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

10 Reasons Coated Paper Is Ripe for Collusion

The proposed merger of NewPage and Verso Paper may be on the ropes, but it has brought much attention to the oddities of the U.S. market for coated paper.

Intrigued by the unusual proposal (which Verso was forced to reconsider last week), the bankruptcy experts at The Capitol Forum recently published comments from a federal prosecutor explaining why the U.S. coated-paper industry is prone to cooperation among competitors.

The U.S. Department of Justice’s likely presumption that the merger would encourage “coordinated interaction” of competing companies could be a stumbling block for the merger, according to The Capitol Forum (subscription only).

The article made me realize something I had never thought about: Though coated-paper companies have the means and the motive to cooperate on pricing, the same is not true for publication printers, even though they have a similar customer base. The anonymous prosecutor’s comments, The Capitol Forum’s analysis, and my own experience inspired this list of 10 reasons the U.S. market for coated paper is prone to collusion, both legal and illegal:

1. Price transparency: The prosecutor, who participated in the 2006 prosecution of Stora Enso and UPM on price-fixing charges, noted that “coated paper pricing is very transparent—a firm will announce a price increase to take effect at a future date, and wait for other competitors to follow,” The Capitol Forum said. [Editor’s note: Paper companies rarely announce price decreases, which tend to occur in a less orderly fashion.] 


2. The tradition of quarterly price changes: Except for spot purchases, most deals for coated papers involve quarterly adjustments based on market conditions. That, coupled with those publicly announced price increases, means competitors can implement a price increase simultaneously without ever communicating directly with each other. 


3. Concentrated market: No company has a large enough market share to push prices up unilaterally. But, for most grades, it only takes about three major players acting more or less in unison for a price move to stick. The Department of Justice probably views a NewPage-Verso merger as making such pricing coordination even easier for the mills, according to The Capitol Forum. By contrast, the printing industry is more fragmented, despite massive consolidation.


4. Mutually assured destruction: With stable supply and declining demand, paper companies are tempted to keep the machines running by pricing aggressively to grab market share. But they know that if competitors follow suit, they all lose. Paraphrasing the prosecutor, The Capitol Forum explained that “because declining demand can result in lower prices, firms in distressed industries may have the incentive to collude to stop further price declines. By contrast, when demand is steadily increasing, there may be less incentive to collude because coordination may not be necessary to make price increases stick.” 


5. Near commodity: Those price-increase announcements are meaningful because a statement about a “$60-per-ton increase for coated groundwood” is immediately understood by buyers and competitors. (Whether the price increase is fully implemented is another story.) Commercial printers make no such public announcements because there is no single price for printing; printing contracts often have multiple-page price lists. 


6. Not quite a commodity: Coated paper, however, is not such a commodity that it can be traded in the pits like soybeans or pork bellies. Varying roll sizes, basis weights, finishes, and transportation arrangements make each order a custom-manufacturing job. (There was one company that tried to create a futures exchange for pulp and coated paper. It was called Enron.)


7. Built-in market intelligence: Mills sell much of their output through paper brokers that also represent competitors. Those brokers can provide insight into competitive pricing and act as an indirect communications channel if a mill wants to signal competitors that it will hold the line on pricing. Many major customers also buy from more than one mill, so mills can glean information about what their competitors are up to by observing customers’ order volumes and how they negotiate on pricing. By contrast, most of those customers buy printing directly from the printers and use only one publication printer. 


8. Stable demand: In the short run, demand for graphic paper is inelastic – that is, not affected by prices. It takes months for a major catalog or magazine to carry out a plan of reducing pages or copies, so paper companies assume a 5% change in prices will mean a 5% change in revenue. (Demand for paper is more elastic in the long run, but paper executives – like postal executives and politicians – don’t think about the long-term effects of pricing.) 


9. The uncoated freesheet example: The North American market for uncoated freesheet paper (copier paper, for example) is a near duopoly. Despite having low production costs, the two big players would rather shut down machines than chase market share. This “market discipline” strategy has been profitable for the mills, as both Wall Street and the coated-paper manufacturers know full well. 


10. Safety valves: Idling a machine during slack times is a money loser: Employees still have to be paid, and the bondholders still want their monthly payments. But mills have ways of keeping the machines running without flooding their markets, such as by making more paper for export markets or turning off the coaters to produce uncoated products. Printers don’t have such options.

Related articles:

• Verso-NewPage Deal Will Face Antitrust Hurdles, Analyst Predicts
• The Infamous UPM-Stora Meeting 
• Odd Verso-NewPage Structure Eyed Warily by Wall Street

 

Verso-NewPage Deal Will Face Antitrust Hurdles, Analyst Predicts

The U.S. Department of Justice is likely to delay or even block the proposed merger of NewPage and Verso Paper, according to a news service that focuses on bankruptcy issues.

“Because the deal may increase the likelihood of both post-merger unilateral effects and coordinated capacity reduction and price increases, DOJ is almost certain to issue a second request” for information, The Capitol Forum wrote in a Jan. 24 analysis. “At a minimum, this will delay closing for several months, and could lead to a DOJ move to block the deal outright.”

What will catch DOJ’s eye is that the merged company would control 58% of North American capacity to make coated paper, said the report, which is only available to The Capitol Forum’s subscribers but was shown to Dead Tree Edition.

The report predicted that Justice will examine whether, in the words of its Merger Guidelines, the combined company would “find it profitable unilaterally to suppress output and elevate the market price” of coated paper.

It cited as precedent Justice’s complaint in the 2007 merger of Abitibi and Bowater, which at the time owned 41% of North America’s newsprint capacity. The merger was allowed to go forward only after Abitibi sold a low-cost mill.

The department said that neither Abitibi nor Bowater “acting alone would be of sufficient size to profitably increase the price of newsprint by reducing its own output through strategically closing, idling, or converting its capacity…The proposed transaction would combine Defendants' large share of newsprint capacity, thereby expanding the quantity of newsprint sales over which the merged firm would benefit from a price increase. This would provide the merged firm with an incentive to close capacity sooner than it otherwise would to raise prices and profit from the higher margins on its remaining capacity.” Industry observers have made similar comments about the proposed Verso-NewPage combination.

A significant difference in the Verso-NewPage case is that offshore imports could limit the merged company’s pricing moves. Only 2% of newsprint in North America came from offshore when AbitibiBowater was formed, versus about 16% for coated paper in recent years.

Verso and NewPage may argue that supercalendered paper is part of the same market as coated paper, which would shrink the companies' market share somewhat because Verso no longer makes SC paper.

A significant factor arguing against a Verso-NewPage merger, according to the report, is that the coated-paper industry is prone to cooperation among competitors because it is highly concentrated, has high barriers to entry, and tends to have relatively transparent pricing. Justice certainly is aware of that because it brought charges in 2007 against European giants UPM and StoraEnso for discussing how to stabilize U.S. coated paper prices.

Related articles:

• Odd Verso-NewPage Structure Eyed Warily by Wall Street
• Untangling the Verso-NewPage Deal
• The Infamous UPM-Stora Meeting

Untangling the Verso-NewPage Deal

Somewhere there must be a person who fully understands all aspects of the proposed combination of NewPage and Verso Paper, North America’s two largest makers of magazine-quality paper. But mostly there is confusion and debate and even misinformation about the marriage and what it would mean for the paper industry and its employees, for magazine publishers, and for catalogers.

Such a pre-nup! What Verso and NewPage have worked out is far more complex than described in the companies’ announcements or even in stock analysts’ reports. Included are some odd provisions that have gone mostly unnoticed.

Here is Dead Tree Edition’s attempt to explain the structure and implications of the impending union, which was announced a week ago after a stormy, three-year courtship:

Why is the proposed deal important?: The two companies control roughly half of the North American market for glossy papers (coated freesheet, coated groundwood, and high-quality supercalendered papers). In theory, a company with that much market share has the power to drive up prices, or at least to keep them stable by preventing gluts in the market. NewVerso (my name for the new company) could also throw its weight around among suppliers and merchants, creating both winners and losers.

Will the marriage be consummated? There seem to be two main hurdles:

1) Anti-trust approval: The Justice Department, goaded perhaps by major paper buyers, may block the deal on grounds that NewVerso’s huge market share would be monopolistic. A more likely scenario is that the company would be forced to sell (or close) a mill, as Abitibi and Bowater were required to do when the two newsprint giants merged.

2) Verso noteholders: For the deal to be consummated, holders of $538 million in Verso debt must agree to exchange their notes for ones worth only $267 million. “This implies debt forgiveness of $271.1 million,” wrote Paulo Santos for Seeking Alpha. “Debt forgiveness is usually attained through a pre-packaged bankruptcy or regular bankruptcy.” Bondholders may chafe at taking such a huge haircut without the stockholders taking a hit. But many had paid less than 50 cents on the dollar for Verso’s distressed debt, and they may decide the NewVerso deal is better than the most likely alternative, a Verso bankruptcy.

Who will the winners be if the deal goes through? Lawyers and investment bankers, of course. Perhaps Verso stockholders, who have seen the price spike six-fold in just a week. And probably competitors like Resolute, UPM, and SAPPI, who would benefit from NewVerso using market discipline to keep prices high.

And the losers? Customers. Either Memphis (Verso’s home) or Dayton (NewPage’s headquarters), at least one of which will lose a corporate headquarters. Probably some supplier and paper merchants. The big losers would be employees and towns of the mill or mills that will be closed.

But didn’t Verso promise it wouldn’t close any mills? No, it said it had no plans to close any mills. Translation: “Nothing in the legal documents requires us to close any specific mills.” Analysts seem to be unanimous in their view that the merger would lead to capacity reductions.

In fact, one of the deal documents even provides incentives for NewPage or Verso to reduce their production capacity by more than 10%. (See the discussion of “triggering events” in the Services Agreement Term Sheet. I’m not aware of any analyst or journalist who has addressed the meaning or significance of the Shared Services Agreement, but I find it intriguing – and confusing.)

That doesn’t sound like a straightforward purchase of NewPage by Verso. What gives? Technically speaking, a Verso subsidiary will merge with a NewPage entity. But each company has several subsidiaries that are involved in related transactions with the others’ subsidiaries, making the NewPage takeover anything but straightforward.

For example, the Shared Services Agreement indicates that Verso will be supplying administrative and marketing services either to NewPage before the takeover occurs or to a separate NewPage entity that will continue to exist after the takeover occurs. (Update: As explained in Odd Verso-NewPage Structure Eyed Warily by Wall Street, NewPage would continue as a separate operating company after the merger.) That agreement addresses how certain costs of the merger, such as severance payments, will be allocated between NewPage and Verso. It also calls for Verso to invoice NewPage each quarter for “realized synergies” resulting from the services that Verso provides to NewPage.

How did nearly bankrupt Verso, whose stock-market value was barely $30 million a week ago, pull off a deal that’s been valued at $1.4 billion? Short answer: OPM (Other People’s Money). Longer answer: Good question.

The Verso-NewPage deal is “sort of like two very weak companies holding each other up,” Vertical Research Partners analyst Chip Dillon told Reuters. “Essentially the deal is all debt, there is no real equity involved here.”

The $1.4 billion figure is based on NewVerso giving NewPage stockholders $250 million in cash and $650 in NewVerso first-lien notes, plus taking on $500 million in existing NewPage debt. NewPage stockholders would also end up with 20% to 25% ownership of the merged company.

But how did a financially troubled company like Verso find backers for such a deal? The deal would create value in two ways: 1) Debt reduction: The proposed debt exchange with Verso noteholders would eliminate $271 million of the company’s debt. 2) Synergies: Verso says the deal will yield at least $175 million in pre-tax cost savings during the first 18 months. Besides economies of scale in administration, marketing, and purchasing, having more machines means each can operate more efficiently by making a narrower range of products.

How did Verso go from being worth $35 million to $200 million in barely a day? That’s the subject of some debate in the markets. Until last week, a Verso shares was basically a cheap (as in 65 cents) lottery ticket, apparently destined to be worthless but potentially valuable if the company could avoid bankruptcy. When news of the NewPage deal broke, some traders figured Verso now had a future and jumped in with both feet. There are somewhat disputed reports that Verso short sellers were scrambling to cover their shorts, driving share prices up even further. And the proposed debt forgiveness was viewed by some as “free money” that added to Verso’s stock value.

Whatever the reason, share volume jumped more than 14,000% on Jan. 6 and nearly doubled again the next day.

Is Verso stock a good investment? It's still more like a lotto ticket than an investment. If the deal doesn’t go through, bankruptcy seems likely. And even if the marriage is consummated, NewVerso could end up like the old Verso – too saddled with debt to have much value when demand for its products is in long-term decline. Then again, if NewVerso emerges as even a moderately healthy company, the Verso stock could see huge gains.

Would NewVerso be a successful company? The precedents are mixed. The widely cited model is the North American uncoated freesheet market, where consolidation has yielded two giants that can keep prices stable in the face of declining demand by judiciously reducing their output. But there’s also the case of Abitibi and Bowater, the two largest makers of newsprint in North America when they combined in 2007. High debt and rapidly declining demand pushed them into bankruptcy reorganization only 18 months later.

Related articles:

• NewPage-Verso Merger Unlikely, 2 Experts Say 
• Verso Changes Course -- Why? 
• Are NewPage and Verso Headed to the Altar? 
• How About a NewPage-Quad/Graphics Merger? 
• Did Verso Come To Purchase NewPage Or To Bury It? 
• NewPage, Verso Owners Reportedly Discussing a Deal

 

 

Verso Changes Course -- Why?

Only three weeks after Verso Paper’s CEO said acquiring NewPage was the key to its future, Verso announced it no longer wants to buy its rival. Why the sudden change of heart?

In a mid-August interview with The (Memphis) Commercial Appeal, Verso CEO David J. Paterson said that the company’s key strategy is acquiring ailing companies “to get the cost reductions we can't get on our own.” NewPage, which is in Chapter 11 bankruptcy reorganization, is Verso’s only publicly announced target.

But last week Paterson issued a statement saying, “After careful analysis, we believe it is in the best interests of our company and its stakeholders to focus on the many other opportunities for Verso, including internal growth projects and other potential strategic alternatives.”

Verso's new tack is something of a mystery. Chip Dillon, a long-time forestry industry analyst, announced yesterday that his Vertical Research Partners is dropping coverage of Verso because the company’s future is so unclear. He sees “the restructuring of Verso’s debt as inevitable” but is not sure how or when that will happen.

Among the possible reasons that Verso is no longer courting (or stalking) NewPage: 

• Hard to get: Verso’s latest move may be a negotiating ploy to wrest a better deal out of NewPage. 

Seven Losers and Four Winners in the NewPage Bankruptcy

The recent bankruptcy court filings by NewPage have been blessings for some and curses for others. Here's a look at the scorecard two weeks after the big U.S. paper company went Chapter 11:

LOSERS
Loser #1) Port Hawkesbury employees: NewPage has basically deep-sixed its money-losing Canadian mill, walking away from severance obligations and an underfunded pension plan, not using any of its debtor-in-possession funds to keep the mill running, and leaving many suppliers holding the bag. NewPage has put the mill up for sale but also revealed that it loses $4 million per month on the operation. Unless the muscle-bound Canadian dollar suddenly goes into the tank, a new owner won’t be able to make a go of the mill unless it can avoid NewPage’s pension obligations, reduce labor costs, and perhaps keep part of the operation (two paper machines and a pulp mill) idle.

Loser #2) Nova Scotia: It’s not just the mill’s employees who are suffering; the whole province seems to be getting sucked into the Port Hawkesbury vortex. The provincial government is shelling out $15 million to prop up logging operations that are getting stiffed by NewPage, the power company (owed nearly $10 million) says the loss of such a big customer will force it to raise rates for everyone else, and rail service to part of the province may no longer be viable.

Loser #3) Paper buyers: Spot deals for supercalendered paper disappeared almost overnight when the Port Hawkesbury closure was announced. Contract prices for SCA and the closely linked lightweight coated (LWC) papers are also rising despite declining demand.

Loser #4) Bondholders: Owners of the junkiest of NewPage bonds will probably receive nothing, and even owners of more senior bonds who expected to come out OK might have to accept some equity in a restructured NewPage in lieu of cash.

Loser #5) Suppliers: At least 25 suppliers of such items as chemicals, energy, and timber to the American arm of NewPage got stuck holding more than $1 million each in accounts receivable when the company went Chapter 11. Their prospects are better than those that supplied Port Hawkesbury, but most are unlikely to receive full compensation.

Loser #6) Cerberus: The folks who brought us the Chrysler and GMAC bankruptcies can now add another turkey to their resumes. The Chapter 11 filing wipes out the big hedge fund's stake in NewPage.Cerberus now seems to be moving more toward simply investing in companies rather than trying to buy and run them.

Loser #7) StoraEnso: With NewPage defaulting on the lease of one of its Port Hawkesbury paper machines, StoraEnso is taking a $180 million hit because it is the guarantor of the lease. Stora had already written off its 19.9% equity stake in NewPage, which was a holdover from the sale of Stora's North American assets to NewPage.

WINNERS 
Winner #1) Duluth employees: All of NewPage’s U.S. mills will probably continue running as long as the company is in bankruptcy court. (After three years of writing about ink-on-paper industries, I've seen this movie before. Can you say Tribune, Source Interlink, Quebecor World, AbitibiBowater, White Birch, etc.?) But the future looks especially bright for Duluth, the only NewPage mill besides Port Hawkesbury that can make supercalendered paper.

Winner #2) UPM: The Port Hawkesbury shutdown makes UPM’s recent purchase of the Madison, Maine mill look like a winner because of higher prices and a tight market for SCA paper. Although NewPage’s travails may cause investors to get jittery about other highly leveraged paper companies (which may be why Verso's stock price is down a bit), Finnish giant UPM seems to have the size, strength, and diversification to ride out the storm and to profit from NewPage's weakness.

Winner #3) The Katahdin region of Maine: Ever since the one-machine Millinocket, Maine supercalendered mill closed three years ago, there have been various attempts to reopen it that eventually petered out. But the latest investment plan already seemed to have legs before getting a shot in the arm from Port Hawkesbury's demise. Like Port Hawkesbury, Millinocket has one of the few machines capable of making an SCA for offset printing that rivals the quality and printability of more expensive coated groundwood papers.

Winner #4) Lawyers: Because NewPage filed for Chapter 11 without a “prepackaged” restructuring plan, a passel of lawyers will be kept busy for months sorting through the claims and interests of various creditors. Remember, the first rule of bankruptcy law is that, regardless of who else gets stiffed, the lawyers always get paid.

Related articles:

• NewPage Files Chapter 11, Seeks Buyer for Canadian Mill   
• NewPage Inc. 5000 Ranking Seems Like a Cruel Joke
• A 'Salmon Week' For North American Papermakers: Note the reference to Chapter 11 in this nearly two-year-old article
• List of NewPage Port Hawkesbury’s creditors: The latest NewPage article at ForestTalk, a Canadian site that is thoroughly documenting the Port Hawkesbury saga.

Voulez-Vous Debark Avec Moi? Former Paper Mill About To Become High-Tech Cool

In an unusual example of the Internet replacing paper, some high-tech types are about to discover how cool, and maybe even sexy, a paper mill can be.

The giant paper company UPM is a partner in a deal to turn its former Kajaani, Finland paper mill into “one of the world’s most eco-efficient server centres” for supercomputers and data storage.

Like many old paper mills, Kajaani has hydroelectric dams, which the data center will use to meet its ravenous electricity appetite in an environmentally friendly fashion.

The adjacent river will be tapped for “system cooling water,” reducing reliance on fossil-fuel-burning air conditioning systems. (Technical note: When water is used to make paper and then returned to the river as clean as it came into the mill, the result is called “waste water”. When a data center uses that same river and the outflow back to the river is hot enough to boil fish, that’s called “carbon-neutral cooling”.)

The new tenant, the IT Center for Science Ltd., might find some of the leftover equipment at the mill intriguing, especially if it’s one of those trendy, bring-your-dog-with-you workplaces. But it will soon find out that the debarker is for logs, not yappy poodles. And the web inspection system has nothing to do with the Internet.

But there’s always the couch (pronounced “koosh” or “kootch”), the sexiest place in a paper mill. That’s where water is drained from the pulp slurry, and it’s the base of the French verb coucher, as in the infamous line, “Voulez-vous coucher avec mois, ce soir?”

It’s hard to get an exact English translation of that steamy phrase, but I've used my rudimentary knowledge of French and paper making to come up with three attempts:

1. “Would you like to help me with my wet-end chemistry tonight?”
2. “How’s about dewatering some sheets with me on the third shift?
3. “How about meeting me near the headbox this evening to work on improving formation?

I should also mention that a couch roll sucks water out of the pulp. (Don’t go there.)

I know what some of you are thinking: When Patti LaBelle sang the line – and when e.e. cummings, John Dos Passos, and Tennessee Williams used it in their writing – they were all referring to prostitution, not paper making.

Listen, if you’ve ever been to some God-forsaken subarctic mill town during February, you’d know that the area near a paper machine’s press section is the only place warm enough to “gitcha, gitcha ya ya”.

Other, somewhat lighthearted articles about the forest products industry include:

• A 'Salmon Week' For North American Papermakers 
• Farewell to the 'Commie' Conquistadors: Tables Turned on Finnish Papermakers 
• Condoms to the Rescue, and 5 Other Novel Ideas for Saving the Forests  

A 'Salmon Week' For North American Papermakers

Pity the Pacific salmon: It expends all its energy swimming upstream, then gets screwed and dies.

Several North American papermakers know the feeling, as evidenced by several events this past week:

• Rick Willett announced his resignation as CEO of the continent’s largest maker of magazine paper, NewPage, saying, “After considerable personal reflection on my longer term career interests, I have made the difficult decision to leave NewPage to pursue opportunities in other industries." My guesses as to what he might have left unsaid:

1. “Other industries – yeah, like ones where you can actually make a profit.”
2. “When the (black) liquor runs out, it’s time to leave the party.”
3.  “Angry customers, lots of half-idle machines, and a mountain of high-interest debt: My work here is done!”
4.  “It’s time to move on to another chapter in my career, and I don’t want it to be Chapter 11.”

• AbitibiBowater had to idle its Fort Frances pulp and paper mill because cold weather caused the effluent-treatment system to fail. You mean it gets cold in Ontario?
  
  
• Nearly 400,000 gallons of black liquor stored at Tembec’s closed pulp mill in Marathon, Ontario keeps leaking before it can be transfered to, of all places, the Fort Frances mill. Some has apparently made it into Lake Superior. Silly Canadians! Why can’t they act like Americans and get big tax breaks for their pulp byproducts?
  
  
• Speaking of Tembec, the owner of its former mill in St. Francisville, LA, filed for Chapter 11 only 5 months after restarting the shuttered operation to make paperboard and paper bags. Question for the investors in Renew Paper: Tembec concluded 3 years ago that the mill was a dog. Did you bother to check it for fleas before you sinking millions into buying and fixing it up?
  
  
• Catalyst Paper had a bad-news hat trick this week – a bankruptcy-court lawsuit asking it to return millions of dollars paid to it by Quebecor World, closure of its recycled-pulp operation in British Columbia, and permanent idling of its BC newsprint and directory mill. The Quebecor World bankruptcy trustee is also seeking another $18.5 million from UPM and smaller amounts from more than a thousand other vendors.
  
  
• And for those counting on a rebound in magazine advertising to lift the paper business, consider this: The latest issue of Newsweek, which is placing a multimillion-dollar bet on upgraded paper, is only 52 pages, including the cover story by President Obama. Chief rival Time has only 56.

Related articles:

• Newsweek Spending Millions in Paper Money: The newsmagazine's new design includes an expensive bet on heavier paper of higher quality.
• No Quick Exit For AbitibiBowater: The Canadian giant is likely to remain in Chapter 11 until at least late this year.
• "Black Liquor" Credits Are Helping Paper Buyers: The government subsidy was a two-edged sword for NewPage, giving it much-needed cash but driving down paper prices so much that it had to renegotiate its debt.

Farewell to the 'Commie' Conquistadors: Tables Turned on Finnish Papermakers

A decade ago, a prominent U.S. paper executive used to refer to Finns as "communists" -- until a Finnish company bought his firm.

Now it's the Finns' turn to complain about America's paper industry, weak currency, and government subsidies.

"The forest industry countries that charge in dollars or have tied their currency to the greenback . . . have a decided competitive advantage," the Helsingin Sanomat wrote in a recap of the Finnish forest industry's past decade. "Exports to the USA have turned unprofitable."

Sounding like an old-school American papermaker, the Finnish newspaper says that currency devaluation used to be Finnish industry's "classic trump card" before the euro and that overseas markets were where "the excess tons were dumped" to protect European price levels. The trouble began when Finnish companies decided to buy North American mills even though they were "in poor-to-appalling shape" and had been "patched up with metal wire and duct tape."

"In 2000, the Finnish forest lords strode like conquistadors of old into North America," states a companion article in the Helsinki newspaper. Like Spain and Portugal of old negotiating a line of demarcation, executives from UPM and StoraEnso even held discussions in 2002 about which company should exercise leadership in the U.S. market for coated papers. But both have largely abandoned their attempts to colonize North America.

UPM closed its Miramichi, New Brunswick operations after seven unprofitable years and is down to two operating machines at the four-machine Blandin, MN mill. StoraEnso sold its North American assets to NewPage at far below their original purchase price, then wrote down its remaining investment in NewPage last year as the American company was on the brink of insolvency.

Declining demand for publication papers and the euro's strengthening versus the dollar both caught Finnish executives by surprise, the newspaper notes. It doesn't mention that last year's huge subsidy of U.S. pulp mills in the form of black liquor credits put another nail in the coffin of Finland's ailing pulp operations.

"Europe has now become the dumping ground where the new forest industry countries offload their surplus," the newspaper laments.

Related articles:

• The Infamous UPM-Stora Meeting: the "market leader" discussions between the UPM executive and his Stora Enso counterpart, which were the subject of criminal and civil trials.
  
• Say Farewell to Miramichi: UPM has dismantled its former Canadian mill so that paper cannot be made there again.
  
• "Black Liquor" Credits Are Helping Paper Buyers: The government subsidy drove down paper prices but also helped keep NewPage afloat.

The Infamous UPM-Stora Meeting

Today’s history lesson, paper-market observers, regards the discussions a UPM executive and a Stora Enso executive had in 2002 about the need for market leadership in the "fragmented" North American market for publication papers.

I alluded to the meeting in yesterday's item about coated paper prices but thought it would be enlightening to provide details, especially for those of you who think private equity is the root of all evil in the paper industry. Both UPM and Stora are publicly traded.

The passage below is from a document Stora itself submitted at its criminal antitrust trial:

In January 2002, UPM promoted Markku Tynkkynen to become the President of its Magazine Paper Division. As President of the Division, Mr. Tynkkynen was responsible for magazine paper sales and operations on a global basis, including within North America. At the time of his appointment, prices for magazine paper market in the United States were the lowest they had been in years. In an effort to improve sales in the U.S., Tynkkynen restructured the Magazine Paper Division and hired Heikki Malinen as the head of sales in North America. Mr. Malinen developed a sales plan — referred to as a “go to market” approach — to increase UPM’s market share. Under that plan, UPM’s policy was to be a price follower — in other words, to follow a competitor’s price increase announcements — rather than a price leader.

In the late summer of 2002, Mr. Tynkkynen contacted SENA’s President Kai Korhonen while Mr. Korhonen was in Finland visiting his family and invited him to lunch at UPM’s headquarters in Helsinki. Messrs. Tynkkynen and Korhonen had known each other for more than thirty years, having begun their careers together at a mill in central Finland and owning vacation homes on the same lake. Mr. Korhonen, an engineer by training, had been serving as SENA’s President since September 2000 and his primary task was to integrate the operations of Consolidated Paper, which had been acquired by SENA’s parent company, into SENA. Mr. Tynkkynen invited Mr. Korhonen to lunch to learn about the challenges associated with operating in the United States, identify SENA’s position in the U.S. market, and to figure out if SENA had the capacity to lead a price increase in the United States. During the course of their lunch, Tynkkynen’s questions about SENA’s position in the market were answered: Korhonen told him that the U.S. market was “fragmented,” with International Paper, SENA, UPM, and MeadWestvaco being of about equal size. Korhonen indicated that SENA was not a price leader in the United States. Tynkkynen knew, however, based on SENA’s past behavior, that it would nevertheless be a price follower—that is, it would follow a competitor’s increase.

Messrs. Tynkkynen and Korhonen met again on November 6, 2002, when Mr. Tynkkynen was traveling in the United States on business. Mr. Tynkkynen was again responsible for initiating and arranging lunch—this time at the Hilton hotel, adjacent to Chicago’s O’Hare airport. At that lunch, Messrs. Tynkkynen and Korhonen discussed various logistical issues, as well as the poor state of the magazine paper market in the U.S. They both agreed that the market was very soft. Given the soft nature of the market, it was clear to Mr. Tynkkynen that the entire industry needed a price increase and, in that respect, SENA and UPM were no different. Based on that fact, and in light of Mr. Korhonen’s representation in August that SENA would not be a price leader, Tynkkynen believed that SENA would be a follower if someone else increased prices.

Ten days after he met Mr. Korhonen met for lunch in Chicago, Mr. Tynkkynen learned, on November 16, 2002, that competitor MeadWestvaco had issued a price increase announcement. He called Mr. Korhonen after UPM had internally decided to follow the increase, but before it issued the announcement publicly. Mr. Tynkkynen was unable to reach Mr. Korhonen, but left him a voicemail message notifying him of the increase and stating that UPM was going to follow. SENA, along with two other paper manufacturers — Sappi and IP — also followed MeadWestvaco’s price increase.

The next price increase occurred in February 2003, when IP announced that it was raising prices on coated, grade 5 paper. On February 10, 2003, the day that IP issued its price increase announcement, Mr. Tynkkynen had an internal meeting with Heikki Malinen, Kevin Lyden, and Hans Sohlstrom, in which they decided that UPM would issue a matching announcement. UPM began calling its customers that day to inform them of the pending price increase.

The following day, on February 11, 2003, while Mr. Tynkkynen was visiting UPM’s Blandin Mill, he received a message that Mr. Korhonen had called. Later that afternoon, Mr. Tynkkynen returned Mr. Korhonen’s call. Mr. Tynkkynen has little memory about the conversation, but to the best of his recollection, there were two topics of discussion: a union vote at UPM’s Blandin Mill and IP’s price increase. Mr. Korhonen told Mr. Tynkkynen that SENA was following the increase. Mr. Tynkkynen responded by indicating the UPM had already issued an announcement. That day, both UPM and SENA issued letters announcing the planned price increase. Norske Skog North America and Madison-Myllykoski issued similar announcements on February 12 and 13, respectively.

Stora’s argument was that, though Korhonen’s actions violated Stora’s anti-trust policy, the U.S. government could not prove there was an agreement or conspiracy to fix prices. Although the jury apparently agreed and quickly acquitted Stora, civil antitrust litigation has not been resolved.

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.

Say Farewell to Miramichi

Any hopes that the weak Canadian dollar and low energy costs would revive the Miramichi, NB coated-paper mill have been dashed. The owner, Finnish paper giant UPM, has reportedly disabled the two machines so that they can never be used again to make paper.

A UPM spokesperson has confirmed that the machines were disabled in September in prepartion for selling the mill property, the Miramichi Leader reported yesterday. A union official claims that the disabling process involved drilling three-inch holes into rolls on the machines, which were relatively large and modern by North American standards.

UPM purchased the mill in 2000 but claims it never made a profit at the mill, which had the capacity to produce 450,000 tons per year of coated groundwood. It idled the mill in the summer of 2007 and closed it permanently a few months later.

The former owner, Repap, relied almost exclusively on brokers to sell its paper, but UPM had a reputation of being anti-broker. In the months between the sale to UPM being announced and actually closing, the mill reportedly lost half its business as brokers shifted their clients to other mills.

The mill was also plagued by labor strife, high freight costs, an inability to make acceptable rotogravure paper, an inefficient pulp operation, and an unfavorable currency market (most of its paper was priced in U.S. dollars)