PAPERWATCH: World Trade Battle Starts With Coated Paper

For the first time in two decades, the U.S. government ruled to impose countervailing duties on “non-market” foreign producers which have undercut the domestic market by selling below cost. The U.S. manufacturer responsible? A paper mill! Since a court ruling in 1986, the government could not identify subsidies in centrally planned economies, so imposing duties was not possible. This new decision makes it clear that subsidies can be calculated based on information like global raw material costs and capital investment.

The two Chinese paper companies named, Shangdong Chenming and Gold East (part of Asia Pulp & Paper), are both known to have built new machines, imported pulp and minerals to make coated paper and then shipped products to ports in Long Beach, CA; Camden, ME; and Houston—where volumes and values are reported. The selling price, with its usual mark-up by distributors, was found to be well below manufacturing cost, indicating an export subsidy was fetched in China.

New Page Corp. filed a complaint, and a ruling was made this spring to impose significant countervailing duties for coated free sheet on exporters from China, Korea and Indonesia. Imports of coated free sheet have soared in value from $29 million in 2004 to $224 million in 2006. There were 31 other cases brought before the U.S. International Trade Commission (ITC) since 2001, and this was the first won by the petitioner.

The case has several steps to go before it enters the Federal Register, leaving about a year for a settlement to be reached. Barring that, duties range from a few percentage points to more than 20%.

Not surprisingly, the National Assn. of Manufacturers (NAM) praised the decision, while retail pressure groups condemned it. PIA/GATF called itself “disappointed” in a statement from CEO Michael Makin three months ago. “This is yet one more blow to domestic printers sure to be impacted by pricing and supply dynamics of the CFS [coated free sheet] paper market,” he said.

The U.S. trade merchandise deficit with China alone stands at $223 billion, with the current accounts deficit starting to creep upwards as well. Coated free sheet represents less than 1% of the total, with apparel, shoes and electronics making up the bulk of the trade gap.

Over the last decade, imports' share of coated freesheet consumption in the U.S. has risen from about 10% to over 30%. Overall demand for coated freesheet is 5.5 million tons, up roughly 20% since the mid-1990s. Economic growth is credited with the trend, as print advertising, inserts, brochures and mailings have increased with overall increased consumer activity (retail sales and tourism), the real estate boom and durable goods spending. Domestic producers washed out high-cost capacity and added very few new tons during the downturns of the early 1990s and 2000s, while capacity in Asia grew dramatically. European paper economies were roughly balanced. Clearly, the U.S. market was ripe for the taking by the new producers in Asia.

Printers have suffered price increases all along, due in part to raw material cost increases for pulp, minerals, chemicals, energy, labor and even water. Prices are up 10% to 20% in most categories of coated paper. Relief was sought through distributors with contacts in the new production corners—namely, China.

ITC-filed and -issued documents are riddled with blackouts, primarily for figures such as prices and volumes, which aren't wanted public. But it can be deduced that Asian imports are up about 1 million tons in the last two years, largely from China. This is eating into European imports from places like Italy and Austria, and contributing to the downward spiral of coated paper profits worldwide.

Looking back, this is really no surprise. A similar situation occurred from 1997 to 1999, when Korean and Indonesian producers came on with new coated freesheet capacity, and imports' share of U.S. consumption roughly doubled.

Although New Page's documents and evidence were being prepared late last year, this year's downturn in coated paper markets could have triggered the petition and ruling. At this time last year, demand and prices for coated free sheet were up significantly, driving production higher for domestic producers. Nice profits were being amassed, which were used to make payments on the debt issued to finance the acquisitions.

Recently, profits have turned to losses in some cases, and the debt market is being restructured. Clearly, the timing for a petition was good. In the past, petitioners relied on political clout backed by the promise of votes. Today, that clout is backed by dollars.

The petitioner in this case, New Page Corp., has some “juice” in Washington, given the new paradigm in assets ownership, particularly in manufacturing. New Page Corp. is owned by Cerberus Capital Management, a big private equity player with interests in banks, airplanes, retailers and more. Cerberus was recently in the news with its acquisition of Chrysler, which may have tipped the corporate credit world into its present turmoil.

Verso Paper, the spin-off of International Paper's coated paper business, is privately held by Apollo Management, another big player in private equity. IP has a distribution business in xpedx, which is a competitor to one of the interested parties, Unisource, a distributor of the imported papers. Other domestic producers have been named in the petition documents, notably West Linn and Smart. The global producers operating in the U.S., like Stora Enso, UPM and Sappi, are standing on the sidelines.

New Page and Verso are not the only paper companies held by private equity firms. Many containerboard material manufacturers, converters and forest product, machinery and chemical companies have been bought by private equity companies. New Page is the first to petition the government for relief.

Private equity companies have the ear of the executive branch, which manages the Department of Commerce and, consequently, ITC. Private equity companies are funded by wealthy individuals, and their main asset collateral is U.S. treasuries. These “customers” of the U.S. government simply have the right lobby to get things done, unlike a union or a consumer group that directs its fodder to the U.S. Congress. Congress must then agree to send their bill to the White House, which reacts (or not) to political winds and its own caprice. Today, the winds blowing up Pennsylvania Ave. are not as favorable, and this action, which gained media attention quickly and thoroughly with so little risk, was issued by ITC without an invitation of public comment.

Since the decision was made, threats have been traded back and forth across the Pacific. The Chinese government has hinted that it might dump its U.S. treasuries (“interesting” now that they are making money on these for the first time in years!).

New Page also suspects overseas firms are not fully cooperating. “Low-priced imports continue to dampen free sheet demand and pricing somewhat as we believe some Asian producers may be trying to circumvent the new preliminary dumping and countervailing duties,” CEO Mark Suwyn said last month in the company's Q2 earnings release.

Industries such as metals, textiles, auto parts and others are watching closely, since they may have the same claim and now also precedent. There is a long way to go before actual duties go into effect (and they could be retroactive), but the paper industry is likely to be recognized for years to come as the one that broke through the government to fight unfair competition.


READER COMMENT:

Doug Rawson 
Superior Lithographics, Los Angeles

This is a potential body blow to companies such as ours that have to compete in a global economy and can not go to the U.S. government to stop the importation of printing produced in China, Mexico and more importantly Canada. Although there may exist U.S. industries hurt by Chinese government subsidies, it is sad that the Bush administration chose the American paper industry as its example.

As the owner of a printing company that used $1 million of the $224 million of coated sheet paper imported from China last year, I know the reality. This segment of the U.S. paper industry has refused to install new equipment in the last 30 years, while the Chinese have brand-new machines. The shocking and sad reality is revealed by the fact that NewPage (the protagonist) just shut down a paper machine they said was not competitive to operate. That machine was new in 1904—that is not a typo. How would your company’s income statement look if you ran equipment 50 years old, let alone 103 years old?

The result of the lack of capital investment by U.S. papermakers is they can compete on price, but not on quality. Is it no wonder that both IP and MeadWestvaco have sold they coated paper divisions. They sold because of their historically lacking investment in new papermaking that has put the American industry at a disadvantage of companies with new machines, like the Chinese. It is telling that the same American papermakers that are not investing in the U.S. are doing joint ventures in Asia.

NewPage, on the other hand, is not a paper company looking for long-term viability of their industry but rather a “value buyer” who wants to sell their stock in a few years and make a profit on that sale, leaving this industry. They have zero interest in leaving a viable company for the new buyer. Moreover, they have zero interest in supporting the American printing industry that is why they have no problem raising our paper prices while their countervailing duty allows the same Chinese paper into the U.S. with ink on it (printed in China, Canada, Mexico, etc.) This is a blatant “I-don’t-care-about-you” statement to their customers: us.

The Bush administration's decision is potentially devastating to the consumer of that high-quality Chinese paper: the U.S. printing industry, which employs 1.1 million Americans in 40,000 firms and exports more than it imports.

The countervailing duty will only delay the demise of the American papermaking industry due to their lack of capital investment. It will protect a few thousand U.S. union jobs for a few more years at the potential expense of hundreds of thousands of U.S. printing jobs that will probably never return. This will lead to more economic harm than benefit.