Monday, December 12, 2011

Why Mills Can't Keep the Coated Paper Market in Balance

There’s a simple way for North American mills to prevent the prices of coated paper from collapsing next year, the “Paper Guru” pointed out recently. Simple, but it won't work.

Responding to last week’s Dead Tree Edition article about the possibility of declining prices, Jack Miller, Printing Impressions’ Paper Guru, wrote, “Uncoated freesheet producers have reduced capacity, balanced supply and demand, and maintained prices.”

“With U.S. coated mills still under cost pressures from pulp and chemicals, and with margins where they are,” he suggested, the coated mills might take out capacity to keep the market in balance. But what works for uncoated freesheet will be hard to apply to coated paper.

The North American uncoated freesheet market is dominated by two big players, International Paper and Domtar, that are financially strong and have low-cost mills. That puts them in a position to idle machines or shut down mills if necessary to keep the market in balance.

But leadership of North America’s coated-paper market has one foot in the grave and the other on a banana peel. The #1 maker is NewPage, which is under Chapter 11 bankruptcy protection, making it nearly impossible to shut down a machine or mill in the short run. Besides, NewPage claims it has already mothballed all its high-cost machines.

The #2 manufacturer is Verso, a highly leveraged firm with a debt-to-equity ratio of about 18:1. Like NewPage, it’s not in much of a position to idle machines that could be generating cash.

SAPPI is the only other manufacturer with significant market share, but it produces coated freesheet almost exclusively. Coated groundwood (AKA coated mechanical) is where the big trouble lurks.

The bottom line is that no company with the financial strength to reduce capacity has enough North American market share to make much of a difference in the supply-demand balance. That’s why industry analyst Verle Sutton recently predicted that coated prices will decrease next year until losses force some companies to idle their machines.


Anonymous said...

Very little that comes out of the NewPage rhetoric/spin machine can be believed or trusted. This is ship without an udder or a sail, I suspect most managemnet people are wondering how to carve out a bonus or severence package for themselves, as opposed to making actual best for the company as a whole decisions, such as shutting down capacity. Bankruptcy cannot protect them forever. Even White Birch with their two year bankruptcy, and seven extensions (without chnaging a thing)has had to finally take MEANINGFUL action by closing a mill in Quebec City.

Anonymous said...

The DIP financing that N.P secured is not going to last forever, considering the monthly losses this operation is dealing with.They have assets that are not viable and not on apollo's radar.The issue may be is that anything that gets shut now could lower the company valuation,which may change the outlook for who is going to ultimatly get paid.

Anonymous said...

udder? Are they trying to milk the ship?

HP Printer Cartridges said...

Bankruptcy is a problem that haunts many industry and it will just be a matter of engaging on the best techniques to grasp a chance for survival.

Anonymous said...

Well said Deadward - CGW is the issue and both NP and Verso are floundering overall, though each have assets/people/products that will survive the current debacle. Sappi is solid and continues to put money into their assets. And don't forget some of the little guys out there that maintain solid product lines - appleton & west linn continue to hold on and lower pulp prices will keep them viable, at least short term. Its all about nimbleness going forward and NP has shown no sign of nimbleness unless you are talking about their executive's ability to get payouts, bonuses, and sickening salaries while their company languishes in bankruptcy. (You did see that the bankruptcy court approved the executives' request for bonuses based on cash flow - how can they sleep at night????)