Wednesday, July 29, 2009

"Black Liquor" Credits Are Helping Paper Buyers

The “black liquor” tax credit is driving down paper prices, according to NewPage, North America’s largest maker of coated paper.

The company’s average selling price for coated paper probably declined by $40 to $50 per ton in the 2nd Quarter from its 1st Quarter level of $975 per ton, NewPage revealed in a recent financial report. The number of tons sold actually inched up.

“We believe that pricing has declined primarily as a result of producers passing on the benefits of the alternative fuel credit to customers,” the report said.

No, NewPage hasn’t suddenly turned into a na├»ve bleeding heart that thinks its competitors are generously sharing their new-found riches with customers. The point is that the tax credits give U.S. companies a huge incentive to keep their kraft-pulp mills running full bore and then to turn that pulp into paper, even if it has to be sold at rock-bottom prices.

The credits, originally intended to subsidize non-petroleum motor fuels, are being granted to owners of U.S. kraft pulp mills for using black liquor, a pulp byproduct, as an energy source. Analysts have estimated that the program, scheduled to expire Dec. 31, will hand out $6 billion to $8 billion this year to U.S. pulp mills for doing something that has been common industry practice for decades. (For more on the black-liquor program, see "Pulp Fiction: Eco-Credits for Black Liquor" and "Why U.S. Pulp Mills Are Like NBA Players"

NewPage isn’t exactly complaining about the IRS’s sudden largess. The struggling paper giant is in the process of renegotiating its debt, in some cases paying about 50 cents on the dollar, in a way that Standard & Poor’s has dubbed “tantamount to a default.” So its $67 million in 2nd Quarter black-liquor credits, about 9% of revenue, was certainly welcome, especially because it was the difference between a huge loss and nearly breaking even.

The report suggests NewPage has shifted to making a higher proportion of papers that use a lot of kraft pulp. By most accounts, prices for various grades of coated paper declined by at least $60 per ton, and in some cases $100 or more, during the second quarter.

So NewPage’s decline of only $40-$50 per ton suggests it is making more high-priced, kraft-intensive papers like coated freesheet and less heavy coated-groundwood papers that contain little if any kraft.

There has been some talk of paper prices stabilizing or even rising in the second half of this year. But as long as there's a roughly $200-per-ton subsidy on kraft pulp and plenty of excess capacity, don't expect mills suddenly to become more disciplined about taking downtime rather than chasing deals at low prices.


Anonymous said...

Can you possibly believe that? Paper prices are coming down because demand is down. Rest assured that if demand were strong and supplies tight, the tax credits would be flowing right to the bottom line.

Anonymous said...

Prices have plummeted to cash costs or below. These credits will not allow this to continue. Do you know a private equity guy ok with running a company at break even? Prices are going up in the second half of the year with soon to come capacity curtailments in all market segments. Your advertisers are going to love you when you have to down grade the paper stock because you have been playing the market. Good luck with that kind of short term thinking.

Anonymous said...

I think this explains a lot about what NewPage has been doing with their available capacity. All mills have been hesitant to idle efficient machines and these credits are allowing New Page (and others) to keep them running in the face of declining prices.

Anonymous 2 reminds us that NewPage is run by Private Equity guys not paper people. I think that they would do anything to keep the banks off their backs. And I agree with our blogger's observation that breaking even is better than losing money as they surely would have.

Anonymous 1 is right that demand is staying down which begs the question "what happens on January 1 when the credits expire?". Do machines finally get shut to rationalize demand? And if that happens do we then find ourselves in the allocated market that Anonymous 2 points out?