Downsizing Has Made NewPage A Low-Cost Producer

In less than three years, NewPage has gone from talking about its high-cost coated paper machines to bragging about its low-cost position.

“As of March 31, 2010, 90% of our non-specialty coated paper machines were in the top 20% of efficiency of all non-specialty coated paper machines in North America, Europe and Asia based on the cash cost of delivered product to Chicago, as reported by RISI,” the company said in a filing with the U.S. Securities and Exchange Commission late last week.

“We believe our scale and efficiencies are unmatched within the industry,” North America’s largest producer of coated paper said in the document.

Its cost-per-ton advantage in the past couple of years has ranged from 8% ($49 per ton) when low pulp prices helped non-integrated producers, to 14% ($84 per ton) when pulp prices were high, NewPage’s filing said. The company did not specify the grade of paper it was describing, but the reference to non-integrated producers (those who must buy their pulp) suggests it is coated freesheet (CFS).

As they prepared in late 2007 to buy Stora Enso’s North American operations, NewPage executives put out the word that they would soon own a disproportionate share of the continent’s smallest (and therefore highest-cost) paper machines. Rather than letting market weakness drive down prices, they said, they would idle their high-cost machines to keep the market in balance.

Sure enough, NewPage shut down six paper machines during 2008, and coated prices rose gradually for most of the year. But when excess capacity started causing prices to crash just over a year ago, NewPage stated publicly that it had no more high-cost machines to shut down. (See NewPage Turning Over a New Page: No More Shutdowns.)

With competitors slow to respond with their own market-stabilizing shutdowns, NewPage took a more active tack this year: It bought out Domtar’s coated-groundwood (CGW) business, which ensured that the company’s only coated mill would remain idle, then reportedly did a similar deal with Kruger last month to help its Trois-Rivieres, Quebec mill exit CGW. (See NewPage Reportedly Has Deal For Kruger's Idled Machines, which, by the way, has not been confirmed or reported by other media -- or denied by the two companies.)

Other interesting factoids and statements in the NewPage filing include:

• "We have substantial indebtedness. As of March 31, 2010, we had $3,150 million of total indebtedness and we have up to $410 million available for borrowing under our Revolver."
• "For the year ended December 31, 2009 and the quarter ended March 31, 2010, earnings were insufficient to meet fixed charges by $363 million and $175 million, respectively."
• Annual production capacity on its 20 machines is about 3.2 million tons of coated paper, 1.0 million tons of supercalendered paper, and 200,000 tons of specialty paper. In 2009, 58% of the coated paper was CFS and 42% CGW.
• “Our largest customer, xpedx, a division of International Paper Company, accounted for 19% of 2009 net sales. Our ten largest customers (including xpedx) accounted for approximately 50% of 2009 net sales.” Other “key customers” are Condé Nast, McGraw-Hill, Meredith, News America, Pearson Education, Rodale, Time, Quad/Graphics, R.R. Donnelley, Worldcolor, Sears, Williams-Sonoma, and paper merchants Lindenmeyr and Unisource.
• “For the year ended December 31, 2009, we produced approximately 94% of our pulp requirements, which excludes our sales of market pulp, with the remainder supplied through open market purchases and supply agreements.” NewPage sells some hardwood pulp to other companies.

For more insight into NewPage, please see:

• Are NewPage and Verso Headed to the Altar?: A "vulture trio" of hedge funds that own rival Verso is trying to take control of NewPage by buying up its debt, a published report said in March. NewPage's filing says that Cerberus Capital Management is still in the driver's seat.
• "Black Liquor" Credits Are Helping Paper Buyers: Though NewPage raked in more than $300 million last year from black liquor tax credits, it says the loophole distorted the market and drove paper prices down.
• Is Domtar's Exit a Game Changer for Coated Paper?: More on the NewPage-Domtar deal.