Searching For Direction

The North American paper industry appears to be at a crossroads. Some sectors continue to show stress, while others display resilience. The crossroads comes as the overall economy continues to struggle.

Among the various sectors of the North American paper industry, the newsprint industry may be in the most difficult situation, but it is by no means the only sector in trouble.

The paperboard industry is tethered to the general economy as well. And, despite higher finished product prices, the packaging sector continues to be buffeted by sluggish consumer spending.

The printing and writing (P&W) paper segment of the industry, including paper for magazines, also has been struggling. Bankruptcy filings and mill closings are magnifying the difficulties in the P&W sector.

The tissue and towel sector, one of the most stable sectors in the paper industry, is feeling a modest pinch, as a slower economy means a decline in consumption of away-from-home tissue and toweling products. "The tissue industry is growing a little bit slower than the overall GDP (gross domestic product)," says Stuart Benway, a paper and forest products equity analyst with Standard & Poor's, New York City.

As bearish as these indicators may seem, the outlook is more optimistic for many parts of the North American paper industry. The relative strength in finished product prices offers a promising sign. Benway says margins for most paper grades are quite good right now. "I am cautiously optimistic," he says. "I think the economy should improve, and that would help employment, improving paper demand."

Paper producers have been able to push through multiple price increases from their products throughout the past several years. However, these price increases have barely kept pace with greater price increases for raw materials (recovered fiber and pulp) at many mills.

Consolidation Is Key
The move to consolidate within the paperboard sector is creating optimism in the investment community, at least. Two recent deals could greatly accelerate the industry's consolidation.

In a high-profile deal announced in early September, International Paper (IP), a Memphis, Tenn.-based paper company, which has a significant position in a range of paper sectors, has reached an agreement to acquire Temple-Inland, an Austin, Texas-based company that operates a number of North American board mills. Because of potential antitrust issues, the deal still needs to be approved by the Department of Justice. However, if the deal is approved, the combined companies would have an approximate 37 percent market share in the U.S. industrial packaging sector.

IP currently operates 13 board mills, 104 box plants and 21 recycling facilities in North America. Temple-Inland, the third largest corrugated packaging producer in North America, operates seven containerboard mills, 59 converting facilities and has 4 million tons of containerboard capacity. If the deal is approved, some mills likely will be closed while other facilities could be sold.

Temple-Inland initially resisted IP's first offer, made in June 2011. But outside influences, including a chemical spill at its board mill in Louisiana and a lawsuit concerning the failure of a bank Temple-Inland helped to create, reportedly induced the company to negotiate with IP, eventually working out a deal that was officially announced Sept. 6, 2011.

This proposed merger follows the acquisition of Smurfit-Stone by RockTenn, which was completed in May of 2011. That deal was significant, as RockTenn had previously been a regional company in the packaging sector, while Smurfit-Stone, which emerged from bankruptcy protection in 2010, was one of the largest companies in that sector.

Newsprint Searches for a Bottom
The packaging industry may be in the midst of consolidation; but, the newsprint industry is trending toward continued erosion of end markets.

The largest North American producers are all facing challenges:

• AbitibiBowater, the largest newsprint producer in North America, which emerged from Chapter 11 bankruptcy protection in December 2010, has been closing capacity since that time, including the shuttering of its Coosa Pines, Ala., facility.
• White Birch Paper, the second largest newsprint producer in North America, continues to languish in Chapter 11 protection and has closed a number of facilities. The newsprint producer Bear Island Paper Co., a White Birch subsidiary, has filed bankruptcy liquidation plans. (Last year, Peter Brant, the owner of White Birch Paper, sold a Pablo Picasso painting to prevent the company's bankruptcy.)
•  SP Newsprint, another subsidiary of White Birch, thus, also has been refinancing. The company reportedly has had success converting one of its machines from newsprint to packaging grade material.
• Catalyst Paper, the largest newsprint producer in the Western U.S. and Canada, has struggled with oversupply by cutting capacity. Now the company would like to merge with another company to stave off further fiscal problems.

Recent statistics from the Pulp and Paper Products Council (PPPC), Montreal, show that North American newsprint shipments have declined from 10.25 million metric tons in 2008 to an estimated 7.4 million metric tons in 2011. The PPPC says it expects shipments to continue declining in 2012, reaching an estimated level of 7.1 million metric tons.

A PPPC spokeswoman says one of the few areas of hope for the newsprint industry is the increase in finished product exports, primarily to developing countries. While demand from North American consumers has been declining, she says exports have climbed and now make up nearly 30 percent of the North American market.

Newsprint's problems are not limited to North America. Finland-based Poyry Management Consulting estimates that Europe's newsprint business has an overcapacity of roughly 500,000 metric tons, or 7 percent of capacity.

The Finnish company UPM recently announced plans to remove 110,000 metric tons of capacity from its German newsprint mill. In fact, UPM's decision to idle a significant amount of its newsprint production capacity was part of the company's overall plan to remove 1.3 million metric tons of total papermaking capacity from the market through the shutdown of paper machines and mills in Finland, Germany and France.

A Challenging Environment
The P&W business may not be in as difficult a situation as the newsprint industry, but its challenges are similar.

Recent figures from the American Forest & Paper Association (AF&PA), Washington, D.C., reveal that total printing and writing paper shipments for July 2011 decreased by 6.8 percent compared with July 2010. All four major P&W grades declined in July. Domestic P&W shipments dropped by 4 percent for July 2011 relative to July 2010, according to AF&PA figures, while inventories increased 6 percent at the end of July 2011 compared with the previous month.

Miamisburg, Ohio-based NewPage Paper, one of the largest coated paper producers in North America, filed for bankruptcy protection in September. The company owns and operates paper mills in Kentucky, Maine, Maryland, Michigan, Minnesota, Wisconsin and in Nova Scotia, Canada, with combined annual production capacity of 4.1 million tons, which includes 2.9 million tons of coated paper, 1 million tons of uncoated paper and about 200,000 tons of specialty paper. According to one report, NewPage controls nearly 35 percent of the North American coated paper market.

According to an article in the Wall Street Journal, Apollo Management, New York City, a venture capital firm that has a significant stake in Verso Paper, a Memphis, Tenn.-based producer of printing and writing paper, has taken a stake in NewPage. The Wall Street Journal says a merger between the two top players may result in better cash flow, given the poor outlook for the paper industry.

As earlier noted, problems in the printing paper business are not limited to North America. In late August 2011, UPM announced plans to remove 1.2 million metric tons of coated paper from production in Europe. In deciding to shutter the facilities, Jussi Pesonen, UPM president and CEO, said, "The paper industry faces severe challenges due to high raw material, energy and logistics costs and considerable overcapacity. The profitability of our paper business is clearly below the level required to run long-term sustainable operations. The planned restructuring would further strengthen the cost competitiveness of UPM's paper operations and reduce the future need for major maintenance investments."

He continued, "With the planned actions, we would respond to the magazine paper overcapacity challenge for our own benefit. In addition, we would ensure the efficient use of our remaining capacity. However, this plan would not solve the cost challenges of the industry."

All is not bleak, however, in the paper industry. In late August 2011, Cate Street Capital, a New Hampshire-based investment group, purchased two idled paper mills in Maine and is considering re-opening them.

One of the Maine paper mills, located in East Millinocket, closed in April 2011. The mill was an integrated pulp and paper operation capable of producing 250,000 tons per year of recycled uncoated groundwood papers for use in directories, catalogs and newsprint applications.

The second mill, located in Millinocket, Maine, has an 180,000-tons-per-year paper machine making paper for catalogs, magazines and retail industry fliers. That mill was closed in late 2008.

According to the Bangor (Maine) Daily News, Richard Cyr of Cate Street Capital, Portsmouth, N.H., says he hopes to have at least one of the mills running by the end of October 2011.

FutureMark Paper, a Chicago-area paper mill that produces 100 percent recycled-content paper for the magazine industry, has been able to withstand the roiling market for printing and writing paper. Part of FutureMark's advantage, according to Steve Silver, president and CEO of the company, is that it targets a niche market with its 100 percent recycled-content coated paper product.

Despite having a fairly profitable 2011, Silver foresees significant challenges for the printing paper industry ahead. "Much of the problem on the domestic side has been the sharply higher recovered paper prices," Silver says. These prices have resulted in at least four U.S. recycled paper mills being forced to close.

However, Silver continues, quality levels continue to decline, creating an exceptionally challenging environment for printing and writing mills. Silver estimates that from 10 to 15 percent of the raw material the company receives is nonfiber material. Because of this, "We began our own collection program. We are now getting about 10 percent of our needs each day from our own efforts."

Silver says recyclers opting to ship their material offshore are putting the domestic paper industry in jeopardy. "They need to be worried about who they are selling to." As well, China continues to develop its internal collection programs, which, Silver cautions, could result in China reducing its reliance on recovered fiber from the United States.

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