Printing Paper Outlook 2010: Running in Place

“The survey also reported that 14 U.S. mills were permanently closed in 2009, shutting down 16 paper and paperboard machines, and an additional 11 machines were permanently shut down at other mills,” the organization said. “Furthermore, several mills and machines have been indefinitely idled in response to weak market conditions, but have not been removed from the survey base because they may be restarted at some future date.”

The permanent production shut-downs and indefinite idling represent a type of holding pattern in response to uncertain national and global economic conditions. For example, in International Paper’s year-end report, Chairman and CEO John Faraci noted, “Our focus on reducing overhead costs, matching our supply with our customer demand, and realizing Industrial Packaging synergies gave us the ability to generate record free cash flow and pay down a significant amount of debt while positioning ourselves for 2010.” IP ended the year with a modest profit of $663 million, compared to a loss of about $1.3 billion for 2008.

Similarly, Domtar saw sales decline from approximately $6.4 billion in 2008 to $5.5 billion in 2009, yet earnings rose to $310 million in 2009, compared to a loss of $57.3 million the year before. “While we faced a high level of lack-of-order downtime and a steep decline in pulp prices in the first half of the year, we benefitted from stable prices in papers and kept our inventories low. Meanwhile, our efforts to reduce working capital and lower fixed costs proved to be a catalyst for the second half of 2009,” said John D. Williams, Domtar president and CEO.

Briefly stated, instead of producing paper no one wanted to buy, the mills idled capacity to save production costs and prevent piling up inventory. The larger mills generally finished the year in sound financial condition, ready for whatever 2010 might bring.

Black Liquor
Another boon to the paper industry was the black liquor tax credit loophole. Black liquor is a tar-like by-product of the paper production process, and for decades it has been used to fire paper mills. The provisions of a highway bill passed by Congress in 2005 encouraged the use of alternative fuels, such as ethanol, by granting a 50-cent tax credit for every gallon consumed of a traditional fossil fuel mixed with an alternative fuel. In 2007, this tax credit was extended to industries outside transportation. Those paper mills that were able mixed some measure of diesel fuel with the black liquor they were already using in order to qualify for the tax credit.

In total, the federal government gave out more than $6 billion in these alternative fuel tax credits to dozens of companies in the paper industry in 2009, and this went a long way toward supporting their bottom lines. However, the issue has raised many objections and cries of foul play, and 2009 was the last year the mills could take advantage of the program.

Interesting to note, the impact of the tax credit program has been not entirely positive and even a little bizarre. For example, although the alternative fuel tax program for paper mills expired at the end of 2009, some congressional legislators submitted proposals to redistribute the alternative fuel tax credit dollars to include them as part of the funding for federal health care proposals. These legislators determined that by re-directing the $6 billion per year from alternative fuel credits over the next four years, they could count that money as another $24 billion available for federal health care reform, even though the tax credit program has expired.

In addition, Brazil claimed that because the United States was “subsidizing” the printing paper industry via the alternative fuel tax, U.S. paper products sold to Brazil and other nations could and should be subject to a tariff. The World Trade Organization dismissed Brazil’s claim.

Speaking of Tariffs...
For the second time over recent years, paper mills raised the issue of Asian mills “dumping” paper on U.S. markets—or selling paper below market cost. This time, it was Wisconsin-based Appleton Papers, NewPage Corp. and Sappi Fine Papers, along with the United Steelworkers (USW) union, which urged an investigation. On March 2, 2010, the U.S. Department of Commerce imposed a preliminary countervailing duty—a tariff—on coated paper imported from China and Indonesia. The ruling is based on findings that certain Chinese and Indonesian paper mills are subsidized by their governments, giving them an unfair advantage in the marketplace. Because their production costs are artificially low, they can price paper products below the cost of U.S. manufacturers.

The Steelworkers Union joined the complaint because, “Too many paper workers have already lost their jobs and the community impact has been tragic,”said Leo W. Gerard, USW international president. “The subsidies used by China and Indonesia are grossly unjust and we welcome the tariff margins as a remedy.”

Similar claims of dumping were raised several years ago, primarily by NewPage Corp., and the International Trade Commission (ITC) found that some Asian companies were benefitting unfairly from their governments’ support. However, at the time, the agency decided that U.S. paper mills had not been injured by the competition, so no permanent tariff was imposed.

Now, however, a statement issued by Appleton, NewPage, Sappi and the USW noted: “The Department of Commerce’s decision follows the preliminary determination of injury to the industry by the ITC last November. The ITC’s report showed that imports from China and Indonesia jumped by more than 40 percent during the first six months of 2009 compared with a similar period of time in 2008. During the same period, shipments of paper covered by the domestic manufacturers’ petitions declined by about 16 percent. Market share held by Chinese and Indonesian imports increased from 15.3 percent in the first six months of 2008 to more than 25 percent during the same period in 2009.”

In the earlier case, both the larger paper industry and representatives from the printing industry strongly opposed the tariffs on foreign-made paper. The AF&PA argued that when the United States establishes a tariff, the action only invites retaliation from overseas buyers of U.S. goods, and U.S. mills do market overseas. In addition, cheaper, foreign-made paper products have given printers here a lower-cost supply alternative.

Beginning this month, the Dept. of Commerce will begin an in-depth investigation into the dumping claims and the resulting damages to U.S. manufacturers, with a final decision due this fall.

Some Good News
While paper manufacturing in the United States has slowed down, the contraction only reflects decreasing demand. Apart from current economic conditions, printers also are familiar with the migration of both personal correspondence and direct marketing to electronic media, as well as ongoing pressure from environmentalists to reduce the use of paper when possible. But despite these negative trends, AF&PA reported that orders for most categories of paper are up so far this year.

In its monthly Printing-Writing Shipments report for February, the organization noted that total shipments of these products increased 10 percent compared to shipments last year, and “two of the four major printing-writing grades recorded double-digit growth when compared to 2009.” Also, “Total printing-writing paper inventory levels decreased 54,900 tons from January 2010, a decrease of 3 percent.”

Overall, AF&PA reports for February:

• Uncoated free sheet shipments up vs. year-ago for third consecutive month;
• Coated free sheet shipments hit double-digit growth vs. year-ago for third month;
• Year-ago shipments of coated mechanical reached double-digit growth for fourth consecutive month;
• And uncoated mechanical shipments increased following 28 percent surge in January.

Putting it All Together
The larger U.S. paper manufacturers used the economic slowdown and decline in demand to improve their internal cost structures and strengthen their financial positions. While the industry shows virtually no growth, it has managed to adjust successfully to the current economic and market environment.

Printers will likely see stable paper supplies, possibly with price increases if demand improves ahead of current tight inventories. Additionally, printers who have been looking to imports for lower pricing will find that avenue blocked—at least in terms of pricing, and at least through most of this year.

Conventional business wisdom states that uncertainty is the greatest evil. Although considerable uncertainty still prevails in the broad market for printed materials, the paper mills have achieved a level of stability. Prices may go up with rising demand and due to events beyond anyone’s control; for example, Sappi predicts increasing prices in Europe because of the impact of the earthquake in Argentina on the pulp market. However, printers in the United States should be able to rely on getting quality, domestic-made paper, though it may be at somewhat higher prices than they would like to pay.