MICHAEL JONES
is senior consultant with Jacobs-Sirrine Consultants, Atlanta, Ga.

Challenges and changes for kraft papers

by MICHAEL JONES

In general, the pulp and paper industry has come under intense scrutiny in the past several years due to rising manufacturing costs and very high capital costs. For kraft paper grades such as unbleached bag, bleached bag, multiwall shipping sack, and kraft specialties, these rising costs are compounded by a declining market. And, perhaps no other paper grade has been harder hit by the introduction of alternate media than kraft packaging. For example, the introduction of plastic has decimated the grocery bag market.

CHALLENGES FOR NORTH AMERICA. U.S. shipments of unbleached grocery bags reached a high in 1984 of 2.2 million tons, while today these shipments are less than 1 million tons. U.S. shipments of multiwall sack reached a high of about 1 million tons in the 1970s, dropping to the 800,000-tpy range in 1999. As with many grades, the most serious challenge facing producers of kraft papers is managing supply and demand through the business cycle.

Overall, from 1985 to 1995, U.S. production capacity for kraft papers decreased by 1.4 million tons due primarily to the increased use of plastics. The good news is that demand is expected to remain relatively constant for the foreseeable future. And, in response to plastic, "handled" shopping bags are appearing, particularly in the U.S. Midwest and West. Bleached bag producers are producing a brighter, smoother sheet in response to the needs of these converters, who are looking to produce more aesthetically pleasing bags with vivid colors and graphics.

Grade differentiation is important in the kraft papers market as producers attempt to maximize profits. Multiwall shipping sack sells at a premium of about $200/ton. Northern mills have an advantage in this market with superior fiber. While southern mills produce this grade, northern mills in the U.S., Canada, and Europe dominate the higher end, "high-performance" grades typically used for cement bags.

Consolidation, very common in most grade lines, is not occurring with kraft papers in North America. International Paper (IP), once perhaps the largest producer and converter of kraft paper is no longer a major player in this market. In 1997, IP sold its multiwall converting plants to Southern Bag. Also in 1997, IP shut down its bleached bag machine in Moss Point, Miss. In October 2000, IP announced the permanent shutdown of its Camden, Ark., mill, which produced about 260,000 tpy-210,000 tpy of which was multiwall and unbleached bag. Part of this production will be transferred to other IP mills-Roanoke Rapids, N.C., and Savannah, Ga.

In addition, Smurfit-Stone ceased production of bag and kraft papers at its Florence, S.C., and Jacksonville (Seminole), Fla., mills. In spite of this, Smurfit-Stone's Hodge, La., mill is the largest producer of kraft papers in North America.

CONSOLIDATION IN EUROPE. On the European front, consolidation is much more prevalent. AssiDomän, once Europe's largest producer of kraft papers, has effectively exited the kraft papers market in two separate deals. One was the sale of two mills to Frantschach, and the other the spinoff of its two remaining kraft paper mills. Frantschach Packaging and Billerud have emerged as the leading European producers of kraft papers.

Frantschach is now the largest converter of kraft bags, producing some 3 billion industrial sacks per year. In the largest acquisition in its history, Frantschach purchased the entire industrial sack division-two paper mills (Vaja, Sweden, and the Sepap mill in Czechoslovakia) belonging to AssiDomän. The total value of the acquisition was 550 million Euro. Frantschach now has four mills producing kraft papers with a capacity in excess of 600,000 tons.

Billerud is a 50/50 joint ownership between AssiDomän and Stora Enso and was formed with the spinoff of AssiDomän's Karlsborg, Sweden, and Skarblacka, Sweden, mills and Stora Enso's Gruvon, Sweden, mill. The total capacity of Billerud is over 400,000 tons. Other big players in the European market include Korsnäs at Gävle, Sweden, and UPM-Kymmene with mills at Pietarsaari and Tervasaari, Finland. Together, these companies produce about 500,000 tpy of kraft papers.

Western Europe currently produces about 2.1 million tpy of kraft papers, about 20% of which is bleached. This is comparable to North American production. North American producers, particularly multiwall producers, are increasingly concerned about the threat of imports, as well as competition in the international markets from European producers.

From an operations perspective, the principle challenge facing both North American and international producers of kraft papers is the rapid increase in energy costs, particularly natural gas and electricity. For North American producers in 1999, the average fuel cost per ton across all grades was $21.60/ton, and in 2001, it is $33.59/ton-an increase of 55%. Similarly, the average electrical cost increased 37%, rising from $8.73 to $12.00.