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

Boozing It Up on Black Liquor: One Company's High Is Another's Hangover

If you need proof that the power to tax is the power to destroy, or to enrich, look no further than announcements from two paper companies yesterday.

International Paper revealed that it expects to receive $413 million in "black liquor" credits from the U.S. government for the first quarter of 2009. The estimated credits for its printing-papers segment will total $170 per ton, which was 89% of the segment's EBITDA. In other words, without the credits the segment would have barely covered its cash costs but with the credits it had a rather profitable quarter.

Fraser Papers blamed those same credits, which are being lavished on kraft pulp mills in the U.S., Friday for its decision to shut indefinitely a coated-paper machine at its Madawaska, Maine mill. That mill on the Canadian border is itself a vestige of tax policy -- the former practice of placing tariffs on imported paper but not on imported pulp.

But what worked in the pre-NAFTA era is now backfiring on Fraser. Its pulp mills that supply Madawaska are not eligible for the black liquor credits because they are in Canada. The ideal set-up today would be just the opposite of Fraser's: kraft pulping in the U.S. to get the tax credits, paper making in Canada because its weak currency makes costs there so low.

"We are calling on the U.S. Government to close this outrageous tax loophole that unfairly benefits a select group of paper companies in the country,” Jeff Dutton, president and COO of Fraser, said in a statement yesterday. He said the credits "are providing an enormous incentive to certain of our competitors to produce at full capacity when they may not otherwise do so."

Even with tax credits distorting the paper market, the future of Madawaska's PM6 would have been shaky because of the economies of scale and newer technology on competitors' larger machines. Fraser also blamed the weak market for coated paper. The tax credits were merely the final straw.

The credits are a mixed blessing for one closely watched paper company -- giant AbitibiBowater, which filed for bankruptcy organization last month. It should qualify for millions in black-liquor credits for its U.S. pulp operations, but its Canadian pulp mills will struggle to compete against what are essentially heavily subsidized U.S. competitors.

And one of the company's strengths -- making groundwood papers that are a low-cost substitute for kraft-containing freesheet papers -- will be undermined if the tax credits enable competitors to make freesheet papers less expensively than the groundwood substitutes.

There isn't much confidence in AbitibiBowater these days. Half the voters in a recent Dead Tree Edition on-line poll predicted the company would be broken up. Only 16% thought it would emerge from Chapter 11 stronger than ever; 19% said it would emerge from Chapter 11 but still be weak. And 12% voted for "Put some butter on it; it's toast."

The credits will also cut both ways for NewPage, the largest maker of coated paper in North America. The tax credits will enrich it but will also undermine its argument that punitive tariffs should be placed on allegedly subsidized coated papers from China.

Katahdin may enter green energy business

Katahdin’s closed paper mill in Millinocket, Maine may enter the “green” electricity business when it starts making SCA (supercalendered) paper again, its customers were told today.

The company is “proposing to retrofit a large, existing oil-fired boiler with a modern biomass gasifier,” Fraser Papers Limited stated in a letter to customers. Fraser operates Katahdin's mills in Millinocket and East Millinocket; both companies are subsidiaries of Toronto-based Brookfield Asset Management. Fraser has previously cited the use of more than two barrels of oil per ton of paper as the major reason that Millinocket’s one machine shut down in early September.

The new boiler would provide steam for the mill and 20 megawatts of power to the market. But there are several conditions that have to be met, including financing, permits, having a reliable supply of biomass (presumably from trees), and expanded transmission capability, the announcement said. Another Brookfield subsidiary already sells electricity into the grid from a hydroelectric dam at the Millinocket mill.

Demonstrating its intent to reopen the mill, Fraser pointed out that it is spending nearly $1 million to winterize and protect the paper machine and another $500,000 on feasibility studies.
Fraser has not indicated whether rapidly declining prices for oil and kraft pulp, which it purchases on the market, might entice it to reopen even before a biomass conversion is completed.