Paper Companies Getting Liquored Up

Now we can add tax breaks to the long list of valuable byproducts that come from the kraft pulping process.

The kraft, or chemical, pulping process has long been known to produce such marketable items as turpentine, cholesterol-lowering food additives, electricity, and chemicals used in everything from inks to asphalt to chewing gum – not to mention the pulp that forms the main ingredient in freesheet papers and is a significant part of many groundwood papers.

The Toronto Globe and Mail reported a few days ago that “the devastated forestry industry is agog over potentially huge U.S. alternative-fuel tax breaks based on a substance the sector has in plentiful supply: black liquor, a byproduct of the chemical pulp-making process.” (Not that becoming agog over liquor is anything new for paper companies, as evidenced by the recent Paper Week gathering in New York, but that was mostly brown liquor.)

Several paper companies revealed last week that they have received or will receive millions of dollars from the U.S. government this year for using black liquor to power their plants. For using black liquor at one of its mills, Verso Paper received a government payment in the fourth quarter of 2008 worth $29.7 million, which earlier this month was enough to buy all of the company's stock.

Pulp mills have been using black liquor as a power source for decades. In an odd twist on the concept of alternative fuels, they have to add a conventional fuel, such as diesel, to the black liquor to qualify for the government handouts. A stock analyst said Verso, International Paper, Domtar, and others are “burning black liquor into gold".

Kraft pulp mills have often been a target for environmentalists because they convert two pounds of tree to one pound of pulp, not to mention the rotten-egg odors they can produce. An idea kicking around the industry for several years has been to convert kraft mills to “forest biorefineries” (Doesn’t that sound greener?).

Rather than focusing on pulp, with byproducts as afterthoughts, a biorefinery would maximize the value of the wood by making a wide variety of products -- including ethanol, black liquor, and acetic acid – with less energy consumption and waste. Now Uncle Sam is sweetening the pot by offering subsidies for both the ethanol and the black liquor.

But converting a pulp mill to a biorefinery doesn't solve one problem: The plant would still produce pulp, which no one seems to want much of these days. Perhaps the paper companies could get a government grant to convert an idle paper machine (plenty of those these days) into a "biomass dryer" that would process the pulp into a burnable product that could qualify for more alternative-fuel subsidies.

Don't you just love free-market capitalism?

Quebecor Closing Covington Plant

Quebecor World told customers and plant employees in the past few days that it is shutting its Covington, TN printing plant, sources tell Dead Tree Edition.

Quebecor World still lists the Covington plant on its Web site without reference to it closing, but the sources say the plant will be shuttered within a couple of months. Quebecor World's 2008 annual report, released last week, said the printing industry "is still in the process of consolidating and is still suffering from overcapacity."

"We are also aggressively aligning our cost structure to mitigate the impact of the economic downturn," the report added, without mentioning any plant closures other than the three that Quebecor World implemented last year.

Covington's pressroom has mostly long-cutoff presses -- that is, heatset web offset presses that typically produce pages that are 10 7/8" tall. Most magazines and catalogs have moved to short-cutoff presses, which produce pages that are only 10 1/2" tall, thereby reducing paper and ink costs. And once they make the move to short-cutoff, they rarely go back.

This is the second big hit in barely three months to the town of 9,000 north of Memphis. In December, AbitibiBowater announced the closure of its NuWay converting facility in Covington, which turned newsprint into coated paper.

No Postal Rate Increase Next Year?

The chairman of the Postal Regulatory Commission was only partly correct when he told Congress this week that postal rates seem likely to rise less than 1% next year.

There's actually a good chance that the rates for market-dominant classes (such as Periodicals, Standard, and First Class) won't increase at all in 2010. But that may not be all bad news for the U.S. Postal Service.

Dan Blair's exact words were, "Should current inflation trends continue, the price adjustment for 2010 would likely be less than one percent."

He has a point: Even if the Consumer Price Index rises at an annualized rate of about 6.7% for each month during the rest of 2009, the Postal Service would only be able to raise rates by 1%. And if the inflation rate is only 4% each month for the rest of the year, the Postal Service will not be able to raise rates for the market-dominant classes at all. (Sorry, mailers, there's no requirement that the Postal Service reduce rates if the average monthly change in CPI is negative this year.)

Although consumer prices have risen at more than 5% (annualized) the past two months, the CPI in February was still more than 3.5% below its peak in July of last year. Fuel prices caused the CPI to spike in mid-2008, then crash late in the year, and now inch back up in early 2009.

The Postal Service has indicated it spent nearly $3 billion on fuel the last fiscal year (October 2007 to September 2008). By comparison, it may be on track to save $1 billion or more this fiscal year.

Low inflation also helps the Postal Service's labor costs. Many unionized employees who were recently due for cost-of-living adjustments got nothing because the CPI did not increase during the relevant period.

Ultimately, fuel prices, rate increases, and cost-of-living adjustments may not have much to do with the Postal Service's fate. Even getting relief from the Postal Service's unusually onerous retiree-healthcare obligation, as seems likely, may just delay the inevitable.

The Postal Service needs to make radical reductions in its costs -- by consolidating operations or reducing service, for example -- to match its declining revenues. Short of that, sooner or later it will run out of money.

Coated Paper Prices: What's Your Vote?

Publication paper prices in the U.S. will not go much lower, a panel of paper-industry experts said today.

"Given the tight economic environment, we expect prices to remain essentially flat," read the four-person panel's statement to a session at the Publishing Business Conference & Expo in New York, my spies tell me. That's in contrast to my speculation last week that permanent overcapacity would cause further significant drops in the prices for coated paper. (See "Coated Paper Prices: Headed for a Crash?")

So what do you think? On the upper right of this page, you'll see a chance to cast your vote. RISI's Paper Trader pegged the February price of 40# coated #5 as $900 per ton ($45/cwt.) Where do you think it will be in July?

The panelists indicated that uncoated freesheet prices have already hit bottom, while coated prices will drift a bit lower before stabilizing. Coated prices cannot go much lower because some mills are barely recouping their cash costs now, according to paper broker Scott Clifford. He is vice president of Clifford Paper Inc. and knows far more about the paper market than I.

I'm told that Janet Grimm, VP of Book Publishing Papers at another big broker, Lindenmeyr, warned the audience that recent capacity shutdowns mean that the paper market will tighten "in the blink of an eye" once the economy starts improving.

Some buyers in the audience were not convinced, and neither am I, at least not for coated paper. Too much demand has shifted to other grades or simply disappeared permanently for there to be such a violent "snapback". Maybe a couple of machines will be shuttered if prices drift lower, but beyond that I think it will take significant price declines before another 1.3 million tons of annual capacity is removed, as RISI's John Maine says is needed to keep the market in balance.

A lot of folks (buyers, mills, banks, bond-rating agencies, etc.) are trying to make decisions now based partly on where paper prices are headed. So let's help them out with some "crowdsourcing" -- cast your vote! (If the poll doesn't work in your browser, please email me your vote at dead.tree.edition@gmail.com.)