A Place at the Table

The short-term outlook for the paper industry is fraught with challenges. The general challenges in the global economy have hit the paper industry particularly hard, but the industry also is suffering from unique problems.
As the industry seeks to strengthen its position, it continues to grow its stake in recycling. Recent figures from the American Forest & Paper Association (AF&PA), Washington, D.C., show the domestic paper recovery rate at approximately 57 percent, an increase of about 80 percent from recovery levels less than 20 years ago.

The paper industry is a significant sector of the U.S. economy. According to the AF&PA, the paper industry has nearly 1 million employees, makes up nearly 6 percent of the country’s gross domestic product, accounts for almost $200 billion in sales per year and is among the top 10 employers in many states, often in rural areas.

In terms of sectors that make up the paper industry, newsprint has been one of the most challenged, as seen by the bankruptcy filing of Montreal-based AbitibiBowater, the largest newsprint producer in the world. However, the problems in the paper industry aren’t limited only to this segment. Other paper companies have seen their economic problems manifest themselves with bankruptcy filings, including Smurfit-Stone, Creve Coeur, Mo.; and Caraustar, Austell, Ga.

HAVING ISSUES
Donna Harman, CEO of AF&PA, says several key issues likely will have a significant impact on the industry. Renewable energy, environmental issues and the high cost of taxation are three areas the domestic paper industry is keenly watching, Harman says. If those weren’t enough, she also says health care and “cap and trade” policies also will undoubtedly have an impact on the U.S. paper business. “These issues all have a price tag. There could be increased taxes across the board.”

Harman points out that some fiscal policies being discussed could result in the increase of the cost of capital, which would put U.S. paper companies at an economic disadvantage relative to companies operating in other parts of the world. She adds, “We are trying to work with career staff and political staffs (of the regulatory and environmental agencies) to make sure that the regulations don’t impede the performance of our business.”

With the focus on reducing carbon emissions and the concern about global climate change, Harman says the paper industry has done significant work in the areas of renewable and recyclable resources. “This industry has a lot to contribute to environmental goals.”

Supply Imbalance
Paper companies are trying to balance supply and demand. The strategy employed several years ago, consolidation of the industry and the rationalizing of excess tonnage, has not been revisited yet. However, many mills, whether producing newsprint, tissue, paperboard or printing and writing paper, have been slashing production by temporarily closing machines, taking downtime at mills or shuttering inefficient operations.

Production figures for several of the key segments of the paper industry provide a statistical framework for the problems. According to the AF&PA, for the first seven months of 2009, newsprint production declined 32 percent; printing and writing paper shipments declined 22 percent; containerboard production declined 13 percent; and boxboard production declined 11 percent. The sole bright spot, tissue paper, was flat for the period.

Looking at individual grades, there appears to be modest optimism for some, while several others are expected to see difficult times in the near future.

NO BOTTOM FOR NEWSPRINT
Newsprint producers are finding themselves in a difficult position. The economic problems of the last year have accelerated what had already been a fairly steady decline in production.

Figures from the Newspaper Association of America reflect that daily newspaper circulation has dropped precipitously. Recent figures show that in 2008 daily circulation, including morning and evening editions, fell to around 48.5 million, the lowest circulation number since 1945. Sunday circulation has fallen to levels not seen in more than three decades. The figures combined are not very promising signs for an industry that has struggled with holding on to its market share.

The 2009 numbers, as expected, are not much better, with U.S. newsprint consumption down over the first seven months of this year to 3.03 million metric tons, a 25.4 percent drop from the same time last year, according to the Pulp and Paper Products Council.

To compensate for the sharp decline in production, there have been a slew of mill closings, some temporary and others permanent. AbitibiBowater has been taking significant downtime through its mill chain as it seeks to balance supply and demand.

Other North American newsprint producers also have been cutting production, including SP Newsprint, Kruger and Catalyst Paper.

 According to a recent report by the paper industry consulting group PÖyry, since 2005 from 29 to 50 mills per year have been closed in Western Europe. Closings were also significant in North America but they were less aggressive at 16 to 30 per year.

However, Poyry adds, the average mill closed in North America produced 190,000 tons per year, while those closed in Europe averaged around 110,000 tons per year. Combined, roughly 10 percent of total pulp and paper capacity in Europe and America has been shut down since 2005.

With all the damage that has fallen upon the newsprint industry, Rod Fisher, president of Fisher International, Norwalk, Conn., says that while 2010 will be difficult, it probably will not be as bad as this year. He adds that he feels that at some point there will be a balance between supply and demand. “Someone will also make newsprint. Newsprint could be profitable.”

As for the paper industry in North America in general, Kathy Kneer with Poyry says she sees further closures at mills throughout North America. In some cases, she says she expects the shutdowns to be significant. “[U.S. paper mills] have been doing rolling shutdowns as well as shutdowns in converting operations.”

PAPERBOARD BENEFITS FROM INCENTIVES
One thing that may have helped a number of U.S. paperboard companies was the “black liquor” tax credit, which allowed some paperboard companies in the United States to earn significant dollars from their use of the fuel under an alternate fuel clause. However, as that has ended, some paper companies may now view shuttering inefficient plants as a better strategy.

AF&PA’s Harman says the use of the black liquor tax credit highlights the paper companies’ ability to use renewable and recyclable material to lower its carbon footprint. “The black liquor tax credit raised the profile of the paper industry as an industry capable of using renewable energy.

While some critics have complained that the use of the tax credit was essentially a shell game played by some astute paper companies, Harman says that with mandates and incentives (including the black liquor tax credit), it’s difficult to predict the results.

Christophe Pane, with Poyry, says while there is unlikely to be any significant mergers or acquisitions in the forest products sector the rest of 2009, 2010 may be a different story. At present there are hundreds of billions of dollars in private equity money sitting on the sidelines. Despite the likely higher cost of capital, he notes that the top 12 forest products companies are sitting with around $5 billion on their balance sheets. This could be a tempting opportunity for private money.

China is playing a role in the paper industry, albeit at a smaller scale compared to other commodities. One area where China could play a larger role in the forest products industry is in the intake of raw material. Chinese mills already are sizable consumers of recovered fiber, especially old corrugated containers (OCC).

With China’s Nine Dragons Paper Holdings Ltd. primed to become the largest paperboard producer in the world sometime in the near future, demand for OCC will undoubtedly grow. However, Kneer notes that OCC demand can be inconsistent, with spikes when Chinese mills buy heavily, and lulls when they ease back their buying.
Kneer says domestic buyers can take advantage of the lulls by securing raw material for their operations.

LOOKING FOR A STABLE SITUATION
Kneer says that as challenging as the North American market seems, it isn’t “game over” for the North American paper industry. “You have to remember that North America is the largest market in the world,” Kneer says. “To survive and prosper, companies will have to be smart and creative to be successful. They have to understand what is going on in the market and look for growth, choose where they should participate. They need to drill down and understand their customers.”

Pane says, “Challenges create opportunities. Companies need to capitalize on the opportunities, get rid of underused assets and seek out new markets. Right now everyone is afraid, but I think this also is a time for opportunities. Challenges create opportunities.”

The author is senior and Internet editor for Recycling Today and can be contacted at dsandoval@gie.net.