Flattening the Uncoated Paper Field
Michael J. Ducey -- graphic arts online, 12/1/2000
The inevitable rationalization of uncoated freesheet paper commenced last month with major reductions of output across the grade spectrum. International Paper (IP) announced the permanent closure of the source of nearly one million tons of uncoated paper, following earlier shutdowns of heavyweight coated and uncoated boards and specialty papers.
Insiders report that more shutdowns are likely in both coated and uncoated printing and writing grades in former Champion mills. Several of these mills were up for sale preceding the merger, while asset shifts from new investments were expected to reduce production capacity further.
Reduction: 5% here, 2% abroad
These closures represent over 5% of all U.S.-based uncoated freesheet paper, and nearly 2% globally. Total reductions in the printing and writing sector, following recent moves by Consolidated Papers and others, will reach two million tons by the first quarter of 2001. Every grade, from thin register bond papers to heavy coated freesheet, has been hit.
The IP mill shutdowns at the company's Lockhaven and Mobile plants as well as parts of its Courtland facility were all producers of primarily bond papers. Forms and register bonds, copy paper and technical specialties (20-lb., 24-lb. in white and colors), and offset (50-lb.) are being taken out, but there is plenty of machine time available at other IP mills to pick up the tonnage. IP had a similar situation with text and cover grades last year, when it successfully redistributed Strathmore and Beckett grades to more efficient operations.
Champion's text and cover business was up for sale prior to the merger. Brand name rationalization is also near completion. Champion's coated grade names will survive, but the uncoated papers are likely to fold into Hammermill. IP remains the largest producer of forest products in the world, and the largest producer of printing and writing papers in the U.S.
Brown paper affected, too
In addition to the white paper closures, IP will cease production of another 250,000 tons of brown paper. Together with the Smurfit-Stone shutdowns, the brown paper market was reduced about 1.5 million tons in 2000 and 2001. Another million tons were taken out of production by operating mills to balance supply. IP also is closing some market pulp, like Smurfit-Stone, tightening fiber sources for non-integrated mills (see end of column).
Financial problems are plaguing some Northeast and Midwest uncoated mills, both in text and cover as well as bond. Without significant price increases in these sectors coupled with some ease in the pulp market (the major raw material for papermaking), closures will be forced. Another 500,000 tons are at risk. A few have filed for bankruptcy protection with their local courts.
Consolidated Papers will drop two small machines in the coated freesheet markets in Wisconsin without impact. IP recently sold out of its Zanders holdings, and further coated paper rationalization is predicted. Clearly, there are one or two machines in the U.S. that are having problems making money.
Commodity white paper maverick rocked the market
Quietly making its own way in this turbulent market is Willamette Industries, which continues to build capacity unabated. Willamette is following the same strategy that Champion employed-that is, build the best assets ahead of your merger-minded competitors and win the market with quality and efficiency. The company has taken the strategy one step further by building downstream production units to get as close to the end user as possible.
Willamette rocked the market during the spring with a plan to build another world-class papermaking machine in Tennessee, on top of the one it started up in Kentucky in 1998 and 1999. Total capacity is nearly one million tons, though some smaller production is likely to shut.
Willamette shirks off criticism from the Wall Street crowd by demonstrating that the new white paper ends up in its converting plants, capturing market share from companies that have walked away from certain business segments like forms bond. Willamette now controls about 25% of the continuous forms markets.
The company also is expanding into the retail bond market with Willamette Copy Paper, sold at Office Depot and other office supply outlets. Willamette's envelope business also is growing, now around 10% of the total market.
Additionally, Willamette is holding its cards close to its vest when it comes to Forest Express, the Internet business-to-business provider started by IP, Georgia-Pacific, and Weyerhaeuser (see also sidebar). Key investments have been made here in technology and management, so Forest Express should be off and running early in 2001.
Willamette-along with Boise Cascade, Mead, and Louisiana-Pacific-has been invited to join.
What it's all about
After a year of rationalization in the brown paper market following the merger of Stone Container and Jefferson Smurfit, prices are higher and firm. Competitors are quick to shut production at the first sign of inventory build-up. The export market is orderly. Even the customers are conditioned to cost pressures.
Today, Smurfit-Stone is pledging tonnage to independents on long-term contracts. The brown paper market appears stable for the first time in a decade.
History does, indeed, repeat itself. Pricing of white papers firmed in 2000, partly because of the pulp price increases as well as profitability pressure. IP's management has been talking about restrained production, and market-related downtime is creeping into all white paper mills in North America.
Like brown paper, price levels are likely to achieve 80% to 90% of their 1995 peak, or $100/ton (about $5/cwt) from today's levels by mid-2001. Without import pressure and major economic impact, prices will be firmly entrenched so that profits can be generated predictably. Buyers should look at current costs and start planning for 10% to 20% increases for next year's budgets.
