Outlays for new paper machines dropped by $1 billion as North American companies stay focused on projects that reduce costs and improve profitability
	Curbed Spending Continues in Effort to Boost Returns, Offset Weak Economy
	By RAE ANN ROCKHILL, News Editor

FIGURE 1. Project spending in the U.S. continues to decline. FIGURE 2. Low spending at Canadian mills parallels the slow capacity growth expected through 2003. FIGURE 3. Total spending by 27 North American companies was expected to decrease 19% in calendar year 2002.

Spending for capital projects in the North American pulp and paper industry should decrease again this year as companies seek to control capacity and offset the impacts of a weakened economy. According to a Pulp & Paper survey of known projects, capital expenditures should drop almost 30% to $4.3 billion for identified spending at U.S. operations from 2002 to 2004. Investments at Canadian facilities will almost hold steady at C$1.6 billion.

Figures 1 and 2 show historical data for U.S. and Canadian spending during the last 10 years. The U.S. total is down almost 68% from the 1996 high of $13.6 billion (Figure 1) and is among the lowest three-year spending totals recorded in the last 20 years. The Canadian figure represents one of the lowest reported spending totals in a decade, falling from the 1992 total of C$9.0 billion (Figure 2).

However, the project spending decreases are consistent with the expected total capital spending drops in calendar year 2002. Based on a sample of 27 public-ly owned U.S. and Canadian companies, expenditures for 2002 will total $5.1 billion (Figure 3), a decrease of $1.2 billion or 18.7% from calendar year 2001.

Reduced spending in 2002 continued a pulp and paper industry pattern that started in 1997 and has continued for 12 consecutive quarters.

Table 1 summarizes the reported expenditures at U.S. and Canadian operations for the survey period 2002 to 2004. Data are broken out by project type and geographical region. Projects with firm completion dates in 2005 are included in these totals, but they represent a very small portion of total spending.

CONSERVATIVE SPENDING CONTINUES. As in recent years, North American companies are apparently investing in lower-cost projects that offer higher returns. Although the industry has traditionally invested in high-cost, capacity-adding projects, this new spending trend has companies focused on reducing high-cost capacity or adding capacity from rebuilds to machines already in their systems.

Lingering impacts from the September 11, 2001, terrorist attacks and a U.S. economy that has been slow to recover have caused many companies to demonstrate restraint in budget proposals and reconsider more marginal projects. Smurfit-Stone Container Corp., for example, expects to spend $200 million on capital expenditures this year. The company had planned to spend more but reduced its budgets in response to the sluggish economy.

TABLE 1. Reported capital expenditures at North American Mills: 2001-2003+

After aggressively reducing its capital spending budget from 135% of depreciation eight years ago to an estimated 50% in 2001, International Paper Co. has apparently reached an acceptable balance in spending for the time being. Expenditures in 2001 and 2002 totaled about $1 billion, and the company expects expenditures for 2003 to stay at that amount.

In 2002, Weyerhaeuser Co. had planned to divide its capital spending budget primarily between maintenance and environmental projects. The company has also indicated plans to continue spending at a level of about 80 to 90% of its depreciation. Weyerhaeuser also trimmed about $200 million from its original spending estimate for 2002, although it completed the $7.9-billion takeover of Willamette Industries Inc.

FOCUS ON PAPER MACHINE REBUILDS. Paper machine rebuilds are receiving the most funding among U.S. and Canadian projects. New machines and pulp mill projects garner the second- and third-largest amounts of spending for U.S. investments. However, the new machines are often replacing older, less-efficient units that fail to comply with stricter environmental regulations. Pulp mill projects are also high on the priority list for Canadian mills.

Spending for environmental compliance is finally slowing down, accounting for just 4.2% and 2.3% of known project spending in the U.S. and Canada, respectively. In recent years, the Cluster Rule and similar environmental regulations in various stages of development have been largely responsible for the upsurge in environmental spending.

Maximum achievable control technology (MACT I and MACT III) regulations, or Phase I of the Cluster Rule, were established in 1998 for air and water discharges from various types of pulp mills. At that point, companies were given a three-year window to achieve compliance, and the increase in environmental projects took hold.

Additionally, MACT II regulations for air emissions from combustion sources were proposed in 1998 and promulgated in December 2000, giving companies another three-year window to achieve compliance.

The U.S. Environmental Protection Agency also established regulations to reduce NOx emissions from utility and nonutility combustion sources in 22 states east of the Rocky Mountains by May this year. These emission rules are under litigation, but they could indicate more mandatory environmental improvements for some U.S. operations and prompt an increase in spending on such projects.

P&P Survey Results: United States. Total known U.S. project spending is reported to be $4.3 billion for the 2002 to 2004 period, which is much lower than the 2002 survey total. This also marks the sixth 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.

Spending for new paper machines has dropped significantly, falling by almost $1.0 billion from $2.0 billion in last year's survey to $1.1 billion this year. Twelve new paper machines are planned to come online within the survey period, accounting for about 25% of the estimated U.S. spending. Last year's survey tallied eight new machines.

Five new machines were due to start in 2002 with total project costs of $600 million. Bowater Inc. invested $38 million in a Nuway coating plant, and Newark Group spent $100 million to start up a new specialty recycled paperboard machine in Fitchburg, Mass. Weyerhaeuser started up the $475-million uncoated free-sheet paper machine and replaced the soda pulp mill at the former Willamette facility in Kingsport, Tenn. Other announced machines include the remaining tissue machine being installed at Procter & Gamble Co.'s mill in Mehoopany, Pa., at a cost of $175 million and a $125-million expansion project adding a 180,000-tpy recycled corrugating medium machine at Solvay Paperboard LLC's Syracuse, N.Y., mill.

Table 2 identifies the 12 new machines, including one new paper mill, scheduled to begin production in North America within the survey period. Of the new production lines, five machines were scheduled to start in the U.S. by the end of 2002.

TABLE 2. New mills and paper machines announced for North America 2002-2004

The tissue segment remains responsible for the majority of new machine installations, continuing a trend observed in the last few surveys. Half the machines scheduled to start up in the U.S. during the survey period are being installed for the tissue segment.

Spending on machine rebuilds increased last year, totaling $1.2 billion as compared to 2001's estimated $910 million. Combined, spending for new machines and machine rebuilds in the U.S. also increased by nearly 4% to 52.9% of total reported spending as compared to 49.0% last year.

Table 3 lists proposed projects to build new greenfield mills, install new machines, or restart idle mills. Several of the proposals appear to be moving closer to obtaining financing, while others are still struggling to secure capital in a business climate that is discouraging investments for capacity growth.

TABLE 3. Proposed new mills and paper machines announced for North America

P&P Survey Results: Canada. Spending at Canadian operations is expected to hold to C$1.6 billion for 2002 to 2004. Like their U.S. counterparts, many Canadian companies are also operating to limit capital expenditures at or below depreciation levels. Therefore, the number of identified projects has dwindled.

Two new paper machines are scheduled to start up in Canada in the foreseeable future. The C$100-million, lightweight coated papers machine at Kruger Wayagamack's Trois Rivieres, Que., mill is due to come online next year. Additionally, Kruger recently announced plans to start up a new tissue machine at its Scott Paper mill in Crabtree, Que., in early 2003.

Paper machine rebuilds account for C$737 million in spending and are responsible for nearly half of Canadian spending. Gaspesia Papers is spending nearly C$500 million to convert the former Abitibi-Consolidated Inc. (ACI) newsprint mill to produce high-gloss coated paper.

Accounting for 23.8% of total reported spending in Canada, pulp mill improvement projects are another major investment area at Canadian operations, totaling C$375 million. Major investments include ACI's deinking plant project at its Thorold, Ont., newsprint mill.

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 proposal hit a roadblock last summer when the company missed a deadline for filing its environmental assessment report. A one-year extension had been granted to the company for the project, which was first proposed in 1992.

About P&P's Annual Survey. Pulp & Paper '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.