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The North American paper industry has been buffeted and battered this year by lower prices for all grades of printing and packaging papers, excess production capacity, and high energy costs. In addition, the strong U.S. dollar has fueled a flood of imports from overseas producers and reduced demand for U.S. exports.
Earlier this year, industry executives and Wall Street analysts were hopeful that the slowdown would be short-lived and the paper sector would bounce back to its strong performance of last year. Instead, the industry witnessed a record number of mill closings that idled more than 3 million tons of production over the past 12 months. In addition, many pulp and paper mills throughout the country have been forced to take unscheduled downtime lasting from a week to several months due to a lack of orders.
"We're in the clutches of a major recession for the paper industry," said Matthew Berler, a forest products industry analyst with Morgan Stanley Dean Witter. He said he didn't see much relief until the second half of the year. Demand has fallen off across the board, in every product, he said. "The drop is as dramatic as in any period since the last recession in 1990-1991," said Berler.
The toll on the industry's work force has been severe. An estimated 10,000 paper mill workers have lost jobs during the current downturn and more job losses are forecast.
In June, International Paper Corp. (IP) said it would cut 3,000 salaried positions, or about 10% of its salaried U.S. work force, during the next year. The job cuts are in addition to earlier job losses resulting from the closure of about 10 paper mills and 30 converting plants in the 2000-2001 period. The job cuts are aimed at ensuring the long-term profitability of the company, said a spokesman.
In April, IP blamed the weakening U.S. economy, sharply higher energy costs, and plant closings for a loss of $44 million in the first quarter of the year. The company said it would also take a $200 million charge in the second quarter related to additional plant closings.
Other economic factors, mainly the strong U.S. dollar, are hurting the industry's global competitiveness and making it difficult to restore profitability despite aggressive U.S. interest rate cuts. European paper producers have widened their cost competitiveness against U.S. producers, largely because European currencies have plunged more than 40% in value with no offsetting cost inflation since around 1996. The introduction of the euro in January 1999 and its subsequent decline in value further eroded U.S. producers' historical cost advantage. Note that internationally traded products like market pulp, coated papers, and kraft linerboard are priced in U.S. dollars, but costs are in local currencies.
European producers are now the world's low cost producers of coated publication papers, for example, with several mills having a lowered delivered cost to the U.S. Midwest than some U.S. domestic mills. European producers have also acquired paper mill assets in the U.S. and Canada, further strengthening their market leadership.
John Dillon, IP's chief executive and the new head of the Business Roundtable, argues that the strong dollar policycwhich makes U.S. exports more expensive and European and Asian imports into the U.S. cheaper–is causing havoc among U.S. manufacturers.
"There's no question that orders for our products have been off for about a year, and foreign companies are taking an increasing share of the U.S. market," said John Dillon. "It's not that their factories are any more efficient than our factories, but they do have a pretty sizable advantage because of the dollar's relationship with other currencies."
Chip Dillon, an industry analyst at Salomon Smith Barney, said that unless the U.S. dollar weakens substantially in the near term–falling 25% or more than the euro–then U.S. paper companies will not even come close to producing operating profit margins reached in the last upturn in 1995.
With the June price of northern bleached softwood kraft (NBSK) pulp at $530/mton in the U.S., European pulp operating margins were about 31%, up from approximately 27% in 1995, when pulp sold for as much as $925/mton, said Chip Dillon. By contrast, U.S. producers have seen their once superior operating margins collapse by three-fourths to just 12%, due mainly to the dollar's strength, he said.
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VIEW TABLES
TABLE 1. U.S. and Canada imports/exports for selected grades of paper and paperboard (000 tons)
TABLE 2. U.S. permanent machine shutdowns
TABLE 3. U.S. market pulp pricing
TABLE 4. U.S. paper and paperboard production (000 tons)
TABLE 5. Canadian paper and paperboard production (000 tons)
MID-YEAR OUTLOOK BY INDUSTRY:
Pulp | Papers | Newsprint | Containerboard | Capital Spending
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