," said Ken McEntee, editor and publisher of The Paper Stock Report, which covers news and trends in the scrap paper market.

McEntee said that as recently as April, some wastepaper shippers were having trouble finding space on container ships but that few complaints have surfaced since then. He said space was more of an issue on the East Coast, where ships have higher utilization.

Though unglamorous, wastepaper remains the largest U.S ocean container export by volume, with most of the scrap going to China. Last year was a record year for wastepaper exports, which totaled 11.5 million tons. Based on current levels of growth, this year's exports are expected to rise to 13.7 million tons, McEntee said.

The demand for old corrugated cardboard is the greatest. China reprocesses the scrap into cardboard boxes. As the long-standing expression in the industry goes: "They send us stereos; we send them boxes," McEntee said.

China's dominance as the lead destination for U.S. wastepaper exports is fairly new. Until last year, Canada was the largest U.S. export market, McEntee said. China's share of exports through May of this year is 2.4 million tons, close to half of all U.S. wastepaper exports.

Even though wastepaper doesn't command high freight rates, it's still a more lucrative and cleaner commodity than some others that carriers use as backhaul cargoes. Animal hides, scrap metals and scrap resins yield even lower rates and are messier to handle, resulting in potentially slower container turnaround.

For wastepaper shippers, though, freight rate increases are a sizable share of the overall value of their product. For example, scrap paper now sells at about $125 per ton on average. Freight rates are about $20 per ton or about 15 percent of the overall value. Most large wastepaper shippers, such as America Chung Nam and Waste Management - can absorb rate increases. But since profit depends more on volume than margins, some smaller suppliers are effectively locked out of the market and run the risk of going out of business, wastepaper market sources said.

Phil Regan, a longtime paper broker with Paper Tigers, a wastepaper exporter in Point Richmond, Calif., said he hasn't seen any reluctance by trans-Pacific carriers this year to offer space on westbound ships. Last year, however, was a different story. He said that Asian mills started to boost their orders in anticipation of the International Longshore and Warehouse Union negotiations on the West Coast. At the same time, space became tight and rates for wastepaper started to rise.

But most carriers' overall attitude about wastepaper hasn't changed, he said. "When they can get higher-revenue freight, they don't need us. When they don't need us, they can raise their rates."