Mexico: potential waiting to be realized

Perini Journal

Tissue production in 2004, according to the latest available figures from the Mexican Pulp & Paper Association (CNICP), amounted to 812,000 tons, while exports were 122,000 tons and imports 83,000 tons. This gives an apparent consumption in the country of about 775,000 tons and, based on a population presently estimated to be 108 million, a per capita consumption in 2004 of 7.2 kg.

While it is not easy to see Mexico developing as rapidly as other emerging markets such as China, there are good reasons to believe that the tissue production and consumption will grow in the country.

Javier Ortiz is a consultant working with the paper industry as well as with financing and banking issues for other processing industries in Mexico. “I am rather optimistic about the future for Mexico,” he says. “We have a very large young population that is incredibly confident about the future. These young people have a true ‘winners’ mentality and very open minds. In fact, Mexico is the World Champion of Football for the under 17 Youth Championships. We are extremely proud of this and I think it is an indication of positive things to come in Mexico.”

SEVERAL STRONG POINTS. Among the strengths that Ortiz points to in Mexico are the economic stability of the country, as well as the sustained growth that has been taking place over the past years. “The country has been very economically stable for the past 18 years or so. This has increased investor confidence. The economy or GNP has been growing at about 3-4% for the last 10 years which is a good stable rate.”

In addition, the openness of the government and the country to international trade are a big advantage. “We are very active in bilateral trade and feel that this has been a big benefit to the Mexican economy. Of course NAFTA (the North America Free Trade Agreement) has opened our markets to the USA and Canada. This has been good for the economy, bringing manufacturing jobs to the country.”

However, not all the news is glowingly positive about the Mexican economy. Among the weaknesses that Ortiz cites are the high energy costs in Mexico, despite the fact that it is a big producer of crude oil. The high energy costs are due mainly to high taxes on energy, he says.

Another difficulty or barrier to even faster economic growth is the poor condition of much of the infrastructure in Mexico. The power supply system cannot always keep up with the growing demands placed on it and the roads and general transport system are overloaded and outdated.

Thus high energy costs and poor infrastructure are the most important problems facing the Mexican economy today. “Overall,” says Ortiz, “I think you can summarize the Mexican situation as an economy that is clearly experiencing growth pains but this will lead to a positive future. I think we can be happy about that.”

CHALLENGES FOR PULP AND PAPER PRODUCTION. Before looking at the tissue business, let’s take a look at the Mexican paper industry in general. In talks with the Mexican Paper Association (Camara Nacional de las Industrias de la Celulosa y del Papel, CNICP) it is clear that paper manufacturing in the country has quite a few problems. First on the list, as with the economy in general, is the high cost of energy says Oscar Alcantara, managing director of CNICP.

A second major problem for paper manufacturing in Mexico is the cost of water, which is very high, amounting on average to six percent of the production cost for a paper manufacturer.

A third, and extremely important, difficulty for the Mexican paper industry is the lack of fiber in the country. The ejido system, which can be explained as a government sponsored process of taking land from private owners to allow use by a local community, makes it risky to plant trees or try to develop forest resources. This is because when the trees are ready for harvest the owner may suddenly find out that he does not really own the land on which they stand. Efforts are underway to reform this system but the results are not yet clear. As a result, the industry relies heavily on recycled fiber (RCF), which makes up over 80% of fiber used in the Mexican paper industry.

Consequently, as a result of these drawbacks to pulp and paper production, total paper production has been rather flat in Mexico over the recent years (see figure 1). As the economy has developed, paper consumption has grown mainly based on an increase in imports. Thus while total paper consumption in 2004 amounted to over six million tons, only about two-thirds of this was made in Mexico with the other one-third, or over two million tons, being imported.

“We feel that we should not need to import so much,” says Alcantara. “We should be more self-sufficient, but at present we are not. I might also add that we believe that some of the imports are a result of dumping of tonnage by some of our trading partners, who cannot find markets for their tonnage at home.”

TISSUE SHOWS FASTEST GROWTH. Not surprisingly, given the difficulty and expense associated with transport of tissue over long distances, tissue is the fastest growing of all paper sectors in Mexico. Total tissue produced in 2004 amounted to 812,000 tons, which was an increase of 7% from the previous year and an increase of 70% from 1995. Imports amounted to 82,000 tons and exports to 122,000 tons.

In the Mexican tissue market approximately 64% is sold through the large retailers (supermercados and hipermercados) such as WalMart, Gigante and HEB, etc. Another 30% is sold to distributors who in turn supply much of the small ‘traditional’ channels such as corner shops, mom&pop stores and simple stands set up on city streets. The government buys the remaining 6% of tissue sold in Mexico for public facilities and government-operated buildings.

The biggest companies on the Mexican market are, not surprisingly, related to the big multinationals such as Kimberly-Clark, SCA and Procter & Gamble. Kimberly-Clark de Mexico is far and away the biggest tissue supplier in Mexico. K-C Mexico is estimated to have about 50% of the market, selling various brands such as Pétalo, Suavel, Delsey, Kleenex and Vogue. Looking at the A.C. Nielsen numbers for bathroom tissue in Mexico, K-C Mexico has about 50%, followed by Copamex, which was fully acquired by SCA of Sweden in 2005, with about 18% of the bathroom tissue market. Procter & Gamble comes next with approximately 13%. Thus the big brands from the multinational companies have about 81% of the market. Private labels, including retailer brands as well as lesser known labels from converters, account for about 8% of the bath tissue market. Fabrica de Papel San Francisco, which is adding a new paper machine later this year, has about 4% of the Mexican market.

During our visit we met with the very small and rather newly established Mexican tissue converter Grupo Corporativo Papelera, GCP. Eduardo Montero is the general manager of Grupo Corporativo Papelera, which is located in Toluca, an industrial city about 45 minutes to the west of Mexico City.

GCP ENTERED THE TISSUE BUSINESS IN 2002. It is an offshoot of a company called SINTRA, which is a project engineering and services company working mainly with the transportation sector. SINTRA started in 1988 as a subway and train project engineering company and shortly thereafter moved into the airport services business.

Antonio Perez, the company’s technical director, is one of the founders of SINTRA. “We are mainly a project engineering company, but we wanted to diversify a little bit,” he explains. “We also wanted to get into a manufacturing business where we would have on-going business to smooth out the project work. With projects, we go from one contract to the next whereas in manufacturing we saw the advantages of smoothing things out as far as finances, planning and staffing.”

The company also saw some synergies with the airline services business as paper napkins made at GCP could be part of the offering to the airlines it works with. GCP has now developed a good business in that sector to compliment the other airline services SINTRA offers.

The startup in the tissue business says Perez, “turned out to be a little harder than we initially thought. Now however, the operation is working very well and we have a good little business that has accomplished our aim of creating a small manufacturing operation to balance out the project work.” •

ATECP - Seeking to reinvigorate the Mexican paper industry

As pointed out in the accompanying article, the Mexican paper industry has been faced with numerous challenges. In an effort to breathe new life into the industry, and also to make the various government officials more aware of the situation in hopes that they will help, the CNICP and the Mexican Paper Industry Technical and Management Association (ATECP) have been working hard.

Enrique Garcia, who is President of the ATECP as well as being Vice President & Managing Director of Albany International in Mexico, has been a driving force in this effort, together with Oscar Alcantara of the CNICP, both to revitalize the association and the industry. Garcia became president of ATECP in April 2005 and sees his mission as a critical one for the Mexican paper industry. “The technical association was essentially dying,” says Garcia. “We needed to invest not only money but also human resources to revitalize it and hopefully bring new life to both the association and the Mexican paper industry itself.”

Garcia clearly is a man who knows the Mexican paper industry as he has been working with it for more than 28 years. “I work for a supplier company and while we are not directly involved in paper making as our primary business, we are a part of the supply chain that represents 1.44% of the Mexican GDP and employs 5.4% of the work force.

Thus we have brought together all parts of the supply chain to give us more weight and leverage when talking with the government and various officials to help make them aware of the importance of this sector to the overall Mexican economy and its competitiveness. We are now getting a lot more notice than in the past and I am confident that all the measures that we are undertaking will help to improve things.”

Among the numerous activities that ATECP is undertaking is closer cooperation with various universities to establish more pulp and paper technology curriculums. Such is the case of the Wood, Pulp and Paper Department of the Guadalajara University that has this specialty together with a very well equipped laboratory that complements very well the ATECP Lab. A Pulp and Paper curriculum has been developed that can be taken on line via internet, eliminating the need to travel to classes.

In addition, says Garcia, “We are encouraging the supply chain to use the incentives and R&D facilities that our Government has such as the National Council of Science and Technology (CONACYT). To improve our competitiveness we need to educate our Government as well as the Senate and the Congress. We have had several sessions to make them aware of the problems of the supply chain. The Mexican Institute for Competitiveness (IMCO) has played a major role as they have statistics that show where we can improve.

“The supply chain uses secondary fiber and paper, so we have strengthened our relationship with Associations and Institutes that are involved in those areas as well. We have reactivated our relationship with Technical Associations in North America and South America and look forward to doing the same with Europe.

“So far, I am happy to say that our membership is increasing because they are starting to see the value of what ATECP offers not just for the Pulp and Paper industries but for the whole supply chain.”