Paper profits take a dive
Bales of shredded cardboard, paper and packaging are arranged into towers several stories high inside Steve Young’s 130,000-square-foot warehouse in Commerce.
Trucks have been unloading 600 tons of the wastepaper each day for more than a week, leaving the cavernous building filled nearly to capacity.
Ordinarily, much of the scrap would have been shipped to China, where it would be mashed into pulp and recycled into new cardboard boxes to package many of the goods destined for American store shelves.
But American consumers aren’t buying so many nicely packaged televisions, computers and toys these days. And China’s economy is slowing too.
So the stacks of paper in Young’s warehouse are going nowhere. Prices for the material have plunged as much as 75% in the last six weeks and will probably struggle to rebound as demand continues to melt away.
But this is more than a story about unwanted paper. These piles of American trash are a window on the troubled worldwide economy, in which consumers aren’t buying and the Chinese manufacturers who normally serve them are seeing a slowdown in their own breakneck growth.
“Growth in China is so tied to what’s going on in the U.S.,” said Peter Wang, chief executive of America Chung Nam Inc. of the city of Industry, the largest wastepaper supplier in the United States. “It’s a domino effect.”
Chinese manufacturers’ dependence on scrap paper from the U.S. grew enormously over the last several years as environmental degradation and logging restrictions limited their ability to find raw material to make new paper. Companies increasingly coveted recycled American paper, which was considered to be the world’s finest for its strong fibers.
Last year, 11 million tons of scrap paper worth $1.5 billion was exported to China. By contrast, only 1.1 million tons, worth $57 million, was exported to China in 1998, according to the U.S. International Trade Commission.
Last year, about a fifth of U.S. scrap paper was sent to China.
Until the bottom fell out last month, this year was on track to equal 2007, industry experts said.
The drop in demand for wastepaper is mirrored in diminished markets for other commodities previously devoured by the booming Chinese economy, including raw materials for construction and factory production.
“The developed market’s weakness is hurting China and all the other emerging markets,” said Donald Straszheim, a China expert at Roth Capital Partners in Newport Beach. “China has been an enormous demander of paper, copper and all iron and steel, and now that demand is way down.”
The World Bank said last month that China’s annual economic growth rate -- 9.4% so far this year -- may slow to 7.5% in 2009, which would be the lowest rate in 19 years. And Chinese President Hu Jintao hinted at the depth of China’s concern by warning a meeting of Communist Party leaders recently that the country risked losing its competitive edge as international demand for exports tapered, the party’s official People’s Daily newspaper said.
China’s slower growth combined with continued sluggish consumption in the U.S. has meant a reversal of fortune for suppliers who had flourished along with China’s boom.
Wang’s company, America Chung Nam, led the nation last year in shipping-container exports and was one of nine wastepaper companies among the 20 largest U.S. exporters, according to the Journal of Commerce.
Now the company is facing 30% declines in sales compared with the summer, Wang said.
Almost all of the wastepaper Wang’s company sells goes to China, and half of that goes to its sister company there, Nine Dragons Paper, which operates its own mill.
Both companies are owned by Zhang Yin, the 15th-richest person in China, according to the Shanghai-based Hurun Report, which tracks China’s business elite.
Last year, Zhang was ranked No. 2. But Nine Dragons’ shares have lost about 80% of their value on the Hong Kong Stock Exchange since the beginning of the year after reports of slower earnings.
The decline of paper values has occurred too recently to be reflected in industrywide statistics, most of which go as far as September. But industry leaders say the drop-off has been painful and unprecedented.
“Prices have dropped so much that we don’t know where they should be,” said Jim Yang, president of Newport CH International in Brea. “A lot of material is going to the landfill and a lot is stacking up in warehouses in case prices go up again. It’s just so volatile.”
For Yang, rates for corrugated cardboard went from $250 a ton in August to $75 in October to $100 today.
Yang and many other suppliers say the swings have prompted Chinese buyers to engage in brinkmanship by demanding cheaper rates after the wastepaper has already left the U.S., and in some cases, after it has arrived in Chinese ports. Some buyers are requesting up to 70% reductions in prices.
“It’s obviously not ethical to break a contract or renegotiate while the boat is out on the water, but what are you going to do?” Yang said. “It’s not worth fighting. You’re just kind of stuck.”
The California Integrated Waste Management Board is so concerned about the crisis that it has called a special meeting for Dec. 10 with officials and suppliers to discuss ways of easing the hardship and preventing businesses from closing.
One of the options being considered is waiving restrictions on how long suppliers can store waste material, so they can wait for competitive prices to return.
“A lot of our stakeholders are affected by this dramatic price drop-off,” said Jon Myers, director of communications for the board. “It just happened so fast. Recycling has always been an up-and-down kind of market. We saw some big price increases the last couple of years, but we’ve never seen a big drop like this.”
Young, the supplier whose scrap is piling up in warehouses, said his rates for used corrugated cardboard fell in mid-October to $40 a ton from $170 a ton -- not good when you consider $90 a ton is about where he breaks even.
“It was like D-Day for us,” said Young, who founded Allan Co. in Baldwin Park in 1963 and has similar-sized foreign and domestic customer bases.
Rather than sell his material at a loss, Young has chosen to increase his warehouse space by 400,000 feet and hold on to the scrap until prices bounce back.
Hoping to allay the fears of his employees, Young recently fired off a companywide memo that began “The prices of our recovered materials have fallen off a cliff. . . . Our buying customers act as if they just went through an 8.0 earthquake.”
He continued, “We have gone through the recessions of 2001, 1996, 1990, 1985, 1980 and 1975. We survived each and actually made a small profit.”