Old Paper Mills: Monuments to a Strong Dollar

 

1909 postcard: 21 million logs at Millinocket, ME paper mill (from the author's collection)

1906 postcard: ME, Maine paper mill and hydroelectric dam (from the author's collection)

"Strong dollar."

Sounds good, doesn't it? The news that our currency continues to strengthen in comparison with those of almost every other country is like winning the Olympics, right? "U-S-A! U-S-A!"

Once-bustling paper-mill towns in Maine that are now turning to ghost towns tell another story. In a state where making paper was an iconic livelihood on par with Down East's famed lobstermen, half of the paper mills have closed in the past two years. Already this year, the site of the former Millinocket mega-mill (pictured above, nine years after it opened as the world's largest paper mill) was sold to a non-profit for $1, permission to demolish another mill was requested, and the Maine Pulp and Paper Association disbanded.

Donald Trump's tirades against foreign trade resonated in the paper-making regions of Maine, just as they did in the parts of  Pennsylvania, Ohio, Michigan, and Wisconsin that once thrived on steel, autos, coal and paper. Solid-blue counties that previously went for Obama voted instead for Trump, flipping the states' electoral votes to the GOP column.

But as even President Trump recently seemed to acknowledge, the "strong" dollar may be the real culprit behind the loss of American manufacturing jobs. Especially in the paper industry, and most especially in Maine.

The Madison mill -- pictured above 1906, the year it opened -- is a poster child for the inability of protectionist policies to overcome currency issues. Under questionable circumstances, the U.S. Department of Commerce in July 2015 imposed import duties on all four of its Canadian competitors in an obvious attempt to prop up the Madison mill.

That wasn't enough to save Madison. It couldn't overcome a 35%-plus "strengthening" of the U.S. dollar against the Canadian currency in just four years.

With most of their expenses in cheap Canadian dollars but their revenue in pricey American dollars, Canadian mills could still make a profit selling into the U.S. despite penalties of as much as 19%. Similarly, UPM, the world's largest and most profitable paper company, found it made more sense to supply supercalendered paper to the U.S. from its weak-euro European mills than to continue operating Madison.

The Madison mill made its final roll of paper in May 2016. It was sold to an industrial liquidator late last year.

The Digital Revolution and the strong dollar have been bad news for all U.S. makers of publication papers. Maine has the additional bad fortune of mills that were focused on lightweight papers like newsprint, directory, supercalendered, and lightweight coated that have borne the brunt of the shift to digital media. Plus, its out-of-the-way location gives it at best minimal freight advantages versus Canadian mills when shipping to the Midwest or versus European mills when shipping to must of the U.S. East Coast.

Protectionist policies are no match for declining demand and a rising dollar.

Related articles:

• Two Paper Companies Convicted of Being Canadian 
• Port Hawkesbury's Near-Death Experience 
• Seven Losers and Four Winners in the NewPage Bankruptcy

Paper Industry Analyst Prevails in Libel Case

In a victory for freedom of the press and good old American stubbornness, a bogus defamation lawsuit against paper-industry commentator and gadfly Verle Sutton was recently dropped. Sutton, never one to mince words, issued a colorful news release (below) yesterday announcing that his name had been cleared.

In the May 2014 issue of his newsletter, The Reel Time Report, Sutton exposed a scheme that enabled Cate Street Capital to make money from managing the unprofitable, hopelessly outdated Great Northern paper mills in Maine by tapping state funds. He also pointed out the somewhat checkered history of the company and its CEO, John Halle, who responded by filing a libel suit and partially blaming Sutton for Great Northern’s September 2014 bankruptcy.

His Great Northern exposé was not the first time Sutton had plumbed the depths of questionable government handouts to the U.S. paper industry: When news broke in 2009 that federal eco-fuel tax credits were being handed out to pulp mills for burning black liquor, The Reel Time Report accurately detailed the potential bonanza, company by company. Later, Sutton showed that Democrats had turned a blind eye to that multi-billion-dollar bit of corporate welfare to gain passage of Obamacare.

Sutton was his usual forthright self in the 2014 “The Maine Problem” report on Great Northern. Some highlights:

• “Technically, Cate Street purchased the Katahdin mill late in 2011 from Brookfield for $1.00. Practically, however, it was the State of Maine that really provided the capital needed to get the mill up and running again.”
• “Cate Street began operating the mill late in 2011. It messed up everything right from the beginning . . . and it generally behaved like a company that had no clue what it was doing.” 
• “After stranding customers with an abrupt mill closure in January 2014, [Cate Street] stated publicly that it was shutting down to work on its business plan. That was the first time that anyone had ever heard of a company shutting down to develop a business plan.”
• “In hindsight, the high-cost paper company [Great Northern] did not go bankrupt as quickly as we thought it would, because the State of Maine supplied it with a steady flow of funds: newspapers have reported the total at $142 million in loans, grants, and guarantees. So, in effect, Cate Street has lost $142 million in just over two years; this is in addition to the $2.5 million it owes the feds in back taxes, the $2.5 million it owes Brookfield in unpaid utility bills, the $3.0 million it owes Millinocket and East Millinocket in unpaid real estate taxes, and smaller quantities owed to numerous other suppliers. This massive financial failure does not affect Cate Street, of course, because Cate Street is a separate financial entity."
• “Perhaps the game plan all along was just to ride Great Northern as long as it would last, taking a big cut along the way. Great Northern’s slow demise might have lined the pockets of Cate Street owners, and perhaps others.”

It’s no wonder Halle was miffed. Fortunately for Sutton, truth is an absolute defense in libel cases.

Here is Sutton’s news release, verbatim:

John Halle, of Cate Street Capital, drops libel lawsuit against paper analyst and author of The Reel Time Report, Verle Sutton

Chicago, Illinois — May 2, 2016 — As reported recently in the Bangor Daily News (April 22, 2016), John Halle (CEO of Cate Street Capital) has formally dismissed the libel lawsuit that Cate Street Capital and Halle had initiated against Verle Sutton almost two years ago. This claim of libel had resulted from an article in the May 2014 issue of The Reel Time Report, written by Sutton, in which Cate Street Capital and State of Maine officials were strongly criticized for actions they took that related to the Great Northern Paper mills in northern Maine.

Industry Intelligence, the publisher of Reel Time, had also been named as a defendant in this lawsuit. Industry Intelligence and John Halle reached a settlement earlier in 2016.

In response to John Halle choosing to end the lawsuit against Sutton, and the Industry Intelligence settlement, Verle Sutton has issued the following statement:

I am grateful to family and friends who have been so supportive during the last two years as we fought through the groundless lawsuit that John Halle and Cate Street Capital initiated against me for authoring “The Maine Problem.”

The legal costs incurred during the last two years have been substantial, and the time our family lost was unfortunate. However, our losses pale in comparison to the damage that has been inflicted on the East Millinocket and Millinocket communities and, in fact, on all of northern Maine. These communities and this region were misled by state officials and Cate Street about the viability of the restarted Great Northern Paper mills.

And it was mostly small businesses in Maine that lost more than $20 million as a result of the bankruptcy of Great Northern Paper that occurred under the watch of John Halle and Cate Street. In addition, tens of millions of Maine taxpayer dollars were wasted by way of Dolby landfill costs, FAME loans, the New Market Tax Credit program, etc.

Although the financial and personal damages to Maine businesses and taxpayers were severe, that was not the case with the finances of Cate Street Capital. It was my opinion, when “The Maine Problem” was published, that Cate Street Capital had assumed little or no financial risk in its Great Northern investment. That opinion has not changed.

Since my family and I do not live or have business activity in Maine, we have no personal stake in Maine business or politics. I am simply a paper analyst. I initially wrote about Great Northern because it was a paper company in a segment of the paper industry covered by The Reel Time Report. However, in reviewing the activities related to the restart of Great Northern, and the subsequent actions of Cate Street and Maine government officials, it became obvious that something was very wrong.

When Halle initiated the libel lawsuit against me, he stated that I had knowingly lied when writing “The Maine Problem.” That was absolute nonsense. It is unfortunate, from my perspective, that our legal system does not allow me to counter‐sue Halle and Cate Street based on the accusations in that lawsuit. (Accusations made in a lawsuit are, for some reason, legally considered “protected speech.”)

Although the lawsuit has been dismissed, when you Google my name — Verle Sutton — the Cate Street lawsuit is the first story that comes up at the top of the page. It is clear that the blatantly false accusations made by Halle will never go away. The newspaper story that reported those accusations in May 2014 will forever be my online legacy.

In the lawsuit initiated by Halle, he claimed that roughly 73 lines in “The Maine Problem” were libelous. Later, after I had incurred substantial legal costs, all but 18 of those lines (four statements) were simply dropped from the lawsuit by Halle’s attorney. Therefore, after publicly claiming libel based on 73 lines of the report, he privately dropped 75% of the complaint.

My attorney then filed a Motion for Summary Judgment — principally based on protected opinion. Based on this motion, the judge threw out three of the last four statements, leaving two lines remaining— really, only one word.

The next steps were to be 1) a deposition on the part of John Halle (I had already given my deposition), and 2) another Motion for Summary Judgment (but this motion was to be based on relevant factual evidence).

So, at the time this lawsuit was dismissed by Halle, the only remaining issue was the use of the word “convicted.” John Halle had objected to the use of “convicted,” arguing that the word suggested a criminal offense. (The judge had previously ruled that the word “cheated” was not actionable since a New York court had ruled that Halle was legally responsible for committing civil fraud.)

It is true that “conviction” does, in court proceedings, refer to criminal cases, and had I known of this distinction when “The Maine Problem” was written, I would have used a different word. Nevertheless, it is not an error — much less libel — to use words as they are often used in our society. The fact is that “conviction” is commonly used in public discourse, and occasionally even in the media, to refer to the results of civil cases. (A quick computer search had discovered 40 very interesting examples we were prepared to present had the lawsuit continued, but hundreds of examples could have been located.) In addition, it was clear based on the context of the paragraph in question that I did not intend to imply criminal activity. The next sentence stated, “The $1 million (that had never been paid) is, after fourteen years, now up to $2.3 million, according to a New York judge’s ruling.” There was absolutely no reference to criminal penalties, as there would have been had this been a criminal proceeding.

I was, therefore, very disappointed that the insurance company representing Industry Intelligence agreed to a clarification of the word “conviction,” and a sanitized rewriting of the passage in general as part of a settlement agreement. I strongly objected to their settlement, but my concerns were ignored. The insurance company demonstrated a complete absence of ethical conviction. And it was a bad business decision as well.

 
For more information, contact:

Jane Keyes
Sutton Paper Strategies 
mail@suttonpaperstrategies.com

Port Hawkesbury's Near-Death Experience

Last year was a disaster for many North American paper mills but saw a spectacular turnaround for one -- NewPage's Port Hawkesbury, Nova Scotia mill.

When NewPage bought the mill, along with seven U.S. mills, from Stora Enso just over a year ago, Port Hawkesbury's mayor said he was "scared to death" about the mill's future. Even before the NewPage deal was announced, some customers shifted business to other mills, not wanting to rely too heavily on an operation that was reportedly losing money and seemed likely to be shut.

Now both the supercalendered (SCA) and newsprint machines at the mill seem to be running close to full and the mill is actually doing something almost unheard of these days -- hiring new employees.

The change of fortune for the supercalendered (SCA) and newsprint mill can be explained largely with two words – loonie and Katahdin.

Shortly before NewPage completed the acquisition of the mill just over a year ago, it noted that Port Hawkesbury was unprofitable because most of its expenses were in expensive Canadian loonies but most of its revenue was in cheap U.S. dollars. Since then, the loonie has weakened about 20% versus the U.S. dollar.

The closure of Katahdin’s supercalendered (SCA) mill in Millinocket, Maine this past summer kept the North American market for SCA firm despite declining demand. Katahdin, controlled by Brookfield Asset Management, has said it would reopen the mill if it can retrofit its inefficient oil-fired burner with a biomass gasifier that would enable it to generate electricity for sale. (See "Katahdin may enter green energy business.") But unless Millinocket is sold to another paper maker, Katahdin’s erratic marketing and poor communication with customers will make restarting the mill difficult despite its modern technology, high-quality paper, and high labor efficiency.

Rising prices for coated groundwood paper pushed some users to look for savings this year by switching to SCA. Port Hawkesbury's world-class SCA machine is noted for heatset-offset products that look and perform like coated groundwood -- with similar inks, press speeds, and waste levels as coated #5 paper.

Unlike the SCA machine, Port Hawkesbury's older newsprint machine did not seem to have any competitive advantages. After a labor dispute and high energy costs idled the mill for most of 2006 and caused Stora to abandon the North American newsprint market, prospects for the newsprint machine seemed especially bleak.

But even that albatross is flying. NewPage has developed a high-bright newsprint that can run on heatset-offset presses, making it a competitor to the sort of soft-nip and low-grade supercalendered papers often used for fliers and newspaper inserts. Mill closures and changes – such as Irving Paper’s virtual abandonment of SCC and SCB to make higher-priced SCA – opened up opportunities for the Port Hawkesbury product.

Speaking of Katahdin . . .

In reference to Katahdin's idled paper mill (see our Oct. 21 post), someone passed along this moving story from U.S. News & World Report about what this all means to the people in a one-industry town like Millinocket. And, yes, it did appear in U.S. News' dead-tree edition: "Death Watch in a Mill Town"

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.