Boo-hoo!: North American Paper Companies That Enjoyed Black Liquor Subsidies File Complaint Against Foreign Competitors' Subsidies

Please see this update to the story: Hurts So Good: Is International Paper Hoping To Be Punished?


It’s a case of the pot calling the kettle black liquor: Three paper companies that received well over $1 billion in dubious black-liquor subsidies from the U.S. and Canadian governments are suing to stop “unfair” competition from foreign competitors.

Domtar, Packaging Corporation of America, P.H. Glatfelter, and Finch Paper joined with the United Steelworkers union Wednesday to announce they had filed “antidumping petitions against unfairly priced imports” of uncoated freesheet paper (copier paper, for example) from China, Indonesia, Brazil, Portugal, and Australia. Part of their justification for seeking levies on certain paper imports is that China and Indonesia unfairly subsidized their paper companies’ exports.

Since 2009, Domtar has received more than $700 million in tax credits from two U.S. government biofuels programs that have been widely criticized as thinly veiled subsidies of the American paper industry. Both the Alternative Fuel Mixture and Cellulosic Biofuel Producer Credits programs rewarded paper makers for what they and competitors worldwide were already doing – burning black liquor, a caustic pulp byproduct, to power their mills.

Domtar, a Canadian company with extensive U.S. operations, also received $143 million from a Canadian government program that rewarded the use of black liquor at that countries' mills. The program was set up to keep Canadian pulp operations competitive in the face of the U.S’s massive black-liquor subsidies.

PCA quaffed more than $300 million from the programs itself and Boise, which PCA subsequently acquired, took in more than $200 million. Glatfelter imbibed more than $100 million from the programs. Finch was apparently not a beneficiary.

Sitting out this fight is International Paper, a major uncoated freesheet producer that pocketed well over $2 billion from the black liquor programs. IP is a truly global player with much of its production and sales outside of North America, which may make it reluctant to stir this pot even though it would probably benefit if duties are imposed.

"Foreign paper manufacturers are taking advantage of the unfair trade practices of dumping and subsidies to undermine U.S. manufacturers," said Mark Kowlzan, PCA's CEO, said yesterday.

Most of the tax credits were booked in 2009, before Congress finally closed the loopholes that enabled the paper companies to subvert the two programs that were intended to promote the use of environmentally preferable fuels. But favorable rulings from an extremely accommodating Internal Revenue Service have kept the money flowing since then, including $166 million to PCA last year.

IRS whistle blowers have complained that the rulings ran counter to law and logic and based purely on political expediency. Congress dallied in closing the loopholes, apparently as part of the horse trading to get Obamacare passed; then, with some extremely creative accounting, it closed the loopholes and used the supposed savings to help pay for Obamacare.

Related articles:

• Black Liquor Hangover: U.S. Paper Industry Cheers GOP Victory After Gorging on Democrats' Handouts 

• IRS Inaction Leads to Another Black-Liquor Windfall for U.S. Paper Companies
• Black Liquor Tax Credits: The Gift That Keeps on Giving To Paper Mills -- and Taking From Taxpayers
• More than 50 other Dead Tree Edition articles on the black liquor subsidies.

 

 

Black Liquor Hangover: U.S. Paper Industry Cheers GOP Victory After Gorging on Democrats' Handouts

Snark alert: I believe in both the laws of science and the laws of economics, which these days means I'm neither a Republican or a Democrat. So don’t try to read any political bias into the following article; it is intended to be equally offensive to liberals and to conservatives. 

The Obama Administration has enabled U.S. paper companies to pocket an estimated $25 billion in black liquor tax credits the past six years, but here’s a clear sign the tap is about to run dry: The paper industry’s trade association this week hailed the recent Republican election victories as a sign of “Americans’ real appetite for change in Washington, D.C.”

“The bureaucracy that causes delay after delay and regulations that fail to balance benefits with costs have created an atmosphere of uncertainty in the business community, making it difficult to plan for future investment when the rules change faster than they can be implemented,” said Donna Harman, president and CEO of the American Forest & Paper Association. She specifically singled out environmental regulations.

To understand this turn of events, and why the paper industry is biting the Democratic hand that fed it so lavishly, it’s time for a quick civics lesson about the political parties’ competing approaches to climate change:

Democrats want to tackle climate change head on, promoting regulations to tamp down greenhouse gases and new programs to encourage clean energy sources. But those well-intentioned programs mostly end up getting hijacked to benefit favored companies in ways that do nothing to help the environment.

The quintessential GOP approach is to scoff at climate change or the need for carbon-reducing regulations and incentives. Conservatives declare disagreement with the diagnosis (humans are speeding up dangerous climate change) because they don’t like the proposed cure (big government programs). But that doesn’t stop savvy Republicans from investing in companies that will profit from the new Arctic shipping lanes being created by the melting of polar ice.

Some liquor to ease the pain 
The Democrats’ approach started paying off for the paper companies about six years ago, when "the miracle of black liquor" in the form of round-heeled Internal Revenue Service rulings literally kept several companies afloat during a down paper market. The IRS gave the companies permission to abuse biofuel-incentive programs by collecting billions in eco-incentives for doing what they had already been doing for decades – burning black liquor, a pulp byproduct, as a fuel source.

“Industry-wide, black liquor may have cost taxpayers upward of $25 billion,” Jane J. Kim, an IRS lawyer, stated recently in a letter to select Congress members and Treasury officials. She cited Black Liquor, “Son of Black Liquor”, and “Grandson of Black Liquor” tax credits as prime examples of “IRS Management abuse.”

Her protest adds to that of William Henck, a whistleblower IRS lawyer who says IRS employees examining the black liquor credits were told by high-level agency officials “to take a position that was contrary to the law and to published IRS guidance.”

Clearly a cover-up
“There was in my opinion clearly a cover-up of the decision to allow well connected taxpayers to avoid reporting the black liquor tax credits as taxable income,” he wrote. He sees evidence that the cover-up goes all the way to the IRS’s Chief Counsel, an Obama appointee. (In one of many ironies in this twisted saga, one of the largest beneficiaries of the credits, Georgia-Pacific, is owned by the Koch brothers, who are not exactly known for their friendliness to the Obama Administration.)

There is evidence that Democrats left the original black liquor tax credits in place to win a key pro-Obamacare vote from Republican Sen. Olympia Snowe of Maine, where the credits helped a large pulp mill remain in business. (Republican legislators may not like big government in general, but they sure like it when it means bringing some pork home to their constituents. And it’s hard to say which party is worse about creating corporate welfare programs for companies that make generous campaign contributions.)

The Obama Administration and Democratic Congressional leaders also finagled with the credits and threats of additional credits to help “pay” for Obamacare. (Another civics lesson: The concept of "paying" for stuff in the Alice-in-Wonderland world of Congress has little to do with covering its costs. Don't try this at home, unless you want to take an extended tour of a federal correctional facility.)

Closing time
Paper companies are just about done squeezing the last drops from the black liquor credits. For example, Domtar said that the $222 million in earnings it booked last month because of favorable (and questionable) IRS rulings on the taxability of the credits is the last it will see of the government’s black liquor largess.

With no more black-liquor credits or other handouts coming down the pipe, suddenly big government doesn’t look so good to the paper industry.

Said the AF&PA’s Harman: “In the coming months, I look forward to working with the new Congress to help create policies that make businesses a partner in meeting the needs of society through sustainable regulations that balance environmental, social, and economic considerations.”

Translation: “We could stomach the Democrats’ big-government policies as long as the hand-outs exceeded the cost of anti-business regulations. But now that the money has stopped flowing, we might as well throw in our lot with the party that is likely to roll back those regulations.”

Related reading:

• WikiLeaks Reveals Praise for Dead Tree Edition from an Unlikely Source: What a consultant to the AF&PA said about our coverage of the black liquor scandal.
• What, Exactly, Is Black Liquor? Just Ask the Tax Man
• Why U.S. Pulp Mills Are Like NBA Players

  

U.S. Paper Companies May Lose Son of Black Liquor Loophole

Senate Finance Committee Chairman Max Baucus is trying to close the Son of Black Liquor tax loophole that has already provided U.S. paper makers with a windfall of more than $1 billion.

The committee's staff estimates the move would save $2.786 billion over the next four years, which Baucus would use to help pay for highway construction and other infrastructure projects. The staff has not revealed the basis for its calculation, a tricky matter because it requires assumptions about the future taxable income of more than a dozen paper companies.

"Black liquor qualified for the alternative fuel mixture [AFM] tax credit and the cellulosic biofuels tax credit," a news release from the committee noted Friday. "Congress never intended for black liquor to qualify for these credits and, in 2010, prohibited the credit for black liquor sold or used on or after January 1, 2010. This provision would prohibit taxpayers from claiming the alternative mixture credit or the cellulosic biofuels credit on any new or amended returns made on or after February 3, 2012."

The committee is scheduled to discuss the Highway Investment, Job Creation and Economic Growth Act of 2012 tomorrow.

Paper Companies Are Greener Than Average, Study Indicates

Contrary to their popular image as despoilers of the forest, major paper companies get high marks for being green in a recent ranking of large U.S. companies.

All six forest-products companies in Newsweek's "Green Rankings 2010" scored in the top 35%. The magazine ranked the nation's 500 largest publicly traded companies on their environmental impact, "green policies", and reputation.

Leading the way was Kleenex maker Kimberly-Clark, ranked #76 based on a score of 80.65 out of a possible 100 despite a poor showing in the environmental impact category.

Greenpeace ended its Klearcut campaign against the company last year when it agreed to increase its usage of certified and recycled pulp. Kimberly Clark calls itself a consumer-products company, but with its purchase and processing of more than 3 million tons of pulp annually, it certainly fits into the forest-products industry.

Other forest-products companies ranked by Newsweek, along with their scores, were Domtar (#95, 79.00), Sonoco Products (#125, 76.92), International Paper (#155, 75.27), MeadWestvaco (#161, 74.89), and Weyerhaeuser (#172, 74.12).

IP made the biggest upward move from last year's inaugural ranking, jumping from #344, while Kimberly-Clark improved from #120. Domtar wasn't in last year's survey (probably because it was then classified as Canadian), while the other three slipped slightly in the rankings.

Other articles that challenge common conceptions about forestry and the forest-products industry include:

• An Environmentalist's Defense of Clearcut Logging 
• Why Planting Trees Is Not Necessarily Green 
• Condoms to the Rescue, and 5 Other Novel Ideas for Saving the Forests 
• Cutting some trees but saving the forest 

Congress and Paper Companies Covet 'Son of Black Liquor' Funds

The “Son of Black Liquor” tax credits will probably cost American taxpayers hundreds of millions, if not billions, of additional dollars, but Congress might grab the money without paper manufacturers getting a dime.

Seven publicly traded paper companies have estimated that they will net about $570 million from the IRS’ recent ruling that made black liquor eligible for Cellulosic Biofuel Producer credits (CBPC), reports the Press-Register of Mobile, Alabama. Leading the way are Weyerhaeuser with $240 million (pre-tax) and Domtar with $200 million.

The other 14 publicly traded producers of black liquor, including the largest (International Paper), have not released such projections, partly because of uncertainty about exactly what the June 28 ruling means. (See Pulp Manufacturers Scratching Their Heads Over Son of Black Liquor Ruling for more information about these uncertainties.)

Meanwhile, the IRS’ “generosity” toward companies that produce, and burn, black liquor as part of their pulp-making operations has caught the eye of Congress, writes Jeremiah Coder for Tax Analysts. “The agency’s administrative largesse appears to be prompting members of Congress to consider legislation to retroactively disallow biofuel credits for black liquor claims.”

Sen. Charles Grassley of Iowa, the ranking Republican of Iowa, has asked the Joint Committee on Taxation for a “revenue estimate” on such a move, Coder reports. That is significant in at least three ways:

1) JCT’s estimate of revenue (actually, avoided costs) from overturning the IRS ruling is “likely to immediately become an attractive add-on to any legislation in need of pay-fors,” Coder writes. In other words, Congress could use the savings to pay for a new program and claim that it is not increasing the federal deficit (though it would be, because no money has been budgeted to subsidize the use of black liquor).

2) The JCT blew a previous estimate regarding Son of Black Liquor, saying that disallowing CBPC credits for black liquor from 2010 forward would save only about $25 billion when it could have set the number at $50 billion or more. (See How Google Could Help the Democrats By Buying a Pulp Mill and Black Liquor Bonanza: Earnings Exceeding Projections of Experts and Congress for details.) Congress certainly won’t be happy if the JCT low-balls this opportunity to create some funny money, this time by blocking the issuance of CBPC credits for black liquor used in 2009.

3) To back up its calculation, the JCT may reveal how much was paid out to paper companies from the original black liquor tax credit program. The 21 publicly traded companies reported receiving $6.5 billion from that program, but some big pulp makers like Georgia Pacific are privately held and therefore do not have to real what they received.

The JCT will also need to take a stab at some questions that are bedeviling the pulp makers about how to interpret the IRS ruling. Here’s a look at recent statements from some of the companies about those questions and how Son of Black Liquor might affect them:

• Weyerhaeuser (CFO Patricia Bedient): “During the first part of 2009, we produced approximately 238 million gallons of black liquor, which did not qualify for the alternative fuel mixture credit. This equals $240 million of potential cellulosic biofuel credit at $1.01 per gallon, or $149 million net of tax. Since this credit offsets income tax liability, we could only carry the credit forward. It is still unclear whether the credit can be claimed in the same year as the alternative fuel mixture credit [the original black liquor tax credit]. For the last three quarters of 2009, we claimed $344 million of fuel mixture credit. There's a great deal of uncertainty as to the process for claiming these credits and we are evaluating both credits to determine which credit or mix of credits, if allowed, would add the most value to the company.”
• Domtar: "From January 1, 2009 until we started to claim the Alternative Fuel Tax Credits, we have approximately 200 million gallons of black liquor that may qualify for this CBPC that would represent approximately $200 million of CBPC or approximately $120 million of after tax benefit to the Corporation. In July 2010, we submitted an application with the IRS to be registered for the CBPC. There is, however, a degree of uncertainty related to this credit as we have not received our registration for the credit and we believe there is some lack of clarity with the application of the IRS rules. As such, during the period ended June 30, 2010, we have not recorded any impact related to the CBPC."
• Graphic Packaging Corp. (CFO Dan Blount): “It appears that some in the industry are considering the cellulosic biofuel credit path. We have evaluated this approach. And given our large NOL [net operating loss] position and the fact that the cellulosic biofuel credit can only be used to offset federal income taxes payable, we will not be pursuing this option.”
• Smurfit-Stone (which recently emerged from bankruptcy protection): “Cellulosic biofuel producer credits unlikely to be utilized/relevant.”
• Kapstone Paper & Packaging: "In December 2009, the Company filed its registration as a cellulosic biofuel producer for the year 2009 and is awaiting approval. ..The IRS is expected to provide guidance for converting AFTC’s to cellulosic credits for qualifying producers. … At this time, the Company estimates a $22 million potential future after-tax credit for CBTC relating to black liquor burned in 2009 prior to the Company’s AFTC registrations being approved. If the Company were to receive any tax credits related to cellulosic biofuel it would be realized by reducing income tax payable beginning in late 2010."
• Packaging Corp. of America: "As a result of the IRS guidance, PCA has filed an application to receive the required registration code to claim the cellulosic biofuel producer credit. We expect this registration to be received during the third quarter. PCA has not yet filed a claim for any black liquor credits earned in 2009, since our tax -- 2009 tax return is not due until September 15, 2010. Once the cellulosic biofuel registration is received, PCA can claim the cellulosic biofuel producer credit of $1.01 per gallon instead of the alternative fuel mixture credit of $0.50 per gallon. This would increase our total 2008 and 2009 tax credits to about $370 million or $230 million after-tax, compared to alternative fuel mixture credits of $195 million or a $45 million increase."

There's an interesting on-line discussion of Son of Black Liquor taking place at The Paper Planet. And for other recent examples of Congress using alleged "savings" regarding pulp byproducts to "pay for" new programs, see:

• Grandson of Black Liquor: Congress Milks Another Pulp Byproduct for Bogus Savings 
• ObamaCare's Black Liquor Tab: $23.6 Billion

Dead Tree Edition Tops Twitter and the World Cup

RISI, "the leading information provider for the global forest products industry," shocked me and a lot of sane people as well this week by naming me to its "Power List" of the industry's top 50 movers and shakers.

"Written by the self-styled D. Eadward Tree, the Dead Tree Edition blog is not afraid to dig into the issues that the pulp, paper and publishing industry would rather lay buried under dead leaves," says the article explaining my selection as #43. It says this blog "has become a must-read for anybody involved in the pulp, paper and publishing industries, especially those who like a bit of spice with their breakfast reading."

OK, so #43 is pretty far down the list, but at least it's ahead of Domtar CEO John Williams (#48), FIFA World Cup (#49), and "Social Media: Twitter and LinkedIn" (#50).

My selection to this prestigious list has led to some questions that I will now try to answer:

• Q: How much did you have to pay RISI's editors to get on the list? A: Nothing, I swear.
• Q (from my roommate/partner): So does this mean you will get paid actual money instead of just link-bait when Web sites re-publish your articles? A: Hope springs eternal.
• Q: Now that you've given Twitter a good thrashing, will Dead Tree Edition do an IPO? A: Yeah, right. Wanna buy some shares?
• Q: Will Dead Tree Edition start showing up in Google News? And will search engines start giving higher rankings to articles on Dead Tree Edition than to excerpts and quotations of those articles on other Web sites? A: You obviously don't understand how the search-engine gods rule the www.world. They judge an article on Dead Tree Edition to be the unreliable work of an obscure, anonymous blogger. But when those same words appear in a newspaper or an industry Web site, they suddenly become imbued with authority.
• Q: Is it true you almost wrote an article about how certain famous white people could help save forests? A: Yes. I read that the U.S. Department of Agriculture was releasing parasitic WASPs into the Chicago area to stop the spread of emerald ash borers that were killing trees. Finally, I thought, here's a real job for Prince Charles to do while waiting for Mum to, you know. And this could even give Paris Hilton a chance to do something useful. Then I realized that the article was talking about parasitic insects, not parasitic White Anglo-Saxon Protestants. Oh well. I still wonder what happens to the wasps after they eat all the ash borers. Maybe they buy mini-vans and join the local country club.
• Q: If you're so influential, why do members of Congress and most news media still insist that Obamacare was paid for partly by closing a $23 billion loophole for black liquor -- a loophole that you repeatedly said never existed? A: Alleged influence in the forest products industry doesn't carry much weight on Capitol Hill or with the news media. 
• Q: How did you end up ranked ahead of Williams, whose company probably had much to do with preventing the early demise of the U.S. black liquor tax credit (despite your attacks on the program) and then became the #1 recipient of Canada's version of the credit? A: Good question. I guess Domtar employs more voters in Maine and Canada than I do.
  

Other, barely relevant articles about D. Eadward Tree and Dead Tree Edition include:

• D. Eadward Tree Unmasked! A top U.S. Postal Service executive was revealed to be the man behind Dead Tree Edition.
• Dead Tree Makes the AP!
• Can You Trust an Anonymous Blog with an Aggravating Name? Not everyone thinks Dead Tree Edition should be taken seriously.
• Dead Tree Edition's Best of 2009, which will help you understand why I'm especially happy to be ranked ahead of Twitter (as will Twitter vs. RSS: So Much for Superior Technology).

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.

NewPage Reportedly Has Deal For Kruger's Idled Machines

NewPage and Kruger have reached a deal ensuring that Kruger doesn't restart the soon-to-be-idled coated-paper operation at its Trois-Rivieres, Quebec mill, several sources say.

The arrangement would reportedly be similar to the deal NewPage did in March, when it agreed to buy Domtar's coated-groundwood product lines and trademarks after Domtar closed its only coated mill, in Columbus, MS. (See Is Domtar's Exit a Game Changer for Coated Paper?)

In this case, Kruger will continue making lightweight coated groundwood on its world-class machine at the nearby Wayagamack mill. But the sources say its business above 40# is being turned over to NewPage.

One irony of the deals is that NewPage has said it wants to focus its coated-groundwood business more on lightweight papers; both Columbus and Trois-Rivieres focused on medium and heavy weights. But as North America's #1 producer of coated paper, what NewPage gets from the Domtar and Kruger deals is capacity reduction -- that is, less competition -- in the oversupplied coated-paper market.

Kruger announced yesterday that it will lay off 320 employees at Trois-Rivieres in June when it shuts down two paper machines and a coater. It said it would stop making both coated and supercalendered paper at the mill, but it's not clear whether the deal with NewPage includes supercal.

Market observers have said that the age and small size of the Trois-Rivieres machines probably made it a high-cost producer of coated groundwood and supercal. The recent strength of the Canadian dollar versus the U.S. dollar also hurt because most of the mill's output is sold in the U.S. With pulp prices soaring while paper prices are gradually coming out of a trough, it's probably more profitable for Kruger to sell its pulp to others rather than to make paper with it.

Is Domtar's Exit a Game Changer for Coated Paper?

Today we discovered what NewPage had up its sleeve when it announced a price increase for coated groundwood paper on Friday: It knew that Domtar was about to close its Columbus, Mississippi mill.

The two companies revealed today that Domtar next month will permanently close the mill, which has a single machine with the capacity to make 238,000 tons annually of medium-weight coated #5 and #4. NewPage will buy the product lines and trademarks, though it’s not clear whether it will continue to make Choctaw and the other products on its own machines.

The simultaneous news releases this morning were seemingly followed every hour by another North American mill announcing a $30-per-ton price increase on coated freesheet, coated groundwood, and/or supercalendered papers. Even AbitibiBowater, which postponed a price increase on CGW only a week ago because most competitors didn’t go along, came back to the price-increase party and brought supercal along.

One industry watcher called the closing of the Columbus mill “a game changer” because it might finally bring the CGW market into balance.

And another asked a question I can’t answer: If indeed NewPage is about to run out of money (see today's earlier article, Are NewPage and Verso Headed to the Altar?), how could it afford to buy Domtar out of the coated paper business?

Related articles:

• Verso Joins in on Price Increase, Adds Supercalendered

• Where Are Coated Prices Headed? Let's Vote On It! 

For U.S. Papermakers, the (Black) Liquor's Gone, But the Party Goes On

The huge black-liquor subsidy of pulp mills expired last week, but that isn’t stopping the U.S. forest-products industry from tapping taxpayers' money in other ways.

Three-fourths of the pulp and paper companies that received U.S. black-liquor tax credits are signed up to benefit from another biofuel subsidy, the new Biomass Crop Assistance Program (BCAP). But also among the more than 100 mills that have been approved as BCAP "biomass conversion facilities" are at least several that were put at a competitive disadvantage by the black-liquor program, which expired on Dec. 31.

Various paper companies are also getting government help to reduce reliance on fossil fuels, using state grants funded by federal economic-stimulus programs. Just this week, Maine awarded $2 million to Verso Paper’s Bucksport mill and smaller amounts to five other paper companies for investments in such projects as heat recovery and biomass boilers. Last month, Wisconsin made similar energy-efficiency grants totaling about $5 million to four paper companies.

Say hello to Uncle Sam
U.S. paper companies have historically avoided government entanglement. But after some left millions of dollars on the table last year by being late to the black-liquor party, they are definitely keeping an eye on Uncle Sam's wallet now.

BCAP is nowhere near as generous as the black-liquor credits, and the benefits to paper mills and other buyers of biomass will be indirect and uncertain. Boosted by a $517 million appropriation for the first quarter of 2010, the program provides subsidies to suppliers rather than users of biomass.

By being BCAP-approved sites, biomass users – such as paper mills that burn bark, limbs and sawdust to fire their boilers – will presumably be able to buy at less-than-market prices. As with the black-liquor credits, critics are already complaining that BCAP will distort markets in a way that unfairly hurts some businesses without doing much for the environment.

Among the companies and mills on the list of BCAP-approved facilities are:

• All of the top 12 producers of kraft pulp in the U.S. and 24 of the 32 known producers. Those companies earned an estimated $8 billion-plus last year from a federal alternative-fuel program simply by following the standard industry practice of using black liquor, a pulp byproduct, as an energy source for their mills.
• Eighteen mills owned by International Paper, the #1 recipient of the black-liquor credits.
  
• The Woodland pulp mill in Baileyville, ME, which Domtar reopened last year (while simultaneously closing a Canadian kraft pulp mill) specifically because of the black-liquor credits. An improving global pulp market has enabled the mill to continue running even without the credits.
• An East Millinocket, Maine directory mill affiliated with Fraser Papers. Fraser said the black-liquor credits helped push it into bankruptcy reorganization last year; it couldn't get the credits because its kraft pulp comes from Canada. The Maine program also made grants to three other Fraser mills.
• The Boise Inc. mill in DeRidder, LA that used the black-liquor credits to grab share – and hurt competitors -- in the newsprint market. Last spring, Boise publicly announced a decrease of more than 20% on newsprint prices, made possible by its unusual use of (subsidized) kraft pulp in its newsprint.
• Catalyst Paper’s 100%-recycled newsprint mill in Snowflake, AZ, which lost significant business because it wasn’t able to match Boise’s pricing. It became a poster child for opposition to the black-liquor credits, a supposed environmental subsidy that in this case encouraged a switch from recycled to virgin pulp.
• AbitibiBowater newsprint mills in August, GA and Grenada, MS, which also suffered from Boise’s move.

For further reference:

• The U.S. Department of Agriculture's BCAP Web site.
• Black Liquor Scorecard: $4.7 Billion Through September, which lists black-liquor credits earned through Third Quarter 2009 by each of the publicly traded kraft-pulp producers.
  
• International Paper Drowns Its Sorrows in Black Liquor: The giant company earned more in black-liquor subsidies last year than it made from selling actual products.
• Did Black Liquor Credits Pave the Way for Healthcare Legislation?: How the reopening of Domtar's Woodland mill played a role in a key Congressional vote.
  

Canadians Belly Up to the Black-Liquor Bar

Following in the footsteps of their American competitors, Canadian pulp and paper mills received government approval Friday for $1 billion in black-liquor funds.

The Pulp and Paper Green Transformation Program is a response to a U.S. tax loophole that is keeping some American mills afloat and helping to push some Canadian companies toward or into bankruptcy. And it seems designed to avoid charges of unfair trade practices from mills in the U.S., which is the largest market for most Canadian mills.

The program will help finance investments to "improve environmental performance through increased renewable energy production or improved energy efficiency" at 38 mills owned by 24 companies, said a news release from Natural Resources Canada. The funds were assigned based on each company's production of black liquor, an energy-rich byproduct of the kraft pulp process. But eligible companies can use the funds at mills that do not produce black liquor.

The largest beneficiary is Domtar Corp., with $143 million. Domtar has already received $183 million this year in U.S. black-liquor credits, while its main American competitor, International Paper, has received $1 billion.

At least three of the Canadian recipients -- AbitibiBowater, Fraser, and Smurfit-Stone Container Corp. -- are in bankruptcy reorganization, while several others are struggling to avoid bankruptcy court. (Click here for a list of the recipients, the amounts granted, and the mills getting the investments.)

The Canadian govnerment is scheduled to pay out the money late this year or early next year, about the time that the $6 billion-plus U.S. program is slated to expire.

For more information about the controversial black-liquor program in the U.S., please see:

• Pulp Fiction: Eco-Credits for Black Liquor
• Boozing It Up on Black Liquor: One Company's High Is Another's Hangover
• "Black Liquor" Credits Are Helping Paper Buyers

Why U.S. Pulp Mills Are Like NBA Players

My friend the youth basketball coach cringes at mentions of the NBA because of the bad habits his players pick up from watching it.

After seeing their favorite pro player take a couple of steps before dribbling, the kids have trouble telling the difference between proper ball handling and a traveling violation. But my friend doesn't blame the NBA players.

As an environmentalist who makes a living from printed products (at my day job, not from this blog), I hate to see U.S. pulp manufacturers rake in billions of government dollars in black-liquor credits. They are accepting environmental-incentive money for doing something that does nothing for the environment, which could lead to public backlash against all paper-based products.

But I don't blame the pulp and paper companies.

It's the NBA's job to set the rules. It's the players' job to do what they can within those rules to help their team win. It's the refs' job to decide when the rules are broken.

It's the government's job to establish laws and regulations. It's a business's job to maximize its owners' return on investment while working within those laws and regulations. And it's the IRS' job to decide when a pulp mill qualifies for the black-liquor credits.

Forest-products companies are used to being on the wrong side of foolish government policies and pronouncements -- most recently California Governor Arnold Schwarzenegger's claim that digital textbooks are greener than printed ones. Can we blame them for taking advantage of a foolish government policy that for once is in their favor?

Can we, for example, criticize Domtar for its decision last week to accept the credits, which enabled it to reopen its pulp mill in Baileyville, Maine and put 300 people back to work? Can we blame the manufacturers if government policy now gives them an incentive to displace recycled pulp and mechanical pulp with kraft pulp?

Self-righteous Congressmen criticizing pulp and paper companies for accepting black-liquor credits is as hypocritical as NBA officials complaining about the sloppy dribbling of pro basketball players. If you’re in charge of making the rules, don’t complain about people who follow your crummy rules; change the rules.

American forest-products executives do need to understand one thing: Don’t expect any sympathy from Congress, or your customers, the next time you come around whining about how the Chinese, or the Canadians, or the Finns are subsidizing their mills and dumping their product in the U.S. After chugging black liquor this year, don’t try to tell us next year how pure you are.

Coated Paper Prices: Headed for a Crash?

If you think prices for coated paper have declined a lot recently, hang on to your hats. A bigger drop may be just around the corner.

Admittedly, the industry has done fairly well managing capacity through the current perfect storm of high inventories, economic recession, strong dollar, and the shift to digital media.

Mills have been more disciplined than in past downturns about taking downtime rather than chasing business with lower prices., limiting the declines to only $5 to $7 per hundredweight since last year's peak.

But the issue is permanent closures, not downtime, as John Maine of RISI explains in a recent analysis: “North American coated paper producers need to shut another 1.3 million tons of capacity permanently and immediately, followed by further shuts over the course of the next five years if they want to balance supply with demand,” he wrote. The continent’s coated mills can make about 9 million tons of paper annually, split about 50-50 between groundwood (mechanical) and freesheet products.

“Most of the high-cost, inefficient mills have already been closed, so the next wave of closures is going to involve larger, more efficient mills that are still generating a positive cash flow,” continues Maine.

The problem is that mills are not shut down by the industry, they are closed by individual paper companies seeking to maximize their owners’ return on investment. What paper company will volunteer to shutter cash-positive mills or machines? Not AbitibiBowater (aka AbitibiUnderwater), which is trying to stave off bankruptcy. Not Verso, North America’s #2 coated producer, which is also stuck in Penny Stock Land.

Maine points to the more “nimble” uncoated-freesheet market, where giants like Domtar and International Paper have implemented massive capacity cuts to prevent prices from crashing. What he doesn’t point out is that the big players in that industry tend to be low-cost producers, which means that smaller players trying to buck the oligopoly with a price war soon find themselves up Chapter 11 Creek without a paddle.

In the coated-groundwood market, by contrast, size doesn’t seem to matter. The best cost position these days is to be making product in Canada with machines that coat and calender in line. Medium-sized Kruger and single-machine Catalyst Paper fit that bill.

The market’s two big players, NewPage and Verso, make all of their coated groundwood in the U.S. with blade coaters and offline calenders – probably with higher costs than some single-machine companies like Domtar and Evergreen Packaging.

NewPage has demonstrated its willingness to keep the market in balance by shutting high-cost mills and machines, but how much stomach does it have for shutting even more (and more efficient) machines? Recent reports of its making uncoated freesheet and an SCB-type product on coated machines suggest its capacity-rationalization plan is complete.

The paper industry has been through down cycles before, often snapping back with rapid price increases once the economy causes demand to recover. Prices may indeed stabilize – even increase -- in a few months when the current inventory overhang is burned off and we enter the busier fall season, especially if the economy improves or energy costs rise. But that’s likely to be what Wall Street calls a “dead cat bounce” – a brief increase on the way to further declines.

“There will be some recovery in demand once the recession is over, but our best forecast indicates that demand will stay far below its pre-recession level and that demand will continue on a structural decline for the next five years,” Maine writes. Translation: Domino, Best Life, Teen People, etc. aren’t coming to life, and retailers like Circuit City and Linens 'n Things won’t magically re-emerge from bankruptcy to start printing more newspaper inserts.

There will be too many coated mills fighting over too little (and declining) demand, with European manufacturers jumping into the fray more as long as the dollar stays strong versus the euro. Even a meeting at a Chicago hotel to discuss “price leadership,” as UPM and Stora executives tried in 2002, won’t rescue this market.

Debt-laden mills will continue running as long as they are cash positive (not necessarily profitable). That will force prices down until the highest-cost machines are no longer cash positive and have to be shuttered. But continuing drops in demand will eventually force even more mills to close.

Manufacturers will try to cope by making uncoated papers on their machines, either on an ad-hoc basis or via permanent conversions. They will diversify more into bio-energy, such as wood-derived ethanol and wood-burning power generation. After all, public opinion and public policy consider it “green” to cut trees for energy (witness the new tax credit for wood-burning stoves) but un-green to cut the same trees to make pulp and paper.

Some makers of coated paper will survive, perhaps even thrive. But the industry will be transformed.