Saturday, May 9, 2009

It's Silly Season for the Paper Industry

Has the North American paper industry gone completely bonkers this spring? (Not that it was ever a particularly sane industry).

AbitibiBowater kicked off the strange doings last month when it revealed to a bankruptcy court that it owes $62 million to the Finance Authority of Maine. How did that happen? The company has no operations in Maine.

But the silliness was really concentrated in the coated portion of the industry, where demand dropped a record 32% in the first quarter versus last year and shows no signs of bouncing back. In light of that sorry state of affairs, consider the following recent headlines:

  • Sappi filed plans with the state of Minnesota to build a huge coated-paper machine at its Cloquet mill. If press reports are to be believed, the machine would have capacity to make about 700,000 tons per year, nearly double that of any competing machine on the continent. This is the same Sappi that just reported a quarterly loss and said it expects to idle even more machines because of declining demand.
  • An investment group announced it is spending $62 million to buy and upgrade Tembec’s shuttered St. Francisville, LA coated-paper mill. That operation was a money loser even before the latest wave of reduced demand and capacity shutdowns. How can it survive now?
  • Former employees of NewPage’s closed Kimberly, WI mill are mad that the company would sell the operation only to someone who would not make coated paper there. NewPage closed the high-cost mill to ease the continent's oversupply of coated paper, where it holds the #1 position. Why would anyone dream that it would undo those efforts at market stabilization by selling to a competitor at a fire-sale price?
  • Capping off the silliness was Verso's revelation Thursday that the federal government paid it nearly $105 million last quarter in "black-liquor" credits. During most of the quarter, the company's stock was worth less than half that amount.
What should we make of these events that seem to defy the grim reality of the coated-paper business? Sappi’s move may be a matter of posturing – perhaps to wring concessions from unions at other mills, including its recently purchased Kirkniemi, Finland operation that has had recent labor strife. Or perhaps it is signaling to Congress that it will invest in U.S. paper making if the huge black-liquor subsidy is continued.

The new owners of St. Francisville may also be grabbing for those credits by just reopening the pulp mill. And perhaps they will convert the mill to make some other product, such as linerboard or biofuels. It’s hard to envision 60# coated #3 being made again at the high-cost mill.

The Kimberly workers? They were obviously not able to read the writing on the wall that the plant had been in bad shape for nearly a decade -- or that, unlike previous owners (Repap, Consolidated, StoraEnso), NewPage tends to euthanize terminal cases, not put Band-Aids on them.

And don't ask me to explain the logic behind the federal government paying perhaps billions of dollars this year in alternative-energy credits to Verso and other U.S. companies for using black liquor as fuel -- something kraft pulp mills around the world have been doing for decades. There is no logic.


dr droock said...

Given how silliness was revealed in the finance and auto, in the paper industry's defence. No one has cornered the silliness market.

A.M. Mallett said...

While I do not know the plans for the St. Francisville Mill, I do know what assets are in place there. It is an excellent site. It has a pulp mill and two specialty kraft machines along with two coated machines that could be rebuilt/reinvented. The economics of running pulp and specialty kraft were considerably better than the coated publication scheme that ultimately closed the facility (provided capital was available for bringing pulp spec up to market and installing/converting a dryer). With proper management I think they can make a go of it as long as they stay away from medium weight coated.

Anonymous said...

Consider the black liquor tax credit a bail out for a job well done! Its about time the pulp and paper industry received support for the generation of green, alternative energy.

Dan said...

Don't listen to NewPage's propaganda about the Kimberly Mill being non-profitable. In 2007, even in a struggling market, Kimberly made $55 million EBITA. The only thing hurting Kimberly at the time of the closure was not having a pulp mill and NewPage could not reap the benefits of the black liquor "credit". Kimberly, also had the highest rate of tons/person production, so it was the easiest and fastest way for NewPage to take capacity out of the market. Kimberly was ranked in the top 10 in North America for production, efficiency and modernization with new machines in the 1980's and rebuilds in 2002, 2003 and 2004. Why would anyone see the writing on the wall for a modern, efficient mill being shuttered?

A.M. Mallett said...

This s another reason why heavily capitalized industries should be cautious about using EBITDA as a financial yardstick. It is not a reflection of profitability in heavy industry. I am more interested in what their EBIT and cashflow numbers were rather than EBITDA. The latter is for short term performance only while the former provide a better measure of continued sustainability.