Reported U.S. project spending drops to lowest level since ‘84

Spending Shrinks Further as North American Companies Show Restraint

The current U.S. figure of $7.2 billion is the lowest that reported spending has been since 1984 when spending also tallied $7.2 billion, and is down over 45% from the most recent spending peak of $13.6 billion in 1996. Likewise, the Canadian spending total is the lowest since a reported C$2.8 billion tallied in the 1980 survey.

A summary of reported expenditures at U.S. and Canadian pulp and paper operations for the survey period 1998-2000 is reported in Table 1,

with data broken out by project type and geographical region. Projects with firm completion dates in 2001 have also been summed in these totals, though they represent a small portion of the total spending. Historical data is shown in Figures 1 and 2.

RESTRUCTURING EFFORTS CONTINUE. Continuing the recent trends in mergers and restructurings, companies were active in 1998 to boost their long term profit outlook. Champion International Corp. completed part of its 1997 restructuring plan by selling its Texas newsprint operations to Canadian-based newsprint producer, Donohue Inc., but still has assets for sale. Bowater Inc. purchased Canadian producer Avenor Inc. and subsequently sold the Dryden, Ont. uncoated free-sheet mill to Weyerhaeuser Co. Bowater has also put its Millinocket, Maine, coated and uncoated groundwood papers mill up for sale.

The merger of the U.S. operations of Jefferson Smurfit Corp. and Stone Container Corp. was finalized in mid-November 1998. The new company quickly followed with the intended closure of approximately 1.1 million tons of linerboard and corrugating medium capacity and over 300,000 tons of market pulp capacity at five North American locations. However, the company has indicated that some of these mill closures may not be permanent.

International Paper Co. recently announced that it would acquire Union Camp Corp., solidifying its position as the world’s largest paper company. The acquisition is expected to be finalized in 1999. IP has also been active in divesting non-core assets and limiting capital expenditures to the same level as its depreciation and amortization costs.

Other mergers in 1998 include Domtar Inc. acquiring E.B.Eddy Forest Products Ltd., Plainwell Inc. acquiring the tissue operations of Pope & Talbot Inc., and Pope & Talbot subsequently acquiring Canadian market pulp producer Harmac Pacific Inc.

In addition to these efforts, a number of permanent mill and machine closures were announced during the year. Mill closures were announced by Kimberly-Clark Corp., Fort James Inc. (2 mills), Inland Paperboard and Packaging Inc., FiberMark Inc. (2 mills), Sonoco Products Co. (2 mills), Imperial Wallcoverings Inc., and the previously mentioned closures by Smurtfit-Stone. Permanent machine shutdowns were announced by IP, Abitibi-Consolidated Inc., Westvaco Corp, Crown Packaging Enterprises Ltd. and Pratt Industries while pulp mill operations to be shuttered were announced by K-C, Bowater, Donohue, Georgia-Pacific Corp., Procter & Gamble Co., and Stora Port Hawkesbury Ltd., amongst others.

With industry emphasis being focused more on corporate repositioning, it is no surprise to see that capital spending plans have been scaled back another year. Companies have found it more financially attractive to buy additional production capacity than to build it. Additionally, more capital expenditures are being slated for smaller-scale, lower-cost projects to improve product quality and lower production costs. These projects tend to add only small, if any, incremental gains in production capacity, typically 5% to 15%.

Increased flexibility in the manufacturing processes is still a driving force for many ongoing capital investment. For example, newsprint manufacturers continue to install advanced calendering equipment to produce enhanced-quality newsprint while also providing the technology to produce SC grades of paper as well. This increased product range allows a mill to adjust its production more easily adapt to market conditions.

P&P Survey Results: United States. Total U.S. spending is reported to be only $7.2 billion for the period 1998-2000, down $1.2 billion from last year’s survey. This also marks the second consecutive year of U.S. project spending below $10 billion since the late 1980’s. Spending peaked sharply at $18.0 billion in 1990 and declined steadily to $12.0 billion in 1994 before spiking again in 1995 and 1996.

Tallied spending for new paper machines fell more than $600 million from last year’s survey to total just under $1.7 billion. However, spending for new machines still accounts for over 23% of total spending. In conjunction with the record low capacity growth for paper and paperboard forecast by the American Forest and Paper Association (AF&PA) through 2001, there are fewer new paper machine installations slated to come online. Tables 2 and 3 list the new mills and machines scheduled to begin production through 2001. Only 19 new machines are currently scheduled to be installed in the U.S. during 1998-2001, with 13 of them to produce tissue.

The estimated $180 million slated by Caraustar Industries Inc. to build a greenfield gypsum facing paper mill has not been included in the spending totals. Caraustar is currently considering buying an existing single machine mill and reconfiguring it at a much lower cost than building a greenfield mill. A final decision is expected in early 1999.

Spending on machine rebuilds fell over $400 million from last year’s survey, falling to just over $1.2 billion. However, the percentage of total spending on machine rebuilds only fell from 19.8% to 17.2%. Combined, spending for new machines and machine rebuilds fell from 47.0% of total reported spending in last year’s survey to 40.3% this year.

Spending on pulp and fiber and wood spending is lower compared to last year, largely due to the completion of the last of the market deinked pulp mills announced in the mid-1990’s, with none expected in the near future. The last two projects came online in 1997, Ponderosa Fibres of Pennsylvania and Ponderosa Fibres of Washington.

Spending for environmental projects more than doubled from last year to total $983 million this year. This sharp increase is not unexpected as companies have begun to authorize the necessary steps for mills to meet the more stringent environmental requirements of the Cluster Rules legislation. The final legislation was finally published in the Federal Register in mid-April 1998, starting the clock ticking for compliance. While a number of companies have already invested to comply with the new regulations, many have yet to make the process modifications necessary to meet the stricter emissions guidelines.

Estimates of the cost of industry compliance have ranged from $1.8 billion by the Environmental Protection Agency to $2.6 billion by AF&PA. A tally of projected estimated spending by 28 U.S. companies by Pulp & Paper Project Report in mid-1998 pegged the cost closer to $3.2 billion. However, since that time, several companies have announced that they will permanently shut kraft pulp operations to avoid the necessary expenditures. These companies include P&G, K-C, Donohue, and Stone Container Corp.

Spending on energy projects is down approximately $200 million compared to last year’s survey. However, this is somewhat misleading as a number of new boiler installations are being reported as environmental projects. The new boilers, many of which are multi-fuel or hog fuel boilers, are intended to reduce material sent to landfills because they are able to burn sludge and other mill waste materials, while also reducing air emissions with a concurrent shutdown of older boilers.

There are still a significant number of proposed projects to build greenfield mills or install new machines still active in the U.S. Several of them appear to be moving closer to obtaining financing to begin construction while others continue the difficult task of raising capital. It is interesting to note that the majority of proposed projects in the U.S. are not being developed by established paper or forest products companies. Rather, they are spearheaded by independent developers.

P&P Survey Results: Canada. Spending at Canadian mills is expected to decrease 5.7% to tally only C$3.3 billion for the period 1998-2001. This is the lowest spending reported since the C$2.8 billion reported in the 1980 survey. However, the percentage decrease is one of the smallest reported in the past 20 years. Historically, spending at Canadian mills has risen or fallen sharply from year to year, typically by 20% or more on an annual basis.

Spending for new paper machines increased due to the installation of a new 152,000 mtpy uncoated groundwood papers machine by Alliance Forest Products Inc. in Donnacona, Que., with startup scheduled in 2000. The new machine will add only 62,000 mtpy of net capacity as Alliance will end production on two old smaller existing machines at the mill. Stora Port Hawkesbury Ltd. began production on the only other new machine in Canada in the survey period in April 1998 in Port Hawkesbury, N.S.

While the combined total of C$1.75 billion for new machines and machine rebuilds is up marginally from last year’s total, the percentage of total spending for these two classifications is up from 47.6% to account for 53.6% of total spending at Canadian mills.

Increased spending is also reported for environmental and energy projects by Canadian mills, similar to their U.S. counterparts. The largest such project is underway by Weyerhaeuser Canada Ltd. in Prince Albert, Sask. Weyerhaeuser is installing a new recovery boiler and converting the existing recovery boiler to a multi-fuel boiler, to provide many environmental benefits.

There are still two proposed machine installations active. However, a third proposal by Daishowa-Marubeni International Ltd. to build a greenfield lightweight coated (LWC) groundwood paper mill in Peace River, Alta., was put on indefinite hold in 1998 due to the ongoing economic recession in Japan and lower paper prices.

About P&P’s Annual Survey. Now in its 35th year, Pulp & Paper and Pulp & Paper Project Report’s annual capital spending survey covers expansion and modernization projects at U.S. and Canadian mills. Unlike surveys that track spending by year, this survey covers spending by project. Dollar figures represent the total cost of reported projects and often include supporting equipment. The total cost of multi-year projects is assigned to the startup year and is not divided among the years of expenditure. Each survey primarily covers the three-year period, but projects with firm startup dates beyond that time—in this case, 2001—are also included.