Papermakers Convene & Commiserate

As luck would have it, discussions among attendees at last month's 126th annual observance of Paper Week were punctuated by news reports of mill shutdowns, employee layoffs, salary freezes, and asset sales in the U.S. as paper and forest products companies continued dealing with the economic slump, heightened competition from overseas, and the after-effects of extensive consolidation.

The event, which was held in New York City and sponsored by the American Forest & Paper Association (AF&PA), provided an inside look at an essential global industry that's undergoing very challenging times in domestic markets and anxious to explore emerging markets elsewhere. Delegates represented Asia, Europe, North and South America, and Scandinavia.

In his keynote presentation, Eugene van As, the outgoing executive chairman of Sappi Limited of South Africa, the world's leading producer of coated fine paper, prefaced his remarks by pointing out that producers in Europe and the U.S. are at a crossroads, that through much of the 1990s most of them did not even earn their cost of capital. "Yes, some did in some years and some smaller producers did," he conceded, "but most did not."

In Europe, he added, a dozen new machines were built in the 1990s, in the U.S. only two; meanwhile, a big push into Asia has driven down the average age of equipment there to just eight years, less than the average of 10 in Europe and 18 in the United States. He said the investment rate in Asia, which he characterized as "irrational," reminds him of conditions in South America 20 years ago.

U.S. papermakers have lagged in technology, too, he said, in some cases achieving a breakthrough then giving up its development to machinery suppliers in exchange for a discount on the first machine. But when suppliers incorporate such advances in their equipment and offer it to the whole industry, the original developer gains no advantage for its efforts.

As for Asia, van As said, "[It] accounts for more than half the world's land mass, so it is much too large an area to generalize about, especially regarding opportunities in papermaking. Southeast Asia consists of really small individual markets, but together they make up a large market. Also, in the regions outside Japan and Korea, there frankly have been a lot of business scams; in some flops, most of the money was made long before the projects were ever completed."

But, he added, some of the machines are still there, which represents a threat to outside papermakers.

In China, which everyone agrees represents huge, long-term potential for paper consumption, van As emphasized the need to "right-size" any investments and to keep in mind the drawbacks of long-distance shipping from any central facility. Also, he cautioned that, like the Asian crisis of 1997, China might soon be due for a crisis of its own, in the view of some observers.

Concluded van As, "Asia is a massive opportunity [for paper and forest products companies] if we can get investors to believe in us." But how?, asked a listener. The Sappi chief replied, "To win Wall Street's confidence, for example, we should be disciplined enough to shut down older machines, so we can expect more shutdowns in the future. To me, the main lesson here is to run our businesses to customer needs, not to manufacturing objectives."

Meanwhile, Washington, D.C.-based AF&PA reports that it is continuing many successful programs, such as the sustainable resources initiative, industry advertising campaigns, its stewardship awards, lobbying for favorable legislation, and reduction of greenhouse gases.

With the U.S. paper industry expected to achieve its goal of 50% recovered paper this year, the association raised its recycling target to 55%, to be achieved by 2012.