Project spending for environmental compliance remains significant while capacity-adding new paper machines and rebuilds remain limited

Spending restraint continues, focus on environmental compliance projects

Despite the slight increase, the U.S. figure is still among the lowest recorded during the past 20 years and is down more than 45% from the most recent spending peak of $13.6 billion in 1996 (Figure 1).

FIGURE 1: While total spending remains low, Cluster Rule projects offset investment drops in capacity expansion projects.

The Canadian total, while higher than last year, is still among the lowest reported spending totals in 10 years (Figure 2). Canadian spending has continued to decline the 1991 spending high of C$10.2 billion.

While identified project spending remains constrained, total capital spending in calendar year 2000 was expected to jump 16% based on a sample of 36 publicly owned companies in U.S. and Canada (Figure 3). This is a reversal of the trend from 1997 through 1999, when spending decreased at an average annual rate of 13.8%.

A summary of reported expenditures at U.S. and Canadian operations for the survey period 2000 to 2002 is reported in Table 1, with data broken out by project type and geographical region. Projects with firm completion dates in 2003 are also included in these totals, though they represent a small portion of total spending. Figures 1 and 2 show historical data for U.S. and Canadian spending during the last 10 years.

Spending for compliance. Maintaining their recently adopted conservative spending philosophy, North American companies continue to seek projects with a higher return and lower cost, resulting in the low spending levels of recent years. Historically, the industry has invested in many high-cost, capacity-adding projects. However, under this new spending philosophy, capacity-driven projects have diminished. Data from the Food and Agriculture Organization (FAO) of the United Nations indicates the region's paper and paperboard capacity is expected to grow at an average annual rate of only 0.8% through 2002, as compared to a 10-year average annual rate of about 2.6%.

Replacing capacity-driven projects as a primary spending area, environmental project spending has increased, receiving the most funding among U.S. projects and falling second only to pulp mill improvement plans in Canada for the survey period.

For U.S. operations, the Cluster Rule accounts for part of the shift in project spending focus from capacity growth to reducing environmental impact. Maximum achievable control technology (MACT I and MACT III) regulations were established in 1998 with an April 2001 compliance deadline, causing companies to spend the past several years working on environmental improvements.

Additionally, MACT II regulations for air emissions from combustion sources were proposed in 1998. As of this writing, they had not been promulgated, but the U.S. Environmental Protection Agency reportedly was under court order to issue the regulations by Dec. 15, 2000. According to the proposal, companies can expect to have a three-year compliance schedule from the date of promulgation.

The EPA also established regulations to reduce nitrogen oxide (NOx) emissions from utility and non-utility combustion sources in 22 states east of the Rocky Mountains by May 2003. Although the emission rules are under litigation, they could spell more mandated environmental improvements.

International Paper Co. (IP) expects to more than double its spending for environmental projects for the period 2000 and 2001. The industry giant plans to spend more than $350 million in the two-year period primarily on projects to address the Cluster Rule and NOx regulations. In 1999, environmental expenditures were about $89.5 million, or 8%, of the company's total capital spending of $1.1 billion.

The company has yet to make plans to address the still pending MACT II regulations. But it has been an industry leader with respect to environmental compliance, typically converting its operations to meet more stringent standards well ahead of schedule. IP is also working with the EPA on Project XL to develop, test and implement an emissions monitoring computer model at its Androscoggin mill in Jay, Maine.

Keeping with industry efforts to reduce capacity, IP planned to remove 1.2 million tons of capacity from the uncoated papers, market pulp, unbleached kraft paper, and containerboard markets with the closing of mills in Mobile, Ala., Lock Haven, Pa., and Camden, Ark., by the end of 2000.

Georgia-Pacific Corp. (G-P) also reports increased environmental capital spending, according to Susan Moore, V.P. of environmental affairs. It's spending for pollution control and abatement was expected to total $260 million in 2000, up from $147 million in 1999, $90 million in 1998 and $80 million in 1997. G-P expects its compliance investment to total $550 million through April 2006. Figures do not include spending for recently acquired Fort James Corp. facilities.

Environmental spending has also continued to claim an increasing portion of the company's total spending. In 1997, environmental spending accounted for 11% of G-P's $715 million of capital expenditures. In 2000, it should account for 29% of the company's expected $900 million in capital spending.

Moore said G-P is presently researching ways to meet the NOx reduction regulations. Ideas being considered include adding controls to power boilers and other combustion equipment and other alternatives such as switching fuel at some mills. The company is also taking a proactive approach to the proposed MACT II regulations. As part of the EPA's Project XL, G-P will install a black liquor gasification system at its Big Island containerboard mill in Virginia. Gasification converts by-products from the wood-pulping process into a clean-burning fuel that can help power the mill. The effort could reduce air emissions by 90%, exceeding MACT II requirements.

Weyerhaeuser Co. expects environmental spending to be about 9% to 11% of its total capital spending budget in 2000 and 2001 vs. 19% in 1999. The company anticipates spending at one or both of its mills in North Carolina to meet NOx regulations. It is also planning a large project at Dryden, Ont., to reduce air emissions including NOx and rebuild an uncoated free-sheet machine.

Much of the company's remaining spending will be used for project upgrades, which by design will include equipment that also lessens the mill's environmental impact. For example, Weyerhaeuser is planning a C$167 million project at its Grande Prairie, Alta., facility to install an oxygen delignification stage and upgrade the mill's water treatment system by 2002. In addition to improving the pulp mill's productivity, the projects will reduce the mill's use of chlorine dioxide and the effluent color.

As part of Bowater Inc.'s announced plans to spend $281 million at its Catawba, S.C., mill through 2003, the company is installing a $175 million new kraft pulp mill and converting a paper machine at a cost of $106 million. The pulp mill project will bring the facility into compliance for new air and water regulations and should be completed by 2003. As part of the project, the company will be participating in the EPA's Voluntary Advanced Technology Incentives Program (VATIP). Bowater is also spending $88 million on a new recovery boiler at its Thunder Bay, Ont., facility to reduce air and particulate emissions.

P&P Survey Results: United States. Total U.S. spending is reported to be $7.4 billion for the 2000 to 2002 period, slightly more than last year's survey total. This also marks the fourth consecutive year of U.S. project spending below $10 billion since the late 1980s. Spending peaked at $18.0 billion in 1990, then steadily declined to $12.0 billion in 1994 before spiking again in 1995 and 1996, when the total was $13.6 billion.

Expenditures for new paper machines nearly doubled from $900 million as reported in last year's survey to $1.8 billion this year, the first increase in spending on paper machines since 1998. Fourteen new paper machines are planned to come online within the survey period, accounting for about 25% of the estimated spending. Last year's survey tallied 13 new machines.

Six new machines were announced in the past year with total project costs of $1.2 billion. Kimberly-Clark Corp. is installing two new tissue machines and converting lines at facilities in Jenks, Okla., and Loudon, Tenn., at a cost of $300 million, and Willamette is investing $475 million to install an uncoated free-sheet paper machine and replace the soda pulp mill at its Kingsport, Tenn., facility. Other announced machines include two tissue machines being installed at Procter & Gamble Co.'s mill in Mehoopany, Pa., at a cost of $350 million and a $125 million expansion project adding a recycled corrugating medium machine at Solvay Paperboard LLC's Syracuse, N.Y., mill.

Table 2 identifies the 15 new machines, including one new paper mill, scheduled to begin production in North America within the survey period. Of the new production lines, seven machines were scheduled to start in the U.S. by the end of 2000. The tissue segment continues to be responsible for a majority of new machine installations, continuing a trend observed in the last two surveys. Eight machines scheduled to start up in the U.S. during the survey period are being installed for the tissue segment.

Spending on machine rebuilds also increased this year, totaling more than $1.5 billion as compared to last year's estimated $1.3 billion. Combined spending for new machines and machine rebuilds in the U.S. rose to 44.6% of total reported spending as compared to 30.8% last year.

Environmental project spending fell slightly from last year's $2.3 billion to $2.1 billion, but still accounted for more than 28% of reported capital spending. Companies expect to continue this level of spending on environmental projects to meet the more stringent requirements of the Cluster Rule legislation already promulgated and that yet to come.

Table 3 lists proposed projects to build greenfield mills or install new machines in North America under development. Several of the proposals appear to be moving closer to obtaining financing to begin construction, while others are still struggling to secure capital in a business climate that is discouraging investments for capacity growth. Additionally, one project has been relegated to proposed status. Re-Box Paper Inc.'s $172.0 million project to build a white-top linerboard machine at DePere, Wis., continues to be de-layed while the company attempts to secure financing.

P&P Survey Results: Canada. Spending at Canadian operations is expected to increase 8% to total C$2.7 billion for the period 2000 to 2002. Like their U.S. counterparts, many Canadian companies are also operating to limit capital expenditures to at or below depreciation levels. Therefore, the number of identified projects has dwindled.

No new paper machines are scheduled to start up in Canada in the foreseeable future. The C$275 million, supercalendered papers machine at Alliance Forest Products Inc.'s Donnacona, Que., mill started production in October 2000. Paper machine rebuilds account for another $572 million in spending, and combined, the new machine and rebuild projects are responsible for nearly a third of Canadian spending.

Totaling $855 million, pulp mill improvement projects account for 31.4% of total reported spending in Canada. Major investments include Papier Masson Ltee's C$158.0 million project to install a new 740 mtpd thermomechanical pulp (TMP) line at its Masson-Angers, Que., facility. Tembec Inc. is also installing a new C$128.0 million TMP line at its newsprint mill in Pine Falls, Man.

Canadian companies are also making environmental improvements, which are slated to account for 22.0% of total reported spending. Weyerhaeuser's C$167 million project at its Grande Prairie, Alta., facility to install an oxygen delignification stage is among those projects. Its C$343 million project to install a new recovery boiler and convert the existing boiler at its Prince Albert, Sask., facility is also included.

Finally, Grande Alberta Paper Ltd. is still considering a C$900.0 million greenfield mill for lightweight coated groundwood papers in Grand Prairie, Alta., but the target start-up date has been pushed back to 2006, at the earliest while the company completes its environmental assessment report.

A proposed C$420 million project to reopen the Gaspesia Pulp & Paper Co. Ltd. mill in Chandler, Que., (formerly an Abitibi-Consolidated Inc. mill), and convert the former newsprint operation to coated free-sheet production is also still under consideration, but no start date has been finalized.

About P&P's Annual Survey. Now in its 37th 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 tracks 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 start-up year and is not divided among the years of expenditure. Each survey primarily covers the three-year period, but projects with firm start-up dates beyond that time are also included.