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High energy prices put heat on mill profitability
At Enron Corp., the largest energy trader in the world, U.S. pulp and paper companies have lined up for help the last three or four months because of skyrocketing electricity and natural gas prices.
In California, some mills are paying seven times the price for open-market energy than they paid one year ago. Mills outside the U.S. are not immune from higher energy prices. Mills throughout the U.S., especially those without co-generation plants, face excessively higher energy costs caused by increased demand and lack of supply. Even mills in the United Kingdom saw an up to three-fold increase in natural gas prices in January during cold periods, and representatives from various industries asked the government for a full investigation, according to a BBC report last week.
The high prices don't appear to be receding soon. According to the Energy Information Administration, average U.S. natural gas prices are expected to increase 40% this year over last year, and be up 21.5% in the first quarter compared to fourth-quarter 2000. In addition, the high energy costs come as the U.S. economy slows and could possibly hamper demand for paper and paperboard products. This year's U.S. gross domestic product growth has been estimated by some economists to be in the 2% range, down from an estimated 4% last year.
“ There has been a heightened interest about the options that are available and what are the ways to mitigate the potential costs,“ said Bob Anderson, dir., pulp and paper group, Enron Industrial Markets.
At Smurfit-Stone Container Corp. (SSCC)—the world's largest paper-based packaging company—the company expected a minimum $75 million additional energy cost in 2000 compared to 1999. The $75 million by itself represents an estimated 37% of SSCC's estimated earnings of $200 million last year.
When releasing earnings reports, International Paper said its energy cost was up $40 million quarter-over-quarter, and Kimberly-Clark (K-C) said it expected energy costs in 2001 to be $50 million more than in 2000, with the highest costs in the first half of the year.
In California alone in December, six recycled mills shut due to the high energy costs and rolling blackouts affected various operations.
Jacobs-Sirrine Consultants reports energy costs this year represent 20% or about $53/ton out of an average North American unbleached kraft linerboard mill's cash level cost of $265/ton. Energy has become the second highest cost for a kraft linerboard mill behind fiber (about $106/ton), says Bill Studstill, group manager, Jacobs-Sirrine. Mills that must buy natural gas from the indexed open market are most at risk.
Patrick J. Moore, SSCC's v.p./CFO, said the company was working feverishly to constrain energy costs. He told Pulp & Paper Week that the company was trying to hold 2001 energy costs across its system at 2000 levels. He added that the company was also trying to “ ensure ” energy supply for its operation on a consistent basis. Moore also said the company was hedging some of its energy costs as a way to guarantee consistent pricing and avoid volatile open-market prices.
Some companies, including SSCC, also were selling energy from some of their co-generation plants back to the grid as a way to benefit from the high prices
Of about 460 pulp, paper, and paperboard mills in the U.S., approximately 30-40% have co-generation plants that power mill operations. Co-generation plants usually run about $30-$40 million, depending on the size of the mill, but haven't been a high-priority issue in recent years in the capital-intensive industry, especially at independent mills.
High energy cost was a reason Boise Cascade announced a $60/ton price increase for uncoated free-sheet paper for Feb. 1. Boise also cited chemical and transportation costs as key factors.
No containerboard or newsprint companies have publicly stated the need for higher end-product prices to compensate for higher energy prices. Some recovered paper suppliers blamed the continuing-weak recovered paper prices in the U.S. partly on reduced demand from mills that shut because of the energy costs and didn't require material.
Studstill said passing along costs to end-product customers would be difficult because the linerboard and uncoated free-sheet markets have weakened. “Paper companies have to be patient and pay the higher prices, ” he said.
Enron has approached paper and paperboard companies with options for dealing with the higher energy prices: price hedging; installing new, efficient technology that decreases energy consumption and not paper/board output; an operations/maintenance contract where Enron manages a mill's energy system and a weather derivative that offers mills a chance to pay a historical average energy price when they use more power or use less power
Enron would contract to guarantee lower energy consumption at a mill by paying for installing efficient technology. As part of the deal, Enron would share in the future savings from lower consumption that the new technology would provide.
GREG RUDDER, Exec. News Editor
Canadian earnings, shipments up in 2000
Canada's pulp and paper industry had a solid year in 2000, with estimated net earnings of C$2.6 billion and record shipments totaling 31.5 million mtons, according to a state of the industry report in Montreal at the PaperWeek International meeting. Newsprint and printing and writing grades were the top performers for the industry, and the industry achieved the earnings at an operating rate of 94%. The increase in net earnings was an estimated 245%, from C$752 million in 1999. Looking ahead to this year, panelists said additional consolidation is needed within the Canadian industry to lower costs and enlarge companies. Canadian market pulp exports are expected to drop 13%, with newsprint exports remaining flat, compared to last year. Printing/writing papers is the only sector with expected shipment growth, estimated at 1.7% this year.
U.S. paper, forestry profits up in 1999
Paper producers rallied to push 1999 sales and earnings to the highest level since 1995, carried forward by a booming U.S. economy and higher pricing for most pulp and paper products. The year saw a series of successful price increases on products ranging from market pulp to publication papers and kraft linerboard. Companies with lumber and building products businesses, like Weyerhaeuser Co., Georgia-Pacific Corp. (G-P), Boise Cascade Corp., and Louisiana-Pacific Corp. (L-P), also benefited from a strong housing construction market and record prices for building products. A survey of 30 publicly traded U.S. companies showed total net income for the group increased to $5.97 billion in 1999 from $3.75 billion in 1998, a gain of 59.3%. Net sales increased to $131 billion from $121 billion, a gain of 7.5%. The overall net profit margin improved to 4.8% from 3.1%. G-P and L-P recorded the largest net profit gains in 1999, helped by big contributions from building products. G-P increased net income to $716 million in 1999 from $111 million in 1998. L-P boosted earnings to $222 million in 1999 from $38 million in 1998. Weyerhaeuser was the industry's most profitable forest products company. Earnings before charges related to the acquisition of MacMillan Bloedel Ltd. were $681 million in 1999 compared with $339 million in 1998.
Weyco extends Willamette offer
Weyerhaeuser Co. extended its acquisition offer for Willamette Industries Inc. to Mar. 30 from Feb. 1, and the company said it had gained a 51% majority of Willamette common shareholders in favor of the $48/share hostile takeover offer. Rival Willamette's response continued to be strongly against the Weyerhaeuser offer. Sources report that Willamette is under pressure from Weyerhaeuser, as well as its labor unions at the 936,000 tpy Campti, La., linerboard mill and the 167,000 tpy Kingsport, Tenn., uncoated free-sheet mill.
Chesapeake selling retail display unit
Chesapeake Corp. is selling its retail display business and corrugated packaging business. Chesapeake plans to build global market share in consumer, pharmaceutical, and health care packaging, including an expanded presence in North America to complement its strong position in Europe. Field Group plc, acquired in 1999, is Europe's leading supplier of premium folding cartons, leaflets, and labels with forty-one operations in Europe and one in the U.S. Boxmore International plc, acquired in January 2000, is Chesapeake's plastic containers, bottles, and closures business, with five operations in Europe, two in South Africa and one in China. The discontinued businesses accounted for approximately 38% of the company's 1999 revenues of $1.16 billion, but only 15% of the company's 1999 operating income of $106 million. For the first nine months of 2000, the discontinued businesses accounted for approximately 40% of the company's revenues, but generated an operating loss of approximately $13 million.
P&G lowers prices; launches new napkin
Procter & Gamble lowered prices by 4.5% for its Bounty paper towel products late last year, a rollback of an earlier price increase in 2000. Prices for Charmin premium bathroom tissue last increased in the spring of 2000, according to the company. P&G and G-P have about a one-third share each of the U.S. paper towel market, according to estimates, followed by K-C. Separately, P&G announced the national launch of new Bounty brand paper table napkins following a successful test market in Charleston, S.C.
International Paper to sell Ohio mill
International Paper Co. (IP) has signed a definitive agreement to sell its Hamilton, Ohio, 50,000 tpy coated and uncoated papers mill to Smart Papers LLC for an undisclosed amount. Smart Papers LLC is an affiliate of Sun Capital Partners Inc., a merchant banking firm that specializes in leveraged buyouts and venture capital investments. The mill will operate as an independent affiliate of Sun Capital, and will be called Smart Papers LLC. The mill has three paper machines. The sale of the so-called B Street mill is part of IP's plan to divest itself of $5 billion worth of assets including timberlands.
IP said it is selling off assets in order to focus solely on its core paper, packaging, and forest products businesses.
Empire calls off buy of Newton Falls mill
The agreement reached late last year to sell the Appleton Coated Paper mill in Newton Falls, N.Y., to a private investment group has collapsed. Empire Paper Group LLC agreed to pay $20 million for the 140,000-tpy coated free-sheet mill in upstate New York, but could not complete the deal after failing to acquire the required financing. Officials of Empire Paper said the deal is &ldquop;completely off.” Representatives of Marquette Paper Co. of Elmhurst, Ill., and several investors formed Empire to buy the mill and planned to expand production of coated free-sheet papers for the commercial printing market. The group planned to add about 200 jobs, in addition to the current 130 employees.
Caraustar shutters Chicago Paperboard
Caraustar Industries Inc. announced the permanent closure of Chicago Paperboard, a 69,000 tpy recycled paperboard mill due to a lack of demand. The mill was profitable through 1998, but declining sales resulted in operating losses of $2.6 million in 1999 and $1.5 million in 2000. The one-machine mill has been idle since early November due to soft market conditions. Caraustar will incur a pre-tax charge of approximately $4.3 million in the first quarter 2001 to reflect the costs of permanently shutting down the mill and providing transition assistance to affected employees.
Lyons Falls closes N.Y. paper mill
Lyons Falls Pulp & Paper Inc. has begun the “orderly shutdown” of its 220-tpd printing and writing papers mill in Lyon Falls, N.Y. The mill operates two fourdrinier machines with trim width of 100-in and 140-in, respectively. It mainly produces book offset papers and was the first U.S. fine paper mill to offer total chlorine free (TCF) uncoated free-sheet paper beginning in 1991. Lyons Falls employs 186 employees, of which 138 are represented by the Paper, Allied-Industrial, Chemical & Energy Workers International Union (PACE), Lyons Falls Local No. 560. The company and union are in the process of negotiating a shutdown agreement, which, once completed, will provide severance benefits to eligible employees. Salaried employees will also be eligible for certain severance benefits. The company has been actively seeking a buyer for the facility.
Fox River to close Michigan paper mill
Fox River Paper Co. said it will permanently close its small Vicksburg, Mich., printing/writing paper mill by April due to excess production capacity companywide. All production at the 36,000 tpy mill will be shifted to Fox Paper's other facilities. Costs related to the closure are not being disclosed. The company does not intend to sell the mill. The closure allows Fox Paper to sharpen its focus on meeting long-term customer growth needs, according to a company press release. The closure affects 214 employees at Vicksburg. After the mill closes, Fox Paper will operate three other papermaking facilities in Ripon, Calif. (33,000 tpy of printing/writing papers); Urbana, Ohio (36,000 tpy of text papers); and Housatonic, Mass. (33,000 tpy of printing/writing).
Enron set to buy Quebec City mill
Daishowa Paper Manufacturing Co. of Japan plans to sell its Canadian unit Daishowa Forest Products Ltd. and its 515,000 mtpy Quebec City paper mill to Enron Industrial Markets. It would be Houston-based Enron's third purchase of mill assets in the last two years in the U.S. and Canada. Financial terms of the deal were not disclosed. The transaction includes the four-machine Quebec City mill, as well as a sawmill and Ste-Aurelie Timberlands Co. in Maine. The mill has capacity to make about 326,000 mtpy of newsprint, 141,000 mtpy of uncoated groundwood paper, including telephone directory paper, and about 48,000 mtpy of uncoated multiply paperboard. The Quebec City mill employs 1,200 people and is one the largest private employers in the city. With this latest acquisition, Enron would manage at least 546,000 mtpy of newsprint capacity—making the company the eighth largest newsprint producer in North America.
Westvaco files patent infringement suit
Westvaco Corp. has filed suit in the Federal District Court for the southern district of New York against four international companies, charging patent infringement on Westvaco's DVD-Safe package, which provides a secure holder for DVD discs. The technology covered by the patent was developed at DuBois Limited, a U.K. company that is now a wholly owned subsidiary of Westvaco. The four defendants named in the lawsuit are: Viva Magnetics Limited and Finest Industrial Co. Ltd., both based in Hong Kong; Ponica Industrial Co. Ltd. of Corona, Calif.; and Matric Associates Inc. of Pacific Palisades, Calif. Westvaco charges the four companies are responsible for importing into the U.S. DVD packages which infringe its patent. It is seeking to ban further manufacture, use, sale, or importation of its patented DVD holders and also an award of damages for past infringement of the patent.
Potlatch slates layoffs at Idaho mill
Potlatch Corp. will cut 124 jobs at its huge pulp, paperboard, and consumer tissue operations in Lewiston, Idaho. According to the company, the cuts are part of their ongoing effort to reduce costs and increase efficiencies, . The company eliminated 290 salaried positions company-wide in June 2000. In December, Potlatch announced it would lay off up to 60 hourly positions at two pulp and paper mills in Minnesota, one in Brainerd and one in Cloquet. Each mill laid off 30 workers in January. In addition, 80 hourly positions were not replaced at the mills after those employees retired in 2000. The company does not have any specific plans for future layoffs, however, it said it will continue to examine methods to become more efficient, reduce costs, and increase productivity.
Abitibi mill moves to recycled newsprint
Abitibi-Consolidated Inc. switched its 472,000 mtpy Sheldon, Texas, newsprint mill to a 100% recycled operation from 85-90% recycled content. In doing so, the three-machine mill will pull old newspapers (ONP) from a larger area than primarily Texas and Louisiana, such as the Midwest. The move was made because of high energy costs (the thermomechanical pulp line at the mill was an energy-intensive user), and because the company felt the supply for added recycled- content newsprint could be easily found. In addition, the company official said the move to 100% recycled “simplified” the mill's operation. The Sheldon mill outside Houston is Abitibi-Consolidated's second largest newsprint mill, behind 550,000 mtpy Baie-Comeau, Que., mill.
IP to increase paperboard prices
International Paper Co. (IP), the largest U.S. producer of bleached packaging board, proposed a $60/ton price increase for all grades of bleached paperboard produced at its U.S. mills. The increase was to go into effect with shipments on or after Feb. 16. However, the price increase may not be fully implemented until the second quarter. IP cited high energy costs—up $40 million in the fourth quarter compared to the third quarter and $220 million higher for the year. IP also cited higher costs for caustic soda and polyethylene (PE) resin coatings.
Recycled boxboard mills set price hikes
In order to compensate for increases in the cost of recycled fiber and virgin pulp and other manufacturing expenses, a number of North American producers raised prices for recycled folding boxboard grades recently. A broad range of calipers and grades are covered by the company announcements, but the primary focus of the price hikes are the premium folding carton grades, including clay-coated newsback (CCNB), white top, manila lined, and specialty grades. Some of the companies that have confirmed price increases to their customers: Smurfit-Stone Container Corp. increased the price of Mastercoat recycled boxboard by $50/ton effective Feb. 28. The Newark Group increased prices for all clay-coated recycled boxboard grades by $50/ton on and after Mar. 6. Rock-Tenn Co. raised prices on all grades of coated recycled paperboard by $50/ton effective with shipments on or after Mar. 1. Caraustar Industries Inc. will increase base pricing for all clay-coated recycled paperboard grades by an average of 10% effective Mar. 7.
Sonoco, Rock-Tenn set plant closings
Two of the country's biggest recycled paperboard and packaging companies reported lower fourth quarter sales and earnings for the fourth quarter and announced plans to close plants in order to manage costs. Rising energy prices, particularly for natural gas, were also a factor during the quarter. Recycled paperboard mills are large buyers of electricity and fuel and have virtually no ability to generate their own energy requirements. Energy costs account for approximately 18-20% of total manufacturing costs for recycled paperboard mills, compared to only 12% for bleached paperboard mills. Sonoco Products Co. said energy costs increased $5 million during the fourth quarter as natural gas prices rapidly rose. The slowing economy and a subsequent 8% decline in overall business volume also hurt fourth-quarter results. The company has announced its intent to close five packaging plants in the U.S., cutting 487 jobs, or about 3% of its 19,000 employees. Rock-Tenn Co. said net income for its fiscal 2001 first quarter ended Dec. 31 fell 44%, mainly due to high energy costs and weak demand. The company said it expects to close its Augusta, Ga., folding carton plant in April and consolidate production at two other plants in the Southeast.
McDonald's to use new container
A new environmentally friendly Big Mac hamburger container was recently approved for use in 300 McDonald's Corp. restaurants. Containing recovered paper and other composite materials, the EarthShell foodservice package is 100% biodegradable. If this next phase of testing brings positive results, McDonald's intends to expand usage to the West Coast, beginning with California. EarthShell Corp. of Santa Barbara, Calif., indicated that McDonald's is the first commercial testing of its products, which are mostly intended for the disposable foodservice industry. While EarthShell containers are made from a small amount of 100% postconsumer recovered paper and protective coatings, the prime ingredients are limestone, reclaimed starch (from the commercial processing of potatoes and French fries) and water.
IP moves on China joint venture
International Paper Co. (IP) has formed a joint venture with a leading paper products distributor in China, Pacific Millennium Corp. (PMC), to manufacture and distribute paper cups for major foodservice and fast food restaurant customers. IP and PMC will each assume 50% ownership of Shanghai Cup, a company with a 75 year history and the only manufacturer of paper cups in Eastern China. PMC will manage the daily operations of the Shanghai manufacturing plant, while IP will provide technical support, marketing programs and strategic planning. The Shanghai cup plant employs 45 people and has annual sales of approximately $2 million.
Bowater cancels newsprint buyout
Bowater Inc. announced that it has stopped negotiations to buy South Korea newsprint maker Sepoong Corp. for an estimated $201 million. Bowater said in a press release that “there were unacceptable delays in satisfying certain conditions” the parties agreed upon when they signed a preliminary letter of intent in September. A company spokesman declined to comment further. Based on the preliminary agreement, Sepoong was supposed to lay off workers and remove paper equipment at the Kunsan mill. However, based on reports, neither was done. In addition, Sepoong employees staged a strike in November that added to Bowater's doubts surrounding the acquisition of the mill, according to a report in The Korea Herald. The strike called for job guarantees for the mill's workers after the Bowater takeover.
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