Paper Supplement -- Retrenched and Ready

Over the past several years the North American paper and paperboard industry has suffered significant problems. Market overcapacity for many grades, notably newsprint and containerboard, has resulted in some companies taking machines off line, sometimes for an extended period of time, other times indefinitely and still other times permanently. While these moves have hurt, the problems that the U.S. paper industry has seen have continued, resulting in an accelerated number of mills permanently closing.

Adding to the woes, low-coast producers in Asia, especially China, have been nipping at the market in the United States and in Canada. While most of the operations being built in Asia are being used to feed these countries’ internal demands, as some of these countries grow their paper and paperboard manufacturing base the export opportunities of many U.S. paper producers could decline sizably.

ENCOURAGING SIGNS. As U.S. producers continued to idle capacity to bring supply and demand into balance, new capacity from offshore has filled the gap. Prices for finished product have been declining throughout the past several years.

However, after many quarters of wishful thinking by domestic paper companies, signs of a turnaround are appearing. And, as the economy continues to improve many of the paper companies that have been able to firm up their balance sheets are set to enjoy some strong markets. The biggest issue right now is how long this turnaround will last.

Throughout the past 10 years the North American paper company has morphed from a host of mid-sized operations handing a wide range of paper grades to a much smaller group of paper companies targeting specific grades.

Where once there were companies such as James River, Donohue Paper, American Tissue, Gaylord Container, and the like, now there is a much smaller group of companies better able to control the production and markets for many grades.

Adding to that, whereas in the past many paper companies sought to diversify their operations to cover a wide swath of grades, the trend now seems to be for companies to focus on a certain select grade of paper or paperboard. This has resulted, in some cases, in only a handful of companies that have a major stake in a certain market.

Further, a number of the larger paper companies have taken steps to move more toward the consumer end of the business. Boise Cascade, in fact, has taken steps to position itself in this way when it acquired retailer Office Max.

Other companies, such as Georgia-Pacific and Kimberly Clark, are looking to move into the commodity side of the business, hoping to emphasize the consumer products they produce, rather than the over-arching forest products background of the company.

What has resulted is a much smaller group of forest products companies adopting much narrower niches.

The number of North American newsprint producers has shrunk significantly. The market is currently dominated by only a small handful of companies that focus on this grade. Abitibi-Consolidated, Bowater Inc. and Kruger are three of the largest newsprint producers.

For linerboard, Smurfit-Stone Container Corp., International Paper, Inland Packaging and Weyerhaeuser are among the handful of larger paperboard companies still operating.

While the paperboard industry has had some serious difficulties over the past several years, at the present time there appears to be some strength in the market for these grades. Containerboard and packaging markets look good, and volumes have been showing healthy gains during the past several months.

While price hikes are resisted by customers, the market for linerboard corrugated medium and other packaging materials appears to be improving.

Domestic paperboard mills, which have seen capacity declines throughout the past several years, have seen a strong pickup in shipment and demand. According to the most recent figures from the Fibre Box Association, Rolling Meadows, Ill., shipments have increased by 3.7 percent through the first seven months of this year, compared to the same time last year.

Following this improvement, linerboard prices have strengthened, with multiple price increases occurring. According to Fitch Ratings, New York, linerboard prices increased by $45 per ton in March and April and were followed by a $50 per ton increase in June.

While several of the price increases earlier this year have held, questions remain as to whether more recent price increases will hold.

IMPROVING ECONOMY. What has been accomplished is that, as the overall economy has improved, many of these paperboard producers have been able to bring down their inventory levels and they are reporting much stronger movement of material.

If, as many economists forecast, the economy moving forward remains somewhat stronger, the paperboard industry should continue to enjoy a modest improvement. However, because of the dynamics happening in Asia, there will likely be a cap on any upside potential for the U.S. paper industry.

Hundreds of thousands of tons of new capacity are coming on line in Asia, especially China. This will likely keep a lid on export demand from the United States to China for finished product.

While paper domestic paper mills have seen an improvement in operating rates, the profitability of some of these groups are less than assured. Coated freesheet mills were running at almost 100 percent of capacity in June, which is an increase from earlier months.

At the same time, in light of the relative weakness in the U.S. dollar, exports of forest products continue to improve. According to Fitch, overall exports for coated freesheet were up close to 70 percent for the first six months of this year, compared to the same time last year.

Reflecting the more upbeat mood for the paper industry, many of the top paper companies have imposed price increases for a variety of grades. In June, International Paper, Weyerhaeuser, Domtar and Georgia-Pacific announced a hike in prices for their uncoated paper.

Newsprint markets are having the greatest difficulties in North America. Despite a pickup in the economy, many consumers have made permanent changes that are affecting newsprint markets. As fewer daily newspapers continue to be produced (partly because of more one-newspaper towns), and fewer people are reading the newspaper, demand for newsprint in the United States is further reduced.

REMAINING OPTIMISTIC. Despite the problems for the domestic market, larger producers are optimistic. According to the most recent quarterly reports for Bowater, Greenville, S.C., sales increased to $788 million in the second quarter from $664.1 million a year ago.