Halfway to where?

The Fourth of July is one of my favorite holidays. It's the biggest event of the summer and also marks the halfway point in the year. This year, I attended my usual barbecue and fireworks over at the local lake. The barbecue was somewhat unusual in that several people from very different professions were talking about the state of the paper industry. I spoke with an electrician, a pump supplier, a market research consultant, a local university employee, and a chemicals salesman. Each person worked with local mills or was involved with the paper industry in some way and had felt the impact of our current industry troubles.

The discussion was somewhat focused locally, but many of my barbecue companions realized that local problems are being caused by global forces, so we talked about these issues as well. Knowing that I was an editor that follows the ups and downs of the industry as part of my daily routine, many of them wondered if I had any type of explanation for why the paper industry seemed to have so many problems right now. Specifically, they all wondered why the problems seem to go on and on and on.

Well, I did my best to delve into the issues, but it's hard to explain it all in a few short conversations. However, I had just previewed a copy of our mid-year outlook article that appears in this issue of Pulp & Paper. The article provides a snapshot of where the North American industry stands at the halfway point of 2001 and insight into the future as well, so I was able to explain some of the industry's barriers to success. These issues are complicated, global, interrelated, and both short and long term.

ECONOMICS 101. So what does our outlook article tell us? Obviously the last few months have been difficult and, in the short term, it doesn't seem that things will improve much. In fact, one analyst even used the dreaded term "recession" in describing the current state of the pulp and paper industry. Another analyst notes that this is the worst downturn since the 1990-91 recession.

Certainly, based on what I read and hear, the exchange rate is possibly the one overriding factor contributing to the slowdown in production, demand, and profitability. Salomon Smith Barney calls it the number one issue for this paper industry cycle. The strong dollar has made European mills much lower cost than an average U.S. mill. It has also led to a surge of imports and suppressed U.S. exports.

MARKET DOWNCYCLE. The grade-by-grade review in Pulp & Paper's outlook article touches on other market factors such as the weak economy and the subsequent fall off in advertising. The toll on jobs and mills has been particularly difficult, with at least 10,000 jobs lost and a record number of mill closings. And, unfortunately, our capital spending review illustrates that weaker profits are leading to cut backs in investments.

Not all the news is gloomy, of course. The industry is doing a good job of controlling output in many areas and keeping inventories down in the face of sluggish demand. This should mean that, when the economy improves and paper markets recover, rising demand will quickly mean rising output. Still, times are tough.

ENERGY. Energy costs play an important role for any pulp and paper mill. The rapid rise in natural gas and electrical prices in the U.S. has certainly had a major impact on mill costs and competitiveness. The comment column in this issue has an interesting discussion on energy costs and government policy that is sure to raise questions about this important facet, particularly since the pulp and paper industry is a major energy consumer.

It was fun to enjoy the festivities marking our Declaration of Independence, and interesting to again note how the production of paper can affect so many lives and professions.