Ida Goodreau, is president, pulp operations, Fletcher Challenge Canada Ltd. This column is excerpted from a speech given at the Canadian Pulp and Paper Assn. PaperWeek International '98 in Montreal in January.

Comment Column

Leading change
in the pulp market business

I joined the pulp and paper industry 5-1/2 years ago (a time when pulp prices were going down for one of their regular dips) after having spent more than a decade in the natural gas business -- a business where not earning an acceptable return was a cardinal sin, and actually losing money was unheard of. I recall my first monthly staff meeting and review of financial results. The CFO put up the requisite half-dozen overheads -- a loss of several million dollars in the month -- and everyone nodded, yes, to be expected given the state of the markets. I, meanwhile, was in the early stages of panic-a loss of several million dollars in one month! I nervously waited for ramifications. Nothing happened.

The second month a similar scene unfolded -- although the losses were larger. I recall arranging a meeting with my new CEO and delicately asking the question, "How long will this be allowed to continue?" The "cycle" was explained to me again: The low prices would be balanced by highs, with a net gain overall. It might take a few years, but it would come.

Flash forward three years: I am now in New Zealand, and true to prediction, pulp prices start to move up, then rocket up. In September, I am in Asia meeting with customers to explain the next increase -- to $1,000/metric ton. Our customers there, in their wonderfully courteous way, explained that they hoped the price would not continue to go up, but by the way, they had a small problem actually: stocks had built up to six- or seven-month levels, and they thought they might have to stop ordering for a short time -- perhaps a quarter. Within three weeks, prices were on their way down for perhaps the fastest slide in our history.

I learned a lesson from this about the pulp industry-the "cycle" cannot be relied on to bail you out from low returns. If you want to be one of the successful performers in this business, you must rely on your own actions and initiatives to create a profitable business.

The Asian crisis has placed the spotlight squarely on issues facing the market pulp industry once again. Growing optimism that the market was recovering from a lengthy slump has been replaced with serious concern about the market prospects for the next half year, at least, and possibly longer. This downturn, even if only temporary, exacerbates the problems which have been developing in the pulp industry over the last decade. Chronic overcapacity, volatile pricing, high capital investment, and poor returns plague the industry, causing disgruntled investors to discount share prices and demand solutions which will create shareholder value. The industry is now at a stage where only the top decile or 10% of performers in the pulp and paper sector are achieving acceptable returns.

The good news is that the hard economic realities of the last few years have propelled many pulp producers forward in the direction of change and restructuring. The industry is responding in a number of ways, including greater consolidation, specialization, cost/productivity improvements, and a greater emphasis on customer value.

The pulp industry is still highly fragmented today, with the largest five producers having only 20% of the market. However, the direction in the future is clearly toward more consolidation, both on a global and a national scale. The benefits are significant -- access to large pools of capital, greater ability to achieve cost reductions through synergies, and more extensive product development, to mention only a few.

In the pulp business, manufacturing costs are a major driver of profitability and most companies/ mills have launched cost improvement and productivity enhancement initiatives. The early wave of cost-reduction processes tended to be internally focused and addressed production levels, debottlenecking, process consistency, streamlining of supply chain, etc. The next wave will involve outsourcing, joint ventures and strategic partnerships as we find ways to work with outside service providers and even competitors to bring operating performance to new levels.

The focus on costs is necessary and fundamental to any pulp producer's survival, but it will not be enough to achieve top decile performance. It is a move to customer value that must accompany cost improvement. Presently, pulp is seen as a commodity by both customers and producers. Yet research and experience demonstrates that differences in pulp characteristics can have significant cost, quality, and performance impacts on the production of paper, tissue, and board. We must understand, invest in, and develop our knowledge of fiber and fiber blending in order create unique value propositions for our customers.

The pulp industry will be a tough place to do business for the next few years. It is not an industry in decline. Rather it is an industry undergoing fundamental restructuring which will undoubtedly be painful for some players, but will provide tremendous opportunities for others. Those who continue to do what they have always done will be left behind by those who are leading change in employing new approaches, strategies, and technology to outperform their competitors.