2009 Paper Market Outlook

In maintaining a supply-demand balance to meet the needs of the marketplace while sustaining profitability, paper manufacturers face a challenge that's not unlike turning an ocean liner. Changes in direction take some time. Starting up, mothballing, or entirely shutting down paper production capacity has to be done with careful financial and operational planning. Quick shifts in the economy and the marketplace can throw a wrench into the works.

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According to Jacquelyn McNutt, executive director at Georgia Tech's Center for Paper Business & Industry Studies (CPBIS), both demand and shipments in North America for all types of printing papers reached a peak at the start of the millennium, declined rather sharply between 2000 and 2002, and have been generally flat—though fluctuating—for the past six years. In addition, since 2000, paper manufacturers have steadily reduced production capacity to bring costs in line with market demand, and they finally achieved this goal in 2006.

Through cyclical highs and lows, actual shipments have tended to stabilize over the past couple of years, and they've been more or less in sync with the industry's leaner and more efficient production capacity. This allowed the mills to increase prices, so that in 2007 and the first half of 2008, paper makers were showing a profit in most segments. A weak U.S. dollar at the time only helped by making imports relatively more expensive here, and exports more attractive to offshore buyers.

Adjusting to the shifts in the market has not been easy by any measure. The larger paper mills have sold off and restructured assets, and much of the older production capacity has been permanently shut down and dismantled. Two of the largest manufacturers, International Paper and MWV (MeadWestvaco), changed their focus from printing papers to packaging products, with Boise Inc.—the paper company now separate from the lumber business—following suit. External factors, including tightening pulp sources and offshore competition, have all added degrees of difficulty to this process of change. If employment is a useful industry measure, the American Forest & Paper Association (AF&PA) has recently reported that since 2006, some 190,000 jobs have been eliminated permanently from the paper industry, or 15 percent of the workforce.

Early in 2008, things were looking up for paper makers, despite the skyrocketing fuel costs that reduced bottom-line profitability, and the rising cost of pulp. However, mid-year, the U.S. economy began its nosedive, throwing the paper industry and commerce worldwide into a state of uncertainty. AF&PA noted that the production of paper and paperboard packaging declined by 15 percent between November 2007 and November 2008. Broken down by segment, the metrics for November 2008 compared to the previous year paint a grim picture:

  Shipments Inventory
Uncoated mechanical
- 6.8%
+1.3%
Uncoated free sheet
-17.3%
+0.5%
Coated free sheet
-19.5%
+8.8%
Coated mechanical
-34.2%
+9.2%

Demand and shipments slowed down, and inventory began to build, but the mills haven't taken this sitting down.

First Response

The paper mills have responded to the unhappy economic realities by cutting back on production to hold the line on costs and avoid stockpiling inventories that can be used to dilute prices. The scheduled downtime, shutdowns, and even a couple bankruptcies have come quickly.

  • In November, International Paper permanently shut down its No. 3 paper machine in Franklin, Tenn., eliminating capacity for 150,000 tons of uncoated free sheet. A week later, IP announced the indefinite closure of its pulp mill in Bastrop, La., due to declining demand.
  • Also in November, Domtar permanently closed the paper machine and converting operations at its Dryden, Ontario, mill, reducing its uncoated free sheet capacity by 151,000 short tons. In December, Domtar permanently closed its pulp mill at Lebel-sur-Quevillon, Quebec. Both actions were due to unfavorable market conditions.
  • NewPage took "market-related downtime" to reduce its production of lightweight coated groundwood by 40,000 tons—and this action followed a similar curtailment earlier in the year. Only weeks ago, NewPage said it would take more market-related downtime in the first quarter of 2009 to cut production by 150,000 tons, though the company didn't specify exactly which paper grades would be affected.
  • Boise Inc. has restructured its pulp and paper production capacity in St. Helen, Ore., permanently shutting down two paper machines to reduce production by 200,000 tons. Two machines remain at St. Helen, producing lightweight opaque and flexible packaging stocks and tissue. Boise Inc. had been warned by the NYSE that it had to do something to fortify its stock value and capitalization. NYSE guidelines apparently have been satisfied by the St. Helen restructuring. For packaging, the picture appears to be even bleaker, as sales volumes are down for both durable and non-durable consumer goods—both "big box" and more decorative containers.
  • In its year-end report, released at the end of January 2009, MWV (MeadWestvaco) reported "severe input cost inflation and lower demand due to declining global economic conditions." The company is cutting 2,000 jobs (10 percent of its workforce) and will close 12 to 14 manufacturing facilities around the world. Most of the reductions will come in the first quarter this year, but all should be completed by the end of the year. The company also is increasing prices.
  • Richmond-based Chesapeake Corp. filed for Chapter 11 bankruptcy protection on Dec. 29, 2008, at the same time announcing a debtor-in-possession (DIP) arrangement with an investor group that includes Irving Place Capital Management L.P. and Oaktree Capital Management L.P. The buyers promise to run Chesapeake's businesses here and around the world with no interruptions while awaiting the bankruptcy court's approval of the acquisition arrangements.
  • Smurfit-Stone Container Corp., Chicago, filed for Chapter 11 bankruptcy on Jan. 29, 2009, listing $5.6 billion in debt and $7.5 billion in assets. The company does business in the United States, Canada, Mexico, and Asia, producing containerboard and corrugated packaging, as well as serving as one of the world's largest paper recyclers. Chairman and CEO Patrick Moore noted, "The acceleration of the unprecedented global economic recession has weakened demand for packaging, and the frozen credit markets have prevented an out-of-court refinancing of our capital structure."

Burn This

To return for a moment to the CPBIS state-of-the-industry report, McNutt's research shows that in North America, print media usage is steadily falling, except for books and Yellow Pages directories, which remain steady. This includes all printed media. Conversely, consumers are steadily increasing the time they spend with electronic media, except for radio and recorded music, which remain a flat constant. So while North American paper capacity has been permanently decreased, apparently it's only following market demand, and the trend is likely to continue.

While the fortunes of both paper and packaging manufacturers have been impacted by the recession, the mills have taken quick action to remain afloat, if not terrifically prosperous. Printers may see some breaks on pricing if demand continues to fall, but the mills have been very sensitive to the market and will try to maintain prices at least where they are.

The larger question seems to be: What is the forest industry in general going to do with its shuttered and abandoned capacity? (Housing starts, too, are notoriously down.) One suggestion is to convert former pulp and paper production facilities to biomass plants. Using biomass isn't as simple as replacing oil and natural gas generators and furnaces with wood-burning stoves. Rather, researchers are learning how to extract things like ethylene from wood products to use for fuel. In fact, many states already have in place a Renewable Portfolio Standard (RPS), which gives businesses tax credits for using alternative energy sources. In most cases, biomass qualifies for the tax credit. No national RPS has been developed, but if concerns for climate change persist, that may be on the horizon.

In sum, printers may see lower paper prices and positive availability of most printing paper grades during 2009, but if there is any slack in the marketplace right now, it probably won't last long as the mills adjust to decreasing demand.

Jeanette Clinkunbroomer is a freelance writer.

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