Kirk J. Finchem is technical editor of Pulp & Paper magazine.

WHAT'S AHEAD

An exclusive report details trends in supply, demand,
and pricing for key papermaking additives.

PROCESS AUTOMATION

Reports detail advanced sensor developments for the chemical fiberline and the growth in use of neural network technology for various papermaking processes.

RECYCLING

Interviews with recovered paper users define the quality of North American wastepaper and investigate how mills
are changing their processes and educating the public
to improve secondary
fiber quality.

From the EDITORS

A tiger by the tail

The current turmoil in Southeast Asia is both good news and bad news for North American paper producers. Perhaps more accurately, in the short term, it's bad news for most. In the longer term, it will present great opportunities to a few innovative firms willing to do business in new ways and to financially well-positioned firms seeking to establish manufacturing operations and strengthen market positions in the region. For others, the turmoil will create long-lived challenges.

During the 1990s, Southeast Asian pulping and papermaking capacity has increased at a surprising pace, and some opined that market assumptions underlying these projects were precarious. The use of high-cost, private debt rather than equity financing makes the projects highly vulnerable to economic downturns. Developments during the past nine months have-to varying degrees-turned the region's "tiger economies" into glass-jawed Jerry Quarrys, searching for the respite of a firm, comfortable floor.

THE BAD NEWS. The region's producers continue to be among the lowest cost in the world. While their dollar-denominated debts leave them with very high interest costs, many of their operating expenses (particularly those that are denominated in now-devalued local currencies) are lower than a year ago.

In the short term, depressed Asian paper markets will certainly hurt North American producers that export to the region. But the depressed markets will also affect producers that principally serve North American markets, since boats travel in both directions on the Pacific Ocean. The incremental cost of transporting product to Los Angeles, Seattle, or Philadelphia rather than to Shanghai, Taipei, or Bangkok can be attractively small for an Asian producer facing weak regional demand and trying to service dollar-denominated debt.

The result? Imports to North America (and competition in European markets) will increase.

Many in the North American paper industry have mused about the need for market consolidation, presuming that they would be the consolidators. During 1997, a pulp marketing alliance between Singapore-based Asian Pacific Resources International Ltd. (APRIL) and Vancouver-based Canfor was announced. With the stroke of a pen, both firms had expanded their presence in important markets.

Soon after, APRIL and UPM-Kymenne of Finland announced a technical and paper marketing alliance. Suddenly, APRIL had access to some of the best papermaking expertise in the world. Conversely, UPM-Kymenne improved its access to the huge Asian markets.

Then, on January 11, Champion International announced that it had become the latest member of APRIL's global marketing network, which includes UPM-Kymenne, DaiEi of Japan, and BOMO/Cypap of the Middle East. Collectively, the network could become the largest papermaking and distribution organization in the world.

As a member of the network, Champion will market, sell, and distribute APRIL's uncoated free-sheet products in North America, expected to be about 150,000 metric tons (15% of APRIL's total uncoated free-sheet production, expected to be 1 million metric tons by 2000). This nearly displaces the free-sheet capacity at Champion's Canton, N.C., mill-for which the company is seeking a buyer-at no apparent capital cost.

NEW NETWORKS. As the 1990s draw to a close, network building has become a critical element in the competitive strategies of such companies as APRIL and UPM-Kymenne. This will be an increasingly important element in the global paper industry's move toward market rationalization.

Finally, the good news for the financially well-positioned. Last year, Procter & Gamble snapped up an 84% stake in South Korea's Ssangyong Paper Co. In January, Bowater confirmed that it was in negotiations to "acquire a significant interest" in the Daebul newsprint mill in Korea. Also in January, Asian Pulp & Paper of Jakarta announced that it was selling four of its power plants to a joint venture company formed by Singapore Power.

As the U.S. dollar continues to appreciate against Southeast Asian currencies, production assets in the region become less expensive. This, in combination with mounting interest expense pressures, may press many Southeast Asian producers to consider selling at least some of their assets to relieve cash flow pressures.

Given the stated intent of U.S. producers to build market share without adding capacity, the current situation in Southeast Asia presents value-priced assets and access to Asian markets that will sooner or later regain their momentum. But these opportunities are not for the faint of heart.

The political environments of several of the "tiger economies" remain in question. As market capitalism displaces "crony capitalism," and as the longstanding patrons of established cronies fall from favor, investments in the region are inherently risky and problematic. We do live in interesting times.