Trading places: known for its commodities trading services, Enron Corp. now also owns mills that consume scrap paper - Paper Consumer Focus

Recycling Today, Nov, 2001 by Dan Sandoval

Enron Corp. might be considered a neophyte when it comes to making paper. But the company, which has purchased mills, intends to make up for its lack of experience by using many of its financial tools to become a force to be reckoned with.

Enron, the Houston-based energy and commodity trading firm, is starting to become a more noteworthy player in the paper and paper recycling industry. Through its acquisition of newsprint mills in Canada and the U.S., as well as through its Enron Online and Clickpaper.com operations, the company is becoming more active in the paper recycling business.

PUTTING IT DOWN ON PAPER

The growth of Enron's role in the forest products industry catches many people by surprise. However, according to company managers, the model honed by the company is perfectly suitable for commodities from the forest products industry.

Steve Klein, director of Enron Forest Products, stresses this point. "Basically, we see the recovered paper business as a commodity business. We see high volatility. Therefore, we see a big need in the industry for a risk management product."

He adds, "Our overall goal is to be the leading provider of physical and financial risk management services to the industry. We see the need and are actively developing our market position in this sector."

So, what exactly is Enron's goal? And why is there a perceived advantage to using this method?

Malcolm Randolph, vice president of Enron Forest Products, ticks off four advantages to using Enron's financial tools. "The first is liquidity. There is always an opportunity to buy or sell product." Randolph also cites credibility and transparency. "Enron has a strong balance sheet. When you enter a transaction with Enron there are guarantees that we will supply or be supplied by you. Finally, there are efficiencies. Buy online immediately." These four qualities are huge advantages, he contends.

An added feature is the ability to establish a position for a term that is as long or short as a company would like. "We give them price certainty. We are willing to enter a transaction and give them three, five or 10 years where we will take the volume or hedge out their products at a fixed certain price. So in the near term they can budget accordingly. They can evaluate their capital spending budget because they can lock [in] what their revenue stream will look like. Over a longer period or time they can make different capital expenditure decisions relative to where they think their revenue stream is."

This concept was developed for several commodity streams, including oil, agricultural products and other base materials, and has been expanded to include not only recovered fiber, but also broadband capacity and even hedging against weather conditions.

For Enron, the first step to entering these markets often is to develop a physical presence. This is what dictated Enron purchasing its paper mills. To begin the process, Enron purchased the Garden State Paper mill in Elmwood Park, N.J., and a newsprint mill from Daishowa in Quebec City, Canada.

The mills give Enron the physical assets to allow itself to help create the market for newsprint. Both mills are also significant consumers of recovered fiber: the Garden State mill is a 100 percent recycled newsprint mill; the Quebec mill, now called Strathacona, produces 50 percent recycled content finished product.

Before purchasing the two newsprint mills, Enron had a more difficult time obtaining the material to make its trading business effective. "We weren't easily able to get access to the physical newsprint when we tried to do contracts for it with producers," says Klein. "The biggest and most important thing about newsprint that was different from recovered is that it is more difficult to commoditize it. There are lots of different weights, lots of different grades. The first component to start making a market is setting a commodity standard that the entire industry will follow. What we were able to do by buying the two mills is gain access to physical supply that we can then use to standardize the product. Once you build that building block, from there if there are better grades or worse grades you can work off the main screen," he remarks.

"But you need that main screen to create the standardization, and then you create that price transparency that is the fundamental building block for the price risk management tools for producers or users," states Klein.

Another advantage to Enron owning its own mills, according to Klein, is the way it has allowed the company to develop its overall market. "It has anchored our paper recycling hub in the Northeast. It also really kick-started our business in the Northeast. [It opened up] lots of volume that we are able to access [and] buy as a result."

The size of the trading is reflective of this growth opportunity. According to Enron, the company is trading approximately 600,000 tons of newsprint a year out of its newsprint mills, plus around 100,000 tons of directory paper and around 60,000 tons of board.