2008 Paper Recycling Supplement - Trend Lines

AbitibiBowater is a global leader in newsprint and also is big in wood products and market pulp. We service the international market in more than 80 countries and our international business has been growing.

When we look at our company, what are we trying to control is our inventories, our cash and our asset base. There is lot of focus on sustainability and environmental issues, which is a big part to what we do on a daily basis. Our bottom line is to increase financial flexibility within the company.

We are predominantly a North American company, operating in the Southeast United States and Eastern Canada. We also operate a facility in Korea and one in Bridgewater, U.K.

Recycling is a big component of what we do. We do have a nice recycling business both in North America and the United Kingdom. We collect through our Paper Retriever program in several markets, which has gone very well. And we’re a large consumer; we consume more than we collect. We consume approximately 2.5 million tons of ONP (old newspaper), collecting about 36 percent of our consumption. This is an important part of what we do in terms of cost and quality control within our newsprint business. The quality of paper we get in our Retriever program is very high; it’s outside of curbside collection systems, and it’s very clean material.

When it comes to newsprint, world demand is fairly constant and stable, but there’s been a huge shift in where newsprint is consumed; there is a growing international market and a declining North American market. Overall the market is up about 1 percent year over year with significant decline in the U.S. and significant growth offshore.

When we look at growth in North American industry export shipments, we see a pretty steep growth line. AbitibiBowater is the major exporter of newsprint from North America. Abitibi was No. 1, and Bowater was No. 2 as independent companies. Combined, we’re the largest exporter of newspaper from North America.

Where does it go? Currently, 57 percent of our newsprint production goes to North American customers, and the rest is distributed around the world. Given the fundamentals of the North American market and export markets, we’ll be at 50/50 within 12 months—that is my expectation. We continue to see growth in export markets and decline in consumption in North American markets, and those trends have not reversed as of yet.

We are seeing good operating rates in this industry at above 95 percent, which is a significant improvement from the 2007 period as well as being significant in terms of our ability to price our product appropriately.

In our printing papers business, coated mechanical is an important part of our business. We have a facility in Catawba, S.C., and we like this business—its fundamentals are better than newsprint. We’re a very low-cost producer in this sector. We would like to find growth opportunities in this coated mechanical sector—particularly that allow us to convert newsprint capacity into coated mechanical—and now have several options in that arena.

The uncoated mechanical sector is a growing business for us. It’s doing well, and our challenge as a company in this sector is cost. I think price and volume are good. We need to lower our cost platform [and] have identified in our ongoing review of assets how to achieve a lower cost structure in [this] segment.

Market pulp has been good this year, although lately it’s softened somewhat. From our perspective, we’re predominantly a softwood producer with some hardwood grades. It’s a business that’s performed well for us throughout the past couple years, and we continue to look for growth opportunities in the pulp segment through incremental expansion in existing facilities. Our team has done a good job in getting productivity up. Our tons are up across our pulp system, which has a double effect—It’s been a good product for us to sell and it lowers the manufacturing costs on our integrated pulp and paper assets. Not to forget, this is a global commodity, and prices go up and down; but, overall this has been a good performing business for AbitibiBowater.

Anyone who follows wood products understands what’s happened to building permits in the U.S. and the continuing depressed housing market that’s affecting many sectors in the financial market. It’s causing us to run at about 50 percent of our capacity on the building products side. We don’t expect a significant turnaround in this sector in the near-term, so our strategy is to control production and costs. The team in this sector has done an excellent job, reported significant improvements in the second quarter and third quarter. They also have controlled costs.

The Canadian dollar is helping us here, as we’re predominantly a Canadian lumber producer. Again, it’s hunker down and hang on until the U.S. housing market recovers. Don’t ask me when that’s going to be, but it’s going to be a while.

When we look at manufacturing costs, fiber clearly is the No. 1 cost input to our pulp and paper manufacturing. Energy has moved ahead of labor and benefits in terms of the second largest part of our costs to do business. Chemical costs are up, and until recently, were the most rapidly escalating component of our inputs, driven by oil prices. We hope to see chemical prices moderate as oil comes down.

Some 36 percent of our fiber consumption of our newsprint is recycled. That’s good news and bad news. The bad news is ONP prices have reached historical highs. ONP is probably our most expensive furnish in our fiber mills. We’ve mitigated this by reducing consumption of scrap paper where we can and substituting virgin fibers where we can. We’ve had good productivity gains in kraft pulp, and some of that flows to our paper machines.

On the self-sufficiency virgin fiber side, we’ve been selling our free hold timberlands and replacing that with open market or long-term contract purchases. That’s the future state of our company. We’ll hopefully have divested all of our U.S. timberlands by the end of the year. The team has been doing that, but we still have a significant amount of owned land in Canada and significant cutting rights in Canada.

Energy consumption and biomass is a big component of what we do and will be an expanding component. We are currently completing a large biomass boiler at our Fort Francis, Ontario, facility that comes online the fourth quarter of this year. When the biomass boiler starts up, we expect a 40 percent reduction in the purchase of natural gas as a company. Fort Francis is our largest site in terms of consuming natural gas. Fuel oil is coming down, and we also expect to see a reduction in our coal consumption.

Recovered paper continues to be a growth industry in terms of worldwide consumption. This is significant for us in terms of a cost input issue. We see pressure on ONP prices. The U.S. is the major and best source of ONP for export. Of course with the decline of consumption of newspapers in North America, particularly in the U.S., the supply of ONP is diminished as well as the quality of ONP.

The hidden issue in ONP for us is the municipal collection systems in the U.S. are no longer separating paper from regular household trash, which means the quality of the paper we’re getting is deteriorating, which means the yield is going down. We have to buy more tons to get the equivalent yield [through] our waste handling systems. This is an ongoing challenge for us, and I think it’s an ongoing challenge for all consumers—the quality of paper we’re receiving.

David J. Paterson is president and CEO of AbitibiBowater, based in Montreal.