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

Wiping Out Debt, Or Wiping Out . . .

"Restructuring" didn't keep Verso's
Bucksport, Maine mill from closing.

North American paper companies that used to rely heavily on the magazine industry have found two ways to survive: 1) make new products, or 2) undergo “financial restructuring” (our Publishing Word of the Day).

Verso Corporation, the country’s largest maker of magazine-quality paper, announced last week that it had financially restructured away $2.4 billion in debt, reorganized, and emerged from bankruptcy protection as a publicly traded company once again.

Plus, it got an additional “$595 million in exit financing to support ongoing operations,” including “an asset-backed lending facility.”

Market value after the first official day of trading: $406 million.

Like just about every other maker of coated paper on the continent, Verso’s "ongoing operations" now include using its machines to produce more “specialty” papers -- stuff like food wrappers that aren't affected by declines in the publishing business.

(Mr. Tree called his mortgage company to report that the remaining debt on his house is likewise six or so times his net worth and that he therefore qualifies for a financial restructuring to cancel the debt. Oh, and some asset-backed exit financing to support his ongoing operations would really help him write more “specialty” articles. The mortgage company offered to send over some sheriff’s deputies to provide exit assistance by hauling Mr. Tree’s assets to the curb.)

Shacking up
Verso's re-emergence officially ends its unusual relationship with competitor NewPage. The two U.S. companies sort of shacked up instead of getting married, sharing resources but remaining somewhat separate, in a financial restructuring so convoluted that even the bondholders didn't quite seem to understand it. The courtship, drawn out for a year by a federal antitrust review, lasted longer than the non-marriage itself did.

Poor Verso. It didn’t get the memo a few years ago that the rule of the publication-papers industry had become “He who gets to bankruptcy first wins.” Financial restructuring via the bankruptcy courts has already been the salvation of several competitors, though it didn’t do much for the stockholders or creditors.

I believe I’m correct in saying that every significant North American-based manufacturer of publications papers except one has been through a bankruptcy reorganization.

The exception is Kruger, which has heavily diversified into such products as toilet paper and wines. So while its competitors were financially restructuring to avoid getting wiped out, Kruger survived by helping its customers get wiped out.


Other recent entrants in our 31-part Publishing Word of the Day series include PMS envy and sugardaddying.

When 30 Equals 33: America's Bizarre Methods of Calculating the Weight of Paper

My fellow Americans mostly seem allergic to anything having to do with the metric system. Can’t remember how many teaspoons go into a tablespoon? Is our country falling behind in science because we’re handicapping our kids with the “English” measurement system. Doesn’t matter.

 “WAM: We ain’t metric!” my countrymen kneejerk. After all, if you give those socialist, one-world-government Europeans 2.54 centimeters, they’ll take 1.60934 meters.

But when it comes to specifying the weight of paper, even some red-blooded Americans throw up their hands and say “What’s that in GSM?”

There’s never been a better time for U.S. buyers of graphic paper to understand what GSM (grams per square meter) means – and how messed up our own system of basis weights is.

Publishing Executive just published a piece I wrote noting that U.S. prices for magazine-quality paper are at record high levels in comparison with European prices. That means it’s a great time to look overseas for paper, especially since North American mills are gearing up to raise prices again in July. But to get the best deals, you might need to understand how the rest of the world talks about paper weight.

I’m reminded of a colleague’s story about buying 33# SCB paper (lower quality than coated paper but better than newsprint) from a non-U.S. mill. When the shipment arrived at a U.S. printing plant, the printer notified my colleague of an error: The rolls were marked “30#” (pronounced “30 pound”), indicating the paper was about 9% lighter and thinner than intended.

The mill’s sales office had correctly translated the order from 33# to the more universally understood 48.9 gsm. But the mill was only used to making newsprint for U.S. customers, so it thought 48.9 gsm translated to 30# in Americanese. The paper was OK; the label was just wrong.

From Catalyst Paper's "How We Make Paper"

A page of 30# newsprint, you see, weighs the same as a 33# page of magazine-quality paper (and of other publication grades that use the “book, text, offset” method of calculating basis weight).But two same-sized sheets of 48.9 gsm always weigh the same, regardless of whether one is copy paper and the other wallpaper or tissue or newsprint.

The U.S. has 11 different systems for calculating the basis weight of paper. Standard resume paper is 20# bond – generally a nice stiff, opaque sheet. It’s also more than 2½ times the weight of 20# coated paper, which is an extremely thin, translucent paper that is likely to be used in dictionaries or Bibles.

Confused? Wait, it gets worse. When magazine publishers refer to 80# cover stock, they usually mean something that, logically enough, is double the weight of the 40# coated paper they might use on their internal pages. The rest of the world would say the publisher is using 59 gsm text stock and 118 gsm cover stock.

But “80# cover” can also refer to paper that is measured based on the “cover” method of calculating basis weight rather than the “book, text, offset” method. It weighs 216 gsm. Thus, even when Americans are speaking to Americans, a request to use 80# cover stock can easily result in the pressroom printing covers that are too heavy for the saddle stitchers that are supposed to bind the publication and too expensive for the publisher's budget.

Many overseas mills are accustomed to making paper for U.S. customers, knowing, for example, that 40# coated paper should be 59.26 gsm. And if they make a lot of paper for U.S. customers on a steady basis, they might actually make a “true 40#” that is indeed targeted at 59.26 gsm.

But rather than manufacturing a special batch of paper for the U.S. market, many mills will just make 60 gsm, which is a common weight for European magazine papers that comes out to 40.5# in Americanese. That results in using more paper and having higher postage and freight costs versus true 40#. But it’s not a reason to avoid overseas paper.

For my fellow American buyers of magazine grades like coated and supercalendered papers, as well as for book papers, here’s the key formula: 0.675 gsm is equivalent to 1# of basis weight. European mills typically offer weights that are about 1.3% above the U.S. equivalents – e.g. 45 gsm (30.38#) in place of 30#, 51 gsm (34.43#) in place of 34#, or 60 gsm in place of 40#.

A good rule of thumb is that such weight differences will cost publishers about 2%, a bit more if the copies are mostly mailed, a bit less if many are sent via the newsstand system. So if I’m buying 40# coated #5 paper for 40 cents per pound, I might consider a price of 39.20 cents for 60 gsm to be competitive, but not a bargain.

And since that 60 gsm was recently selling for something like 33 cents in Europe, I know the manufacturer has plenty of incentive to be more than just competitive in the U.S. market.

A footnote about Canadian paper: Canadians have pretty much converted to the metric system, but their mills sell so much paper into the U.S. that they usually spec it to U.S. standards and practices. Thus, Canadian paper is pretty much like U.S. paper except that it occasionally throws in a random “Eh?” at the end of a sentence.

Coated Paper Shakeup Leaves Most U.S. Capacity in Foreign Hands

Coated paper was invented in the United States, but after a major industry shakeup today most of the country's ability to make coated paper is owned by foreign companies.

This morning, two momentous events occurred nearly simultaneously in the industry that makes coated paper for catalogs, magazines, inserts, and brochures:

1) NewPage, the largest North American maker of coated paper, sold its Biron, Wisconsin and Rumford, Maine mills to Catalyst Paper, which shifted about 12% of the nation's coated-paper capacity into Canadian hands.

2) The purchase of NewPage by Verso, the continent's #2 maker of coated paper, was completed a year and a day after it was first proposed. The U.S Justice Department, fearing a combined Verso-NewPage would have too large a market share, required the sale of the two NewPage mills for the takeover to be approved.

This past summer, four U.S.-owned companies -- NewPage, Verso, Appleton, and FutureMark -- operated U.S. mills able to make about 4.8 million tons per year of the glossy paper. That was 65% of the country's coated capacity. The rest was in the hands of companies based in South Africa (SAPPI), Canada (Resolute and West Linn), Finland (UPM), and New Zealand (Evergreen).

Since then, FutureMark went out of business, Verso closed its Bucksport, Maine mill, and NewPage sold the two mills to Catalyst. That leaves two U.S. companies -- Verso and Appleton -- with coated capacity of 3.4 million tons, just under half of the country's total. The new Verso, though, is by far the largest manufacturer of coated paper in the U.S., with more than double the U.S. capacity of #2 SAPPI.

On Jan. 3, 2014, the stock price of Verso, which was seemingly on the verge of bankruptcy, was only 65 cents per share. It closed today at $3.37, an increase of 418% in barely a year.

Wisconsin-based Consolidated Paper invented coated paper in 1935, revolutionizing both the paper and magazine industries. But in recent decades, the innovations have come mostly from Western Europe and the investments have been concentrated in Asia. Even the tiny Canadian industry has out-innovated the U.S. companies, with the forerunner of Catalyst pioneering an efficient process of coating and calendering paper and Kruger building the newest machine.

Related articles:

• NewPage and Verso Find a Catalyst For Their Merger  
• The Monopoly That Haunts the U.S. Paper Market: USPS
•  Untangling the Verso-NewPage Deal

NewPage and Verso Find a Catalyst For Their Merger

Update: The Justice Department announced on Dec. 31 that the Catalyst deal will satisfy its antitrust concerns about the Verso-NewPage deal. Both the Catalyst deal and the Verso-NewPage deal were completed on Jan. 7, 2015.

Today's announcement that Catalyst Paper will buy two NewPage coated-paper mills apparently means that the merger of NewPage and Verso Paper will move forward.

Catalyst revealed that it will purchase NewPage's Rumford, Maine and Biron, Wisconsin mills for $74 million -- more than quintupling the Canadian company's capacity for making coated paper. One condition of the sale is that Verso-NewPage deal be consummated.

That merger has been delayed by federal antitrust officials, who were apparently concerned that, by owning half of North America's capacity to make coated paper, a combined Verso-NewPage would have too much market power and be able to drive up prices. NewPage's sale of the two mills, coupled with Verso's decision to close its Bucksport, Maine mill, were presumably a condition of gaining the U.S. Justice Department's approval for the merger.

Catalyst would only pay about $85 per ton of capacity to make paper that typically sells for at least $850 per ton. That looks like a fire-sale price, except that the continent's demand for coated paper is half of what it was barely a decade ago. And except that we've seen this movie before, and the ending wasn't pretty.

Justice allowed the 2007 merger of newsprint giants Abitibi and Bowater to go forward only after Abitibi unloaded one of its gems, a 100%-recycled mill in Snowflake, Arizona, to Catalyst for a bargain price. But a few years later, Snowflake hit a perfect storm -- Chinese buyers driving up the price of West Coast recycled paper, black liquor tax credits subsidizing competitors using virgin pulp, and the collapse of the U.S. newspaper industry -- and was shut down.

Both AbitibiBowater (now called Resolute Forest Products) and Catalyst ended up going through bankruptcy reorganization and emerged as smaller but healthier companies.

Catalyst makes mostly newsprint and uncoated papers in western Canada, but does have a single machine making coated groundwood paper.With the purchase announced today, Catalyst would pick up four machines that make coated freesheet as well as coated groundwood paper, plus some market-pulp capacity.

Related articles:

• Verso-NewPage Deal Will Face Antitrust Hurdles, Analyst Predicts 
• Odd Verso-NewPage Structure Eyed Warily by Wall Street 
• Another Recycled Newsprint Mill Is on the Ropes

The Monopoly That Haunts the U.S. Paper Market: USPS

When it comes to protecting buyers of coated paper from price-gouging, monopolistic suppliers, the federal government has its eye on the wrong targets, an industry analyst says.

The U.S. Department of Justice seems likely to force NewPage and/or Verso Paper to divest at least one paper mill, Verle Sutton wrote this week in his subscription newsletter The Reel Time Report. DOJ is concerned that combining North America’s two largest makers of coated paper would give the new company the power to drive up prices.

History says otherwise, Sutton wrote: “Publication paper prices have been nearly flat (cyclically) for more than thirty years,” he wrote.

“On the other hand, out-of-control postage costs have been an almost insurmountable problem for print advertising customers and, in fact, have led to many bankruptcies, catalog/magazine closures, and paper demand losses to electronic competition,” Sutton added.

Antitrust irony
“Postage costs have escalated sharply for decades, but particularly in the last decade. It is ironic that one government agency (the DOJ) is chartered to make sure there is no possibility of 'unilateral reductions' or 'coordinated effects' in the coated paper business, when the vastly more serious cost problem for print customers is an incredibly inefficient government-sponsored monopoly.”

The bulk of coated paper purchased in the U.S. ends up in the U.S. Postal System in the form of catalogs, magazines, direct-mail pieces, etc. But Sutton is only half right: Yes, rising postage rates are suppressing demand for such items.

But what really hurts is that customers are making strategic decisions knowing that USPS’s future is in the hands of a deadlocked Congress for which "postal-reform legislation" means trying to repeal the laws of supply and demand.

Related articles:

• Verso-NewPage Deal Will Face Antitrust Hurdles, Analyst Predicts 
• UPS Praises Postal Service’s Improvements, But Not Its Rate Hike 
• Affordable Postage A Key To Printing Industry’s Future, Quadracci Says

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

 

What's the Future for the Paper Industry? Depends

The paper market's long-term decline has now spread to the fictional Dunder Mifflin Paper Company: "The Office" had the worst premiere in its nine-year history last night.

The episode had the show's second-lowest audience ever, attracting "just 4.32 million viewers, down 46 percent among 18–49-year-olds from its premiere last year," reports Vulture.com. In other words, the once-hot comedy centered around a dysfunctional paper company (Aren't they all dysfunctional?) is dropping as fast as newsprint demand.

It's not just newsprint that's shaky. A deal to restart the NewPage supercalendered machine in Port Hawkesbury, Nova Scotia fell through today (Sept. 22 update: and then was resurrected); its shaky status means that North America's only world-class, magazine-quality paper machine is in danger of being shipped to another continent or scrapped. And North America's second-largest player in the magazine category (Verso Paper) is at a competitive disadvantage not because it may be on the verge of bankruptcy reorganization but because several competitors have already been through or are in the Chapter 11 debt-cleansing process.

Declining demand means fewer paper machines are needed, but fortunately some of the idled machines are being put to good use. Several that once made copy paper have been converted recently to producing fluff pulp, the main ingredient in diapers.

Here's how to understand the trends: The bad news for pulp and paper companies is that Baby Boomers are reaching senior-citizen status, leaving fewer dinosaurs in the workplace who still print out their emails to read them. The good news is that the aging of the Baby Boom means more people on the continent are incontinent, which is boosting demand for hygiene products that rely on fluff pulp.

Related articles:

• Under Siege: The Outlook for Print Media Is Even Worse Than We Thought, Expert Says -- But Publishers May Prosper  
• A Glimmer of Hope for the Port Hawkesbury Mill  
• Verso Changes Course -- Why?

Why Mills Can't Keep the Coated Paper Market in Balance

There’s a simple way for North American mills to prevent the prices of coated paper from collapsing next year, the “Paper Guru” pointed out recently. Simple, but it won't work.

Responding to last week’s Dead Tree Edition article about the possibility of declining prices, Jack Miller, Printing Impressions’ Paper Guru, wrote, “Uncoated freesheet producers have reduced capacity, balanced supply and demand, and maintained prices.”

“With U.S. coated mills still under cost pressures from pulp and chemicals, and with margins where they are,” he suggested, the coated mills might take out capacity to keep the market in balance. But what works for uncoated freesheet will be hard to apply to coated paper.

The North American uncoated freesheet market is dominated by two big players, International Paper and Domtar, that are financially strong and have low-cost mills. That puts them in a position to idle machines or shut down mills if necessary to keep the market in balance.

But leadership of North America’s coated-paper market has one foot in the grave and the other on a banana peel. The #1 maker is NewPage, which is under Chapter 11 bankruptcy protection, making it nearly impossible to shut down a machine or mill in the short run. Besides, NewPage claims it has already mothballed all its high-cost machines.

The #2 manufacturer is Verso, a highly leveraged firm with a debt-to-equity ratio of about 18:1. Like NewPage, it’s not in much of a position to idle machines that could be generating cash.

SAPPI is the only other manufacturer with significant market share, but it produces coated freesheet almost exclusively. Coated groundwood (AKA coated mechanical) is where the big trouble lurks.

The bottom line is that no company with the financial strength to reduce capacity has enough North American market share to make much of a difference in the supply-demand balance. That’s why industry analyst Verle Sutton recently predicted that coated prices will decrease next year until losses force some companies to idle their machines.

Why Coated Paper Prices Look Ready for a Fall

North American prices for coated paper will decline and more paper machines will be idled next year, according to a leading industry analyst.

Even supercalendered paper, currently in short supply, could see declining prices by the middle of 2012, Reel Time Report editor Verle Sutton said in a webinar recorded a few days ago. The webinar, "Price & demand outlook 2012 for newsprint, publication papers", is still available for download from Industry Intelligence.

Sutton’s forecast runs counter to the brave talk coming out of the mills and the more bullish analysis from rival forecaster RISI. He noted that his and RISI’s 2012 price forecasts are as much as $120-per-ton apart. Sutton, always the iconoclast and often spot-on with his predictions, pooh-poohed claims that rising costs for pulp and other items will prevent prices from declining.

“Coated pricing will decline until capacity is removed. By the end of 2012, it is estimated that about 400,000 to 600,000 tons must be shut down [in North America] in order to balance supply and demand,” Sutton said.

Sutton based his prediction partly on the recent surprising weakening in demand during what should be the busiest buying season.

"Since 2000, even those of us who have been relatively pessimistic on the impact of electronic communications on demand have generally underestimated the true impact of the electronic revolution on paper demand. That occurred again in 2011 in a big way."

Sutton also provided insightful commentary on the newsprint market, why prospects for the idled Port Hawkesbury mill are suddenly looking up, the outlook for European exports to North America, and whether North American mills will use coated machines to make supercalendered paper next year. But as someone who respects copyrights (especially since my day job is in publishing), I won’t reveal any more details about the Sutton webinar.

Among the many previous Dead Tree Edition articles that cited Sutton or his Reel Time Edition newsletter are:

• Did Black Liquor Credits Pave the Way for Healthcare Legislation?:  Sutton showed why even a climate-change-denying conservative could hate that piece of corporate welfare known as the black liquor tax credits. He wrote extensively and entertainingly about the issue in his now-idle blog, including this gem. 
• There's Little Clarity About Some SCA Papers: The newsletter delved into the murky world of mills making coated paper but calling it supercalendered. 
• NewPage-Verso Merger Unlikely, 2 Experts Say

Increase in U.S. Coated Paper Prices Surprised Most Observers

The size of the recent run-up in coated paper prices seems to have surprised most industry participants and observers.

RISI, the paper industry's leading market analyst, will report in a few days that the July market price of 40# coated #5 paper in the U.S. was $805 per ton, an increase of $70 since March, Dead Tree Edition has learned. In a March online poll, only 21% of Dead Tree Edition readers predicted that the index would increase $65 or more by July.

Despite its reputation for having a bulish bias, even RISI's forecasts turned out to be too low. In March, it was predicting that the 3rd Quarter price for 40# would be only $765.

The other major analyst of U.S. paper-market pricing, Forestweb's The Reel Time Report, reports an even larger increase in coated paper prices since March -- more than $100 versus the $60-$70 range for RISI indices. That monthly report had warned about the possibility of sustained price increases this year, but it turned somewhat bearish in March after NewPage restarted two idle machines.

Slight recoveries in catalog mailings and publication advertising, along with the idling of a Kruger mill and rising prices for kraft pulp, have at least temporarily solved the capacity overhang that was driving prices down. Buyers trying to load up before the next price increase have helped to create an especially tight market during the usually busy summer season.

But inventory adjustments can't sustain a bull market for long. Before they get too confident, sellers of coated paper in the U.S. should find out how many of their catalog and magazine customers are spooked by the U.S. Postal Service's attempt to get "exigent" rate increases and are therefore redoubling efforts to shift more to digital media.

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.

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! 

Verso Joins in on Price Increase, Adds Supercalendered

Verso Paper told its customers today it was going along with the April 1 price increase on coated paper announced last week by NewPage and applying it to supercalendered papers as well.

The announcement from Verso, North America's #2 maker of coated paper, says the price for all coated freesheet, coated groundwood, and supercalendered grades will increase by $30 per ton ($1.50 per cwt.) Friday's announcement from NewPage, the market leader, did not mention SC papers.

Unprecedented increases in the price of market pulp (see BusinessWeek's excellent coverage) have paved the way for CFS prices to rise despite overcapacity. The idling of the St. Mary's supercalendered mill in Ontario, the Finnish port strike, and the Canadian loonie's move toward parity with the U.S. dollar may help firm up the SC market, which should not be affected much by the kraft-pulp shortage.

My guess is that CGW prices will move up slower than CFS or SC because producers seem especially reluctant to shut down machines in the face of declining demand. Judging by early results on the poll I posted Friday (in the right column, just under the first ad), there is no consensus in the marketplace yet about where CGW prices are headed.

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

Just when the wheels had fallen off the attempt to raise North American coated-groundwood prices, the wagon started rolling again today.

NewPage announced a $30-per-ton increase on coated-groundwood (CGW) and coated-freesheet (CFS) prices to take effect on Monday. The pricing for most contract customers cannot be changed until April 1, and many have locked in prices through June 30.

Today's announcement came only a couple of days after AbitibiBowater started spreading the word that it was “postponing” its Feb. 25 attempt to raise CGW prices by $60 per ton on April 1. Kruger, which seemed to be the only other mill that jumped on that bandwagon, has also reportedly backed down in recent days.

The North American coated-paper market still suffers from overcapacity that has kept prices low. But thanks to an earthquake, floods, a strike, and a government ruling, an argument can be made for jacking up CFS prices.

Last month’s Chilean earthquake, wet weather in the U.S. South, and other factors have caused prices for kraft pulp -– the main ingredient in CFS -– to skyrocket. Don’t be surprised to see shutdowns soon at CFS mills that rely on purchased pulp. And even integrated mills may be tempted to idle their paper machines so that they can sell their now-valuable pulp to a hungry market.

An anti-dumping decision in the U.S. and a similar case in Europe have also cooled Asian producers on selling low-priced coated sheets in the U.S.

The case is weaker for CGW, a market in which prices had drifted lower early this after seeming to stabilize in the fall. Most CGW products use relatively little, if any, kraft pulp, and Asian producers have not been a factor in North America.

A few years ago, a strike in Finland would have sent U.S. CGW buyers into a panic. But the weak dollar had already chased the Finns away, limiting the impact in North America of a port strike that is strangling the Finnish paper industry.

My guess is that CGW prices will start moving up only after CFS does and only after more CGW capacity is idled.

What’s your bet? On the right you’ll see a chance to vote on where you think the RISI index for 40# coated #5 (at $735 in February) will be on July 1. Warning: I tried a similar crowdsourcing exercise on CGW prices a year ago, and hardly anyone correctly predicted the market crash that came shortly afterward.

Related Articles:

• Coated Paper Prices: Can They Get Uglier? Results of last year's poll on CGW prices.
• A Price Increase on Coated Paper? What is Abitibi Smoking? AbitibiBowater's announcement of CGW price increases last month was based on desperation, not market reality.

A Price Increase on Coated Paper? What is Abitibi Smoking?

AbitibiBowater stunned its customers today by announcing a huge price increase for coated paper – a move that is already DOA, thanks to Abitibi’s competitors.

The announcement says simply that prices for all coated groundwood papers, from standard #5 to high-brightness #4, will increase by $60/ton ($3/cwt.) on April 1.

A couple of months ago, low inventories and an economic recovery caused mills and prognosticators to talk about a possible increase in coated prices this spring. Manufacturers predicted that the expiration of black-liquor subsidies would cause paper machines (usually, someone else’s paper machines) to be shuttered. Some coated mills were unseasonably busy early this year as customers restocked their depleted inventories in advance of price increases.

But machine shutdowns never happened, the shaky economic recovery has mostly bypassed print advertising so far, and spot prices started drifting lower rather than higher.

Hopes for a price hike any time soon were pretty well dashed in the past week as word got out that the largest coated supplier, NewPage, had restarted two mothballed machines. So much for a tight market.

Then #2 Verso bragged to stock analysts yesterday that it “enjoys a distinct manufacturing cost advantage vs. its competition” in its “key product areas” – ultralightweight coated #5 (ULWC) and coated freesheet #3. Verso's presentation included a chart that shows it having a $567 cost per ton to make ULWC, versus a $634 average for the competition.

Between the two of them, NewPage and Verso have a bit more than a 50% share of both the coated-groundwood and coated-freesheet markets in North America. A significant price increase can’t get rolling without a significant push, and perhaps a loss of market share, by one of these leaders.

Verso executives told the analysts they would continue to “take market related downtime to match demand with supply” and to develop new products rather than dropping prices to keep their machines full. But with its apparent low-cost position, Verso seems unlikely to shut down capacity in hopes of driving up market prices.

And NewPage, which single-handledly propped up the coated market a couple of years ago by shutting down high-cost machines and mills, is clearly no longer up to the task of providing such market leadership. It lost $308 million last year despite receiving $304 million in black-liquor subsidies, which it won’t enjoy this year.

Restarting the two machines seems to be a sign of desperation for NewPage, paper-market analyst Verle Sutton pointed out this week. The heavily indebted company may be “running for cash” so that it doesn’t end up joining AbitibiBowater in Chapter 11 bankruptcy reorganization.

And what about coated freesheet? Next week’s decision on the anti-dumping case against some Chinese and Indonesian mills might boost the North American market. (The European Union launched a similar probe last week. Two of the the complainants -- Arjo Wiggins, known as Appleton Coated in the U.S., and SAPPI -- are also involved in the U.S. case.)

But Verso claims an average cost advantage of $61 per ton for coated freesheet, including a whopping $284-per-ton advantage against two competitors. It will be in no hurry to shut down profitable machines. And struggling NewPage has a huge 40% share of the North American coated-freesheet market.

For further reading:

• "Black Liquor" Credits Are Helping Paper Buyers: NewPage claims that buyers, not paper mills, got most of the benefit from the multibillion-dollar black liquor credits in the form of lower paper prices.
• NewPage Turning Over a New Page: No More Shutdowns: The market leader has closed all of its high-cost machines in response to declining demand.
• Coated Paper Market: Been Down So Long This Looks Like Up: After crashing earlier in the year, prices for coated paper finally seemed to stabilize a few months ago.

Coated Paper Market: Been Down So Long This Looks Like Up

North American coated paper mills were generally busier in September than August, but that ain’t saying much.

Despite various announcements of price increases on coated freesheet and high-brightness coated groundwood papers, the unanimous word from the trenches is that no prices are moving up except perhaps for some really low-ball spot business.

The best that can be said is that the market seems to have stablized this fall after months of plummeting prices. North American shipments of coated paper were up in September versus the previous month – 8% for coated freesheet and 5% for coated groundwood, according to the Pulp and Paper Products Council. But compared with September 2008, shipments declined 15% and 8%, respectively.

Actual consumption of coated papers in the U.S., was even less favorable, according to data from printers compiled by Idealliance. September consumption of coated was down more than 5% versus the previous month. Usage of coated freesheet was down a whopping 32% versus September 2008, while coated groundwood dropped “only” 23%.

Consumption of uncoated groundwood held its own versus August and was actually up versus the same month last year for the fifth month in a row, according to Idealliance.

To keep their coated machines busy amidst the declining demand for coated papers, several companies have recently begun making supercalendered and other uncoated-groundwood papers on machines that have coaters. (See, for example, The Rush to Make Uncoated Paper on Coated Machines and There's Little Clarity About Some SCA Papers.)

The new supply continues to place pressure on uncoated-groundwood prices, which seem to be continuing a downward drift.

Though coated-freesheet prices are at their lowest in more than two years, there was speculation a few months ago that they could crash even more. The black-liquor credits subsidizing U.S. kraft-pulp mills to the tune of about $200 per ton threatened to make freesheet papers a virtual byproduct of the kraft process, with the resulting glut continuing to drive paper prices until the credits expire at the end of this year. (See "Black Liquor" Credits Are Helping Paper Buyers.)

But the surprising recent strength of global pulp markets, which by some accounts are experiencing their strongest rebound in history, has provided an outlet for all that subsidized U.S. pulp. And the weakening U.S. dollar has discouraged imports of paper into the U.S. from overseas.

Coated prices seem unlikely to move much for the remainder of the year. And what about next year?

Some paper-company executives claim that prices “must” go up because the black-liquor credits that have kept them solvent will disappear.

But a need for higher prices does not translate into higher prices. (Exhibit A: rates for magazine advertising). And bankruptcy reorganizations of major players don’t necessarily stabilize prices (Exhibit B: the newsprint market this year). Prices won't move up significantly until demand recovers significantly, which seems unlikely in 2010, or more machines are closed.

There's Little Clarity About Some SCA Papers

Is it coated or is it supercalendered? Only the paper mill knows for sure.

We keep getting reports of SCA papers being made on coated machines, along with suspicions that the papers are actually coated rather than supercalendered.

Reel Time Report surfaced the issue earlier this month by reporting claims that Verso’s new Clarity SCA+, which is being made on a lightweight-coated (LWC) machine, was actually a coated sheet.

“Producing an SC-A+ grade is not an easy thing to do. It seems nearly impossible on a machine designed to produce coated groundwood,” said the newsletter, which is available by subscription from Forestweb by contacting publisher@forestweb.com. “The more logical path, from a production-cost perspective, is to simply produce coated groundwood and label it SC-A — maybe bleach the grade a little less, perhaps change the coating formulation some — but the fewer changes the better. That seems to be what Verso is doing.”

My sources tell me that Verso insists it is using proprietary technology to make SCA+ and SCA on a coated-paper machine, but at least one competitor insists that the SCA+ is actually coated. Some sources agree with Reel Time Report in questioning whether SCA+ and LWC can be made on the same machine, but one source notes that the Clarity line has the crackly sound of a supercalendered paper.

Verso has muddied the waters by making SCA on both the LWC machine and the supercalendered machines at the same mill in Sartell, MN. Both are called Clarity SCA, but the specs are different depending upon the machine. Between those differences and tweaks to the new product, printers are having fits trying to evaluate runnability and ink consumption on Clarity SCA, which many customers are eager to use because of its aggressive pricing, sources say.

Sources also tell me that AbitibiBowater has shifted some production of SCA from idled Canadian mills to its coated mill in Catawba, SC. That makes sense given the mill’s low-cost position, the strength of the Canadian dollar, and the black-liquor subsidy of American-made kraft pulp. But again it raises questions about whether the paper is really an SCA or just lightly coated.

We’re also getting reports of an SC sheet coming out of Myllykoski’s Alsip, IL, which only has a coated machine. That may stem from confusion with Myllykoski’s SC mills in the U.S. and Europe. But Myllykoski has been more reluctant than most competitors to take downtime at Alsip during this weak market, so perhaps that mill is producing some grades that are not on the official list of its products.

Catalyst Paper has also toyed with making a paper for the SCA market on its Port Alberni, BC LWC machine but has clearly told customers that the paper is coated. Sources indicate the future of that product is uncertain.

Some people would argue that none of this matters, that the issue is not how the paper is made but rather how it performs. Don’t tell that to the printers. Even the best SCA+ papers consume more ink than LWC and need different tension settings on the web. Because clay and other materials that provide gloss are embedded in the sheet rather than on the surface, as with coated paper, SC papers tend to have less surface strength and are therefore less tolerant of high-tack inks.

What is clear is that North American paper mills are battling overcapacity by using their coated paper machines to make an increasingly wide variety of uncoated papers.

See also The Rush to Make Uncoated Paper on Coated Machines.

Subsidized U.S. Mills Fight Back Against Subsidized, Cross-Dressing Coated Papers

Two paper companies benefiting from multimillion-dollar U.S. government subsidies went on the attack today against subsidized coated paper from China and Indonesia.

NewPage and SAPPI, along with Appleton Coated, announced that they have filed "antidumping and countervailing duty petitions" covering imports of paper for sheetfed presses "having a GE brightness of at least 80."

"Under the antidumping and countervailing duty statutes, the International Trade Commission is expected to make a preliminary injury determination in November 2009 and the Department of Commerce is expected to issue preliminary determinations in the countervailing duty and antidumping duty cases in December 2009 and March 2010, respectively," the statement says. It says that relevant imports of coated paper increased 40% in the first half of 2009 versus the first half of the previous year even though shipments by U.S. mills declined about 38%.

NewPage led a previously successful antidumping effort against coated-freesheet paper coming from Asia, but some Chinese and Indonesian mills have skirted the resulting tariffs by including enough mechanical pulp in their papers to have them classified as coated groundwood rather than coated freesheet. The more generic "GE brightness of at least 80" is obviously intended to close the loophole for such coated-groundwood papers cross-dressing as coated freesheet.

Through the second quarter, NewPage had received $120 million and SAPPI $37 million this year in "black-liquor" tax credits from the federal government. The amounts are likely to double before the program expires at the end of this year. The credits are a sort of accidental subsidy of kraft pulp, the main ingredient in high-brightness coated papers. Appleton Coated is apparently not eligible for the credits.

To be fair, the black-liquor program is temporary, while the Indonesian and Chinese competitors are allegedly receiving more permanent government help in a variety of ways -- tax subsidies, input subsidies, cheap timber, loans, grants, etc.

The statement makes several references to environmental practices, sustainability, and the like. But it makes no direct mention of Indonesia being the international poster child for rape-and-pillage forestry or of the questionable environmental practices of some Chinese paper mills.

Coated Paper Prices: The Dead Cat Bounces

Verso Paper announced a price increase for its coated-freesheet papers yesterday, the first sign of life in the U.S. coated market after 10 dismal months.

(Update: A day after Verso's announcement, NewPage started spreading word of a similar attempt to raise prices on coated freesheet along with a $1 hike on Escanaba, its high-end coated-groundwood product.)

In a letter to customers, Verso said it was increasing prices on its Influence and Velocity grades by $2/cwt. ($40 per ton) "effective with orders entered September 15, 2009 and all orders shipping on or after October 1, 2009." The letter does not mention Verso's coated-groundwood or supercalendered products, which presumably indicates the company didn't think announcing price hikes for those products would be credible.

Not that getting higher prices for coated freesheet will be easy. Even if the economy is getting up off the mat, there's still too much overcapacity in coated paper. And the black-liquor credits, not scheduled to expire until the end of this year, give U.S. mills an added incentive to keep their CFS machines running by chasing low-priced sales rather than to be disciplined and take down time.

In Verso's favor are a weak U.S. dollar that is discouraging imports and a strengthening pulp market that provides an outlet for some of the pulp that subsidized U.S. mills are cranking out.

I will repeat what I wrote in March, when I noted (correctly) that prices for coated paper had further to fall: "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."