Paper Consumer Focus- The Hard Facts

Speaking as part of panel called "The Changing Face of Paper Recycling," Dr. James Burke had a sobering message for attendees of the Paper Recycling Conference & Trade Show, held in New Orleans this past June.

Burke is CEO and president of SP Newsprint Co. (formerly Southeast Paper). The company operates two mills, in Dublin, Ga., and Newburg, Ore. The company also has a large recycling division, SP Recycling. Burke has been employed with Mead Co. and Garden State Paper Co., operators of the first recycled newsprint mill in the U.S. Southeast Paper gained attention when it built a recycled newsprint mill in middle of the pine forests of Georgia.

What follows is a partial edited transcript of Burke’s remarks at the keynote session of the 2002 Paper Recycling Conference & Trade Show.

By way of background, I should note that SP Newsprint currently produces more than 1 million tons of newsprint, ranking it among the top five producers of newsprint in North America. The mill in Dublin uses 100 percent recycled paper as its furnish, while the one in Newburg uses between 40 and 60 percent recycled content, depending upon the availability and some other factors between recovered fiber and wood chips.

The cornerstone of our operations is the fact that we’ve always been a very cost-competitive operation. Not too many folks make in excess of 1 million tons per year on four paper machines. Our number two paper machine in Dublin is far and away the fastest and most productive machine in North America, and is now number two in the world in the latest worldwide statistics. It runs 5,600 feet per minute, and we wonder if they’re having difficulties if they don’t produce 1,000 tons per day off that single machine.

We have historically worked very hard on being a cost leader and have also been very proud of the fact that we have been a leader in the use of recovered fiber in the manufacture of our product, newsprint.

I’m going to limit my remarks to two points. First, I’m going to talk about the condition of the customer for recycled material. And by that, I mean the paper and paperboard mills that you are selling recycled fiber to.

And secondly, those of us who are in the business always have a going concern about quality. But I’m going to talk about quality in terms of what are the requirements of the customers of the paper and paperboard mills and how does that impact raw material needs.

First let’s take a look at the overall state of the paper and paperboard industry. From 1991 to 2001 a total of 95 mills have been shut down, just in the U.S. Seventy-two of those mills have been shut down since 1997.

Employment in the pulp, paper and paperboard mills has declined by 34,000 jobs or 14 percent of the total pulp, paper and paperboard workforce since 1997. That is not a pretty picture. I’m going to be a little more specific about my industry, the newsprint manufacturing industry, and unfortunately the picture is similar. Since 1980, for North America in total, the number of newsprint mills has declined from 79 to 55 in the year 2000 and is forecast to decline to 48 by the year 2010.

Capacity, which was 14.8 million tons in 1980, is forecast to be 14.9 million tons in 2010. And this is a sharp decline from a capacity peak of 17.3 million tons in 2000. Newsprint consumption fell more than 11 percent from 2000 to 2001. So far in 2002, consumption is down another 6 percent over a disastrous 2001.

So even as capacity declines, North American consumption has declined precipitously from 13 million tons in 2000 to an estimated 10.7 million tons in 2002. There’s still too much capacity available for the estimated newsprint required by the market.

I think another fact to note is that U.S. newsprint consumption last year was 83 pounds per capita. This was the highest in the world, and compares to Europe, which has about 55 pounds per capita and Asia, which has seven. But in the U.S., per capita consumption is down substantially from a 1988 peak of 111 pounds per person.

There were huge investments made in the North American newsprint industry in the late 1980s in wide, high-speed newsprint machines. For example, today if you were going to put in a single-machine newsprint mill in North America, you’d be looking at a price tag of one-half billion dollars.

I think it’s worthy to note that there has been only one newsprint machine built in the last 10 years in North America, and that was a relatively small machine at Inland Empire, which replaced another machine at that site. The conclusions, at least for newsprint, but basically for all grades of paper and paperboard, are that the print on paper publishing business is in a long-term decline, at least in the U.S.

The reasons for this I’ll let you speculate on, and I’ll mention a couple of them. The paper industry has not earned its cost of capital in eight out of the last 10 years. So there is little investment incentive, especially considering growth markets domestically. Any of you that have contact with investment bankers or have heard the Deutschbank folks talk or Merrill Lynch or any of those folks, you’ll know how they feel about the paper industry.

The strength of the U.S. dollar has killed export opportunities for most of our grades of paper and paperboard. The dollar is unrealistically strong and it is just now starting to adjust a little bit.

The industry in total has been—I’ll try to be polite and use the word mistreated—by various misguided environmental movements. I’m not going to get into detail about that.

The short-term things that have happened to us have been a dramatic slowdown in the economy, although the economy recovered in the first quarter. Coupled with that, particularly for print-on-paper people, there has been a dramatic slowdown in the advertising market, and we have not really seen that correct itself yet. I think the first and most positive sign I have seen has been the pre-season selling of network television for [the fall of 2003]. We hope that’s a forbearer of better things to come in all types of advertising.

That’s your customer. As you can see, times are difficult. I can’t discuss pricing for products such as newsprint, but I’m sure you can draw the correct conclusion based on the market conditions described.

Now let’s talk quality for a moment. First, even though I’ve said some not very encouraging things, I think we’ve got to assume that paper products will be around for a long time. Even newsprint, a commodity print-on-paper communication media, will survive under the right conditions.

And of course survival depends on the value proposition the product offers. What this means is, basically, good quality at a competitive price to deliver a message. Print on paper will compete for advertising dollars based on its value proposition, vis-à-vis television, cable, radio, the Internet and I’m sure there are a couple of things out there lurking that we haven’t even identified yet.

Now what do I need as a newsprint supplier to help my customers, the newsprint publishers or printers, to compete? Obviously I have to supply them high-quality newsprint, capable of good reproduction at a reasonable cost. And to do that, what do I need from my raw material suppliers? I need good quality fiber at a reasonable cost.

Let’s take a look at recycled fiber use in newsprint. In 1980, 1.5 million tons of recycled fiber were used in newsprint production. By 2000, there was approximately 6.5 million tons used in newsprint production. That figure is probably on the high side because there is now recovered fiber used in other grades that are first cousins to newsprint; things that we call groundwood specialties and some of those other types of grades. The pure newsprint consumption of recycled fiber is probably down around 5 million tons.

That consumption in North American newsprint mills could potentially increase—and I don’t have that figure for the potential in 2010 because it all depends on a lot of things. I think as most of you are aware, it required hundreds of million dollars of capital investment to increase recycled fiber usage from 1.5 million to 6.5 million tons. And it will require substantially more investment to increase usage further from that.

There were several main drivers toward the use of recovered fiber. Unfortunately, some of these were not valid. In some instances, capital spending and energy savings were valid benefits. The landfill scare and the shortage of wood chips were bogus assumptions.

Today landfill capacity is more than adequate, and in the Southern U.S. and eastern Canada we are awash in wood chips at historically low prices. Anybody from around the Atlanta area realizes that the growth of Atlanta all by itself is causing a huge surplus of wood in the state of Georgia. As a matter of fact, if you fly in and out of the Atlanta airport, you couldn’t even begin to count the number of truckloads of wood that are being taken off the site that is being cleared for the fifth runway.

What are my alternatives to secure quality fiber to produce quality newsprint? Well, I can install pulp capacity based on wood chips or convince recovered paper suppliers to supply a quality fiber material. SP is proceeding down parallel paths.

Recovered fibers are described by various grades for a reason. Each type of recovered paper pack is suitable to make a particular grade of paper. The higher-end quality requirements, the higher the quality of the paper pack must be.

So, what can we do working together to maintain and grow recovered fiber usage? First let’s recognize what the measure of success ultimately is. It’s to deliver a product of satisfactory quality and cost such that the publisher or printer can have a print-on-paper product that successfully can compete with other types of delivery (and there I’m talking about everything from television to the Internet.)

A little more specifically, first and foremost, let’s get rid of bogus recyclables that contaminate our fiber streams. Beverage containers, except for aluminum cans, are not recyclable. And specifically, I’ll address the glass issue.

Glass is not only not recyclable, because there is no market for it, but it is a terrible contaminant. It wears out dry sorting equipment, and when it gets in the mill processes, it wears out our mill equipment. On top of that, it is the most serious safety hazard we have in our recycling company. So, we’re obviously not fans of glass.

Glass ends up in landfills, and plastics and tin cans don’t pay their own way. I’m tired of pulling their wagon and incurring the cost and contamination. It’ll be a tough battle, believe me, but we’ve got to get federal, state and local officials to really look at the situation, a la Mayor Bloomberg of New York.

Secondly, we shouldn’t rush to mix all fiber streams together. There is no question it saves the hauler money. But as recovered fiber processors know, the more mixed the stream, the more difficult to separate and the higher the likelihood of cross-contamination. Separation ideally should be done in the dry state. Because once fibers are in the process stream and wet, separation is much more expensive.

I say that and I’ll make a short commercial pitch. We have developed a new separation technology, and we believe our technology will separate wax from OCC; we know that it will completely de-ink Flexographic printing without any trouble at all. Technology will continue to develop, but compared to taking material out in a dry state, taking it out in a wet state and then having to dispose of it is a much more costly proposition.

Another little thing I’ll mention is that the state of Georgia has asked our Dublin mill to do some unusual things, one of which is to begin to monitor floatable plastics in the effluent stream. Our processes take materials in and run them through either continuous pulpers or drum pulpers to get out the large materials. Then the smaller materials pass through various stages of screening and cleaners. Then you pick up the rejects and you concentrate them and incinerate them in a boiler. The problem that we have discovered is that very small particles of lighter weight plastics don’t get trapped and continue in our effluent stream as floaters. We are just now beginning to look at these floaters.

Ultimately, if the recycled fiber streams we receive cannot minimize contaminants, we’ll have to modify our own processes to accommodate more wood.

There is one last issue that I’m not especially qualified to comment on, but I do want to mention it because I think it’s important. You’ll hear throughout this conference a theme of, "Don’t worry. The export market, especially the big C, will save the recovered paper market. And oh by the way, they take trash."

Well, I’d like you to remember these things. The export markets are volatile markets, as is the domestic market. And folks who buy fibers from our shores source worldwide. Without a good counter-balancing domestic market, I think you’ll find that some very bright, shrewd buyers will be very aggressive.

The second thing is, the growth of the domestic paper industry is a solid indicator of the growth of the standard of living. Higher wages and a desire for better quality products are always a consequence of this. I’m going to tell you that the concept of supplying trash and substandard quality will become unacceptable. In the future, the concept of taking America’s waste or excess trash, and putting it in the export markets, will become less and less palatable.