Asia from the supply side: scrap paper buyers representing Asian mills are surveying a glut of material.

On the road ahead to a new century of business, the question of success in many industries may lie in the refocusing of what it takes to properly manage the supply-side of the equation. Simple market theory tells us that given a competitive market environment, supply follows demand by the function of price.

We've been trained, however, to mainly watch the demand-side of the market, often turning a blind eye to the other side of the equation. Somehow it is easier to see the "pulling side" of the market, more exciting to talk about the next new mill or rebuild, waiting to see where new opportunity may lie. What we seem to have forgotten, however, is 'that the risk adjusted process of matching supply with real demand-- not just capacity, is the key issue, and in this process, a balanced portfolio might include market share from both far and near.

EVOLUTION OF GLOBAL SUPPLY MARKETS

Since the early 1970s, recovered fiber supply from North American has been a staple of mills throughout the FarEast. With almost four million tons exported by 1997, many suppliers in the U.S. found a developing reliance on a marketplace that had once been considered inconsistent and unpredictable.

The advent of widespread curbside collections and increased recovered fiber utilization rates energized an industry in the '90s to supersede prior expectations about the pace at which sustainable recovery could grow, and Asia helped significantly feed this growth, slowed marginally by a financial crisis in 1997. During this "Asian flu", many Far Eastern mills found it difficult to afford the highly priced and dollar denominated raw materials from North America due to the erosion of their currency values. The substitution of cheaper raw materials became essential.

While the U.S. economy kept chugging along, absorbing Asian imports as well as the raw materials that had previously gone export, a new global supplier emerged on the scene.

The European Union was as much a dream in the early '90s as a reality, but certain governments, such as Germany, bolstered a common view towards environmental management. No longer was it sufficient to allow the market to find its way towards sustainable recovery, but moreso, new forms of legislation came about to actively manage the lifecycle of raw materials.

This started in Germany with the Deutsche Dualles System, but then other EU Countries such as France began to implement a more holistic approach to environmental resource management. Founded on the concept of producer-subsidized collection, recovery began to grow as never before.

Led by low freight costs and subsidized bulk-grade fibers, EU market share began to grow increasingly in places such as India, Indonesia, Thailand, and Taiwan. Both North America and Europe increasingly find themselves on opposite shores of a common stream whose outlet is the gulf of industry growing in Asia, and in particular, in China.

FACTORS OF SUPPLY: NORTH AMERICA AND EUROPE

Often times, the bottom line regarding supply is delivered cost and yield. Many Asian buyers were forced to buy paper based solely on delivered cost during the later '90s, and this certainly helped the position of lower cost fiber coming from Europe at the time.

Many Asian mills learned to overcome limiting factors of European fiber -- mainly the shorter fiber length and lower yields due to higher EU recovered paper utilization rates. When putting them head-to-head, several key factors must be considered when evaluating supplies from North America versus Europe.

Since the early '90s, North America has outpaced the net volume recovered in Europe. However, one should not let this factor be misleading. The EU's recent Declaration on Paper Recovery shows that the recovery rate in Europe has increased from roughly 39 percent in 1990 to 49 percent in 1999. The goal ahead is to reach a 56 percent recovery rate by the year 2005.

Clearly, the EU will continue its advances in recovery and continue to be a viable source of large supply. The market share challenge, however, is that the supply from Europe is becoming more inelastic. That is, as demand increases or decreases, supply remains relatively unchanged.

As regards quality, North America still enjoys a leading edge in this category, for there is a greater amount of virgin pulp used in the paper making process. This trend, however, is diminishingas older outdated mills are scuttled, making way for a higher utilization rate of recovered fiber in North America. It may be too soon to say, but surely the American fiber of today will not look the same in 10 or 20 years. Regardless, extremely low logistical costs give the advantage to North American fiber. These rates are made ever more possible by the ongoing trade deficit in the U.S., running almost $32 billion monthly.

The last supply side factor of comparison, currency, is changing on an ongoing basis. Advantages from cross currency exchange rates may come and go but the effects in a given market cycle are very real and powerful.

Now that we've considered the supply side of the market, let's take a look at supply side issues as envisioned by a mill company whose success is founded on recovered paper supply from both supply markets: the Nine Dragons Paper Industries (NDPI) mill in Dongguan, China.

NDPI'S SUPPLY SIDE VIEW

A recent report by ABN AMRO's Asian Economics and Market Strategy Division on China states it will be the best performing Asian economy in 2001.

With stability and a forecasted growth rate of 7.5 percent for 2001, China is the best bet going in Asia. It was also recently announced that final WTO accession negotiations were completed with the EU, clearing the way for likely entry.

For Nine Dragons Paper Industries (NDPI), with roots tracing back to a small trading company in the early '90s, the future is a reality today. America Chung Nam formed the mill in 1996 with one machine producing 200,000 metric tons per year. Today, the thoroughly modern facilities at this two-machine mill produce 650,000 metric tons annually of kraftliner, mottled white and medium. A third machine is set to come online next year in order to produce more than one million tons of containerboard: a feat matched by no other mill in a land of over 11,000 paper mills.

In order to continually move forward, however, the focus remains on access to reliable sources of supply. Building lasting supplier relationships is integral to the vision that the mill has. Its suppliers' health is the mill's own health -- these two are inseparable as the mill is predicated on recovered paper as the primary raw material.

The predominant source of supply for Nine Dragons has long been, and should continue to be, from North America. To a growing extent, however, the mill has taken care to establish new sources of supply throughout the global marketplace. With increasing recovery rates and stable trade lanes into the Far East, European supplies of recovered paper are making their way into a meaningful share of supply.

Both North America and Europe are key sources of recovered paper for China and will continue to be so in the future. What Ming Chung Liu, Deputy Chairman and General Manager for Nine Dragons, finds is that the domestic collection of recovered paper is improving, however.

Focused on assisting the development of local collections, especially since they are the most inexpensive source of raw material, Liu believes a collection target of 50 to 70 percent of his requirements may be possible within local markets in the next few years.

Positioned with the technology to utilize recovered paper sources from around the world, the idea of managing a global recovered fiber network is crucial toward developing an optimum cost structure for producing containerboard.

In the end, mills cannot consume more fiber than they can possibly make into saleable orders. Additionally, due to the concentration of production through fewer paper manufacturing companies, orders and capacity utilization can be balanced globally and change regional market conditions in cycle times shorter than ever seen before.

Knowing the cyclicality of the market, and the fact that we are in a trough, it is crucial to consider the other side of the equation -- the supply side. Suppliers must increasingly be more knowledgeable about the competitive nature of global recovered fiber supplies -- and it matters not whether they are in Paris, France or Paris, Texas. Market participants would do well to consider the competitive trends that the global recovered fiber supply presents.

The article is based on a presentation made at the Paper Recycling Conference & Trade Show held this summer in Chicago. The author is European marketing manager for America Chung Nam.

RELATED ARTICLE: Enter the dragon.

Ming Chung Liu, Deputy Chairman and General Manager for Nine Dragons, recently answered several questions about where the Chinese paper industry and Nine Dragons specifically expects to be over the next several years.

Q. Describe your mill. How many machines and employees are there, and what types of finished products are made?

A. Our mill is located in Dongguan, Guangdong, the most developed area in China. Currently we have two board machines, with total capacity of kraft linerboard (KLB) of 600,000 tons per year. We are already the largest KLB producer in China. The Phase 3 expansion project is now under construction, and will start normal production in August of 2002. By then Nine Dragons will have one million tons per year capacity.

Nine Dragons has approximately 1,000 employees, including workers in a central kitchen staffed 24 hours a day, 160 truck drivers, a full crew of mechanical maintenance, power plant, waste water treatment, and fresh water treatment as well as sales and support staff.

Q. Which grades of recovered fiber does the mill consume?

A. OCC (old corrugated containers) #11-12 and Mixed Paper #3.

Q. How much material does your mill need a month?

A. Currently around 50,000 tons of waste paper per month. Starting from August next year that number will increase to 85,000 to 90,000 tons per month.

Q. What percentage of the mill's supply comes from North America?

A. Approximately 70% to 80% from North America; 20-30% from Europe, adjustable depending on change of the market price.

Q. What is the relationship between the Nine Dragons Mill and America Chung Nam?

A. As the parent company, ACN has 100% ownership of Nine Dragons.