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

Port Hawkesbury's Near-Death Experience

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

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

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

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

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

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

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

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

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

Prices dropping for all grades of paper

Deflation has now officially hit the market for publication papers: Prices for everything from newsprint to coated freesheet have declined this month, several sources indicated in the past week.

December prices were down even in the formerly rock-steady market for high-grade supercalendered paper (SCA) paper, according to both Pulp & Paper Week and Deutsche Bank. Mark Wilde of Deutsche Bank put the December drop at $10 to $20 per ton and said SCA prices could continue declining if demand for lightweight coated (LWC) remains weak. Until recently, analysts were predicting that SCA prices would remain steady or even rise during 2009.

“Newsprint prices are slipping,” Wilde wrote, with declining costs and the Canadian dollar making mills more willing to accept lower prices rather than shutting down. The Deutsche Bank analyst agreed with Pulp & Paper Week that newsprint dropped about $10 to $15 per metric ton in December, breaking a string of consecutive monthly price increases that had pushed newsprint prices up more than $200, or about 35%, since the summer of 2007.

FOEX reported a slight drop in U.S. newsprint prices last week, while Forestweb reported that newsprint prices are flat. But Forestweb’s North American Publishing Papers Index decreased in December because of declining prices for coated papers.

Prices for LWC and other coated-groundwood products dropped $35 to $70 per ton in December and are “coming under increased pressure, wrote Wilde. “With consumption likely to remain weak and the US$ rising (increasing threat from imports), producers will remain at battle stations through 2009,” he added. High customer inventories, decreasing catalog circulation, and a weak advertising market for magazines are all dragging down coated groundwood.

The CEO of Abitibi Bowater (aka AbitibiUnderwater) admitted to the Globe and Mail this week that his biggest fear was a collapse of demand in the first half of next year. Despite the bearish news on pricing, shares of the newsprint giant doubled in price during the week (to 52 cents, down from $20.47 at the beginning of the year). AbitibiBowater stock was boosted by news of an apparent sale of some hydroelectric assets, production cuts by competitors, and the company's statement that the current quarter will be more profitable than the previous quarter. All of that boosted hopes that the company will remain solvent despite having $1 billion in debt payments due during the coming year.

Stocks of such other publicly traded paper companies as Verso, Domtar, and Catalyst were generally flat for the week. Wall Street had already accepted that demand and prices will decline. The big question is whether producers will idle enough capacity to prevent paper markets from collapsing.

Another Chapter 11 Filing Dings AbitibiBowater

Today’s Chapter 11 filing by Tribune Company could put a multimillion-dollar hurt on AbitibiBowater, another newsprint manufacturer, and perhaps some fellow newspaper publishers.

Tribune filed papers with a Delaware bankruptcy court indicating it owed nearly $7 million in “trade debt” to Abitibi -- $4.192 million to the Abitibi Consolidated subsidiary and $2.77 million to the Bowater subsidiary.

Also making Tribune’s list of top-30 creditors was “SP Newsprint Company c/o White Birch Paper Company” of Greenwich, CT, with $5.153 million in trade debt. SP is an Atlanta-based partnership owned by three newspaper chains (Cox, McClatchy, and Media General), while White Birch is a separate, privately owned newsprint manufacturer based in Greenwich.

White Birch was presumably a marketing agent or broker of SP paper sold to Tribune, but it's not clear which company is left holding the bag.

AbibitiBowater also has $13.3 million tied up in Quebecor World’s Chapter 11 filing from January. Put together the Quebecor and Tribune debts and you would have enough to buy 81% of AbitibiBowater stock, which closed down 10% today (and 98% from a year ago) at 43 cents per share. The heavily leveraged paper company lists assets of nearly $10 billion but has a market cap of only $25 million.

Quebecor World says it is in the process of exiting Chapter 11, but it’s not clear what kind of compensation its creditors would receive. Tribune’s various newspapers and other media properties are still operating, but the prospects are bleak for major newspaper chains with lots of debt – and for the paper companies that supply them.

Not making the Top 30 list was Catalyst Paper, the dominant newsprint supplier in the West and reportedly a major supplier to Tribune’s Los Angeles Times and other newspapers. That indicates Catalyst's exposure is less than the $1.691 million that the #30 creditor had.

The top of the list is dominated by holders of various debt instruments. The largest trade debt, $23.691 million, is owed to Warner Bros. Television, #13 on the list. Just below that Time Warner subsidiary is Mark Willes, CEO of Times Mirror until Tribune purchased it, with $11.229 million in “retirement and deferred comp”. Three other retired executives also made the list.