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KELLY H. FERGUSON
is editor of Pulp & Paper magazine
WHAT'S AHEAD
PULPING/BLEACHING
Several articles detail the latest developments and uses of ozone and oxygen systems for delignification and bleaching of pulp. In addition, a report on Brazil's Bacell dissolving pulp mill focuses on the mill's production of ozone-bleached hardwood kraft dissolving pulp.
PAPERMAKING
The centerpiece of this highlight is an in-depth startup report on Boise Cascade's new $290 million uncoated free-sheet machine at Jackson, Ala. Also, interviews with papermaking experts and mill users report on how new calendering concepts are being used by mills to improve paper and paperboard properties.
EXPANSION/
MODERNIZATION
P&P editors profile mill projects at Georgia-Pacific's Big Island, Va., containerboard mill and Riverwood International's Macon, Ga., coated paperboard mill.
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A search for value
As discussed in the August "From the Editors" column, there are times when paper companies seem to do the right things-e.g., invest capital in a downcycle or install reliable technologies to improve operating and environmental performance-but are criticized at the time for not "creating value." Value in this case is not product related but refers to the value that stockholders receive for their investment.
Two articles in this issue of Pulp & Paper examine what shareholder "value" is, how it is measured, who creates it best, and why anyone in the industry should care about it. P&P also continues to look at industry projects that show how some companies and mills are attempting to reshape and reposition themselves to create more value.
REASONS AND EXCUSES. Some in the industry will argue, as they always have, that bean counters are taking over the industry. But CEOs-whether they came up through the ranks making paper or were brought in from the financial side-are ultimately answering to their bosses. And their bosses aren't happy.
Others in the industry will say, as they always have, that you have to look long term to view results, not just the past few years when the industry has been in a slump with a quick turnaround in the middle. Well, viewing long-term results shows that the industry hasn't performed well.
For example, David Null and Dan Cenatempo of Jacobs-Sirrine Consultants point out in their article (p.59) that based on a study of 43 leading North American forest products companies, during the past 10 years the industry has earned an average return on total capital of only 7.6%. The authors add that risk-free U.S. government bonds yielded 7.5% during the same period.
Investors must then ask, "Why invest in paper companies?" If you are an employee, you might hold on to your own company's stock (or even other paper stocks) because you believe in the company or the industry as a whole. But the majority of investors don't have such a philanthropic view of investing anymore, if they ever did. Even investors who are willing to settle in for the long term still want a good return for their money at some point. Financially, can paper companies give them that return?
While it's true that overall the paper industry has been a lackluster performer, some companies have provided value. In an interview written by technical editor Kirk Finchem (p. 51), analysts point to such examples as Bowater, Willamette, and Mead as companies that have married the technical and the fiscal into a strong strategy. Null and Cenatempo also offer a review of some companies that have put in strong performances during the past decade.
THE BIG PROBLEM. While there are many factors affecting a paper company's performance, both articles point to one significant barrier that can and needs to be overcome-overcapacity. But the last extended up-cycle didn't help that situation.
According to Salomon Brothers analyst Chip Dillon, "During the terrific up-cycle that lasted from 1985 through 1989, a lot of executives decided that their companies' increasing cash-flow would be best invested in expanded production capacity. In hindsight, that was a poor decision."
Now companies are making decisions designed to correct these problems. The results are more mergers, some layoffs, and the probable shutdown or selloff of assets. But whether there is actual wisdom behind these decisions remains to be seen.
As Merrill Lynch's Sherman Chao says, "For the first time in many years, many companies are voicing a reluctance to spend just to build capacity. Most are talking about avoiding the addition of new paper machines for the balance of this decade. And while their actions are consistent with their statements, their actions have also been inhibited by business conditions since 1995.... The real test of collective learning will be whether companies adhere to their newfound spending discipline as the business cycles turn up."
Let's hope that when the industry reaches that next upswing, companies will be better prepared to make the right decisions.
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