The company received permission Friday from a Montreal Superior Court to increase its debtor-in-possession (DIP) financing from $140 million to $370 million, despite the objections of some creditors.

Ernst & Young Inc., the court-appointed monitor, recommended approval of the DIP financing because it believes AbitibiBowater will remain under bankruptcy protection until at least late next summer. The accounting firm told the court that AbitibiBowater, North America's largest newsprint maker, projects negative cash flow of $70 million next year.

AbitibiBowater was hoping to exit bankruptcy protection in just a few months. But Ernst & Young says "it will take a number of months to complete the business plan and consider all of the restructuring scenarios, negotiate the Plan of Arrangement, raise exit financing, conduct creditor meetings, complete negotiations with employee groups and complete all of the other tasks required to emerge" from bankruptcy protection.

The company's liquidity requirements "are highly dependent upon the market price and demand for paper and wood products as well as the exchange rate of the Canadian dollar relative to the U.S. dollar," notes the report.

AbitibiBowater's projections assume that announced newsprint price increases of $120 per ton from the August low will be implemented by the first of the year and then level off. That is more conservative than independent projections from RISI, which show newsprint prices continuing to rise during 2010.

But the projections also assume an exchange rate of 1 Canadian dollar to 90 U.S. cents, while in recent weeks the Canadian dollar has been a few cents stronger. With each penny in the exchange rate equating to $17 million in annual cash flow and the recent volatility in the U.S. dollar, AbitibiBowater needs access to additional DIP funds so that it can weather fluctuations in currency and paper markets, the Ernst & Young report says.

Meanwhile, a provincial official has made vague comments in recent days about Quebec possibly investing in AbitibiBowater, and a Canadian union has delayed contract negotiations until it gets resolution on the company's $1.3 billion in unfunded pension liabilities.

AbitibiBowater (AKA AbitibiUnderwater) entered bankruptcy protection in April and has subsequently been damaged even further by declining paper prices and the strengthening Canadian currency.

This article originally appeared at Dead Tree Edition (http://deadtreeedition.blogspot.com), which is written by a magazine-industry manager who goes by the pseudonym D. Eadward Tree. Comments made in this blog are the opinion of the author and do not necessarily reflect that of RISI, Inc., its parent company or sponsors.

For other AbitibiBowater and magazine paper commentary at Dead Tree Edition, see "There's Little Clarity About Some SCA Papers" and "Noisy Boise Is Reviving Its Newsprint Sales".

The best that can be said is that the market seems to have stablized this fall after months of plummeting prices. North American shipments of coated paper were up in September versus the previous month - 8% for coated freesheet and 5% for coated groundwood, according to the Pulp and Paper Products Council. But compared with September 2008, shipments declined 15% and 8%, respectively.

Actual consumption of coated papers in the U.S., was even less favorable, according to data from printers compiled by Idealliance. September consumption of coated was down more than 5% versus the previous month. Usage of coated freesheet was down a whopping 32% versus September 2008, while coated groundwood dropped "only" 23%.

Consumption of uncoated groundwood held its own versus August and was actually up versus the same month last year for the fifth month in a row, according to Idealliance.

To keep their coated machines busy amidst the declining demand for coated papers, several companies have recently begun making supercalendered and other uncoated-groundwood papers on machines that have coaters.

The new supply continues to place pressure on uncoated-groundwood prices, which seem to be continuing a downward drift.

Though coated-freesheet prices are at their lowest in more than two years, there was speculation a few months ago that they could crash even more. The black-liquor credits subsidizing U.S. kraft-pulp mills to the tune of about $200 per ton threatened to make freesheet papers a virtual byproduct of the kraft process, with the resulting glut continuing to drive paper prices until the credits expire at the end of this year. (See "Black Liquor" Credits Are Helping Paper Buyers.)

But the surprising recent strength of global pulp markets, which by some accounts are experiencing their strongest rebound in history, has provided an outlet for all that subsidized U.S. pulp. And the weakening U.S. dollar has discouraged imports of paper into the U.S. from overseas.

Coated prices seem unlikely to move much for the remainder of the year. And what about next year?

Some paper-company executives claim that prices "must" go up because the black-liquor credits that have kept them solvent will disappear.

But a need for higher prices does not translate into higher prices. (Exhibit A: rates for magazine advertising). And bankruptcy reorganizations of major players don't necessarily stabilize prices (Exhibit B: the newsprint market this year). Prices won't move up significantly until demand recovers significantly, which seems unlikely in 2010, or more machines are closed.

This article originally appeared at Dead Tree Edition (http://deadtreeedition.blogspot.com), which is written by a magazine-industry manager who goes by the pseudonym D. Eadward Tree. Comments made in this blog are the opinion of the author and do not necessarily reflect that of RISI, Inc., its parent company or sponsors.

For other coated paper and magazine paper commentary at Dead Tree Edition, see "The Rush to Make Uncoated Paper on Coated Machines" and "There's Little Clarity About Some SCA Papers.".

I choose the cheap sparkling wine because, well, it's nice that the recession is over and for many people and businesses, the third quarter was far better to them than the first or second quarters of this year. But in order to assess the near- and medium-term future, it is more important to remember the more than 7 million US workers who have lost their jobs since the beginning of the recession and the 768,000 jobs that fell off payrolls just in 3Q09 alone.

The point, of course, is that we are not out of the woods yet. Unemployment is still on the rise and household incomes are falling. Initial claims for unemployment insurance are still running above half a million per week, which is hardly a signal that the labor market is improving, and we expect the unemployment rate to reach 10% by the end of this year. If everyone who reads this article takes my advice and buys Californian sparkling wine, then at least we will help a state whose unemployment rate reached 12.2% in September.

The third quarter numbers showed strong consumer spending growth of 3.4% that was only made possible by considerable government stimulus measures (i.e., "cash for clunkers" and the first-time homebuyer's credit). The "cash for clunkers" program ended and auto sales dropped off the map. The first-time homebuyers credit is expected to expire at the end of November and we can only speculate about how negative that might be for home sales and related purchases (if the credit is not extended or expanded).

Third quarter data did see a revival in residential investment after many consecutive quarters of double-digit declines. Residential fixed investment climbed at an annual rate of 11.4% in 3Q09, which is good news for many in our industry. However, residential investment now accounts for just a 2.5% share of GDP compared with a 6.3% share at the peak of the housing boom. Again, let's celebrate with the cheap stuff.

The trade picture improved considerably in that goods started moving. Net trade detracted from headline growth because imports rebounded stronger than exports, but we expected that would happen since the rebuilding of US inventories requires imports, and growth abroad is not strong enough to support an export-led recovery in the US despite the weakening of the dollar.

Do we expect the US economy to contract again during this "recovery"? No. I wouldn't suggest any sort of celebration if that was our baseline scenario. Growth, however, will slow over the next two quarters before reaccelerating in a meaningful way. Think of it this way, that good champagne will taste better in 2011 (when we celebrate the return to GDP growth near potential) than it would today.

The best indicator of future pulp production in Brazil may be the annual planting of eucalyptus by the pulp and paper companies that are members of BRACELPA. The industry is mostly on a six-year rotation, so the 133,000 ha planted in 2002, along with other coppiced plantations and perhaps 20% supply from third parties, supported the 10+ million tonnes of hardwood pulp produced in Brazil in 2008. But annual planting (including replants) by the Brazilian pulp companies surged to nearly 200,000 ha in 2005 and then to almost 300,000 ha in 2006 and 2007. This indicates anticipation of a strong expansion in production of eucalyptus pulp in Brazil by 2012-2013. There may be market-related or financial reasons why some of the planned pulp projects in Brazil are delayed over the next five years, but one factor will NOT be a problem: lack of wood fiber. The trees are already in the ground, and growing a lot faster than they did in previous rotations. According to BRACELPA, the average productivity of eucalyptus pulpwood plantations in Brazil has increased from 24 m³/ha/yr in 1980 to 41 m³/ha/yr in 2008, with the potential to go to 70 m³/ha/yr.

Source: BRACELPA

Brazilian pulp producers have been expanding to new regions recently, for example Suzano is developing a plantation base of 250,000 ha in the states of Piauí and Tocantins in northeast Brazil. In Mato Grosso do Sul, there is a major expansion of the Votorantim plantations, but two other pulp producers are also establishing plantations which could support future mills. In addition to expanding their own plantations, Brazilian pulp companies are looking to strengthen their ties with third parties who are willing to invest in new plantations to support future pulp projects. For example, Klabin formed a partnership with The Forest Company, a UK-based investment fund, to plant new lands close to Klabin's operation in Telemaco Borba in Parana state. To date, The Forest Company has committed US$20 million to this, targeting a planted area of 2,500 ha. (Timber Capital is the asset manager for The Forest Company.) Other Brazilian pulp companies have spoken to me about their interest in similar partnerships in different parts of Brazil, with some companies aiming to have 30% of their plantation base established by third parties.

And in addition to the traditional pulp producers, some new players are trying to enter the pulpwood plantation space. Claritas Investments Ltd., a Sao Paulo-based firm with $850 million in assets under management, has several investment funds in the forestry sector, including Eco Brasil Florestas. This fund is a JV with the former owners of a large pulp and paper company in Brazil, which is targeting establishment of an industrial scale pulpwood plantation in a frontier region of northeast Brazil, with the ultimate objective of supporting a pulp mill. Another new player, GMR, has reportedly acquired over 150,000 ha in the state of Tocantins, where it intends to establish eucalyptus plantations for both the energy sector and yet another new pulp project.

Finally, although timberland investors have been somewhat disappointed that the South American pulp producers have not sold off their forest assets like North American pulp and paper companies have, some opportunities have been developing. This is partly the result of restructuring (e.g. the merger of Votorantim and Aracruz), and partly due to the surge in new planting offering possibilities for companies to consolidate land holdings in one area by disposing of or swapping assets in other areas. We understand that Aracruz may have already sold (or is selling) plantations established in Minas Gerais state which were intended for a future pulp cluster which Fibria will not be developing. Last week, Celulose Irani sold 3,285 ha of pine plantations in Santa Catarina state to a US-based TIMO. Other plantation sales are reportedly "in the works", so it looks like a great time to gather at RISI's conference in Sao Paulo to get the latest industry perspectives.

Bob Flynn is Director, International Timber, and in mid-2009 published the South American Tree Farm Update: Opportunities for Investment in Forest Industry and Biomass Energy Plantations (www.risi.com/satreefarm.)

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This delay until at least 2011 had been expected, but the key part of this announcement was Putin's comment that the tax rate would not be lowered, and that at some point the planned increase in the export tax is still going to happen. According to Reuters, Putin said, " We will still do it (increase the export tax to 80%), but we will not do it stupidly...as the situation will change, you have time to calmly prepare." During 2009, there had been speculation that perhaps the tax would be rolled back or abandoned, but Putin's statements make this increasingly unlikely. Finland has backed down on its initial threat to block Russia's from joining the WTO because of the log export tax, with Finnish Prime Minister Vanhanen now saying that Helsinki backs Russia's bid.

It appears that Finnish companies have largely made adjustments to live without Russian logs in the future, and the importance of Russian roundwood in Europe in general has declined dramatically in recent years. Based on actual exports through the month of August, it appears that Russian hardwood log exports to Europe in 2009 will be 85% lower than in 2005, and exports of softwood logs will be 88% lower (Figure 1). Finnish import data indicate a 79% decline in imports of Russian logs in the first seven months of 2009, compared with the same period in 2008. Of course, demand for logs in general has declined in Europe in 2009, but the fact that all three of the big Finnish pulp companies (Stora Enso, UPM, and Metsäliitto) have reportedly either closed their logging offices or sharply reduced staffing in Russia sends a strong signal. As we've said numerous times, a "delay" in the very high log export tax Russia has threatened is just that.... Finnish companies had hoped for some reprieve, but have also been developing plans to live without Russian wood, and we do not expect to see a strong rebound in imports of Russian logs in the future.

(Figure 1 Source: Global Trade Atlas)

The average price of Russian softwood logs imported into Finland fell from US$95/m3 in June 2008 to $69/m3 in January 2009. Prices have fluctuated only slightly during the year, and in August softwood Russian logs imported into Finland averaged US$71/m3, according to Customs data. If the Russian log export tax had increased to a minimum of 50 Euros per cubic meter, and underlying log values had remained unchanged, the average August price would have increased from $71/m3 to $121/m3, a 70% increase. With Europeans largely turning up their noses at Russian logs, China becomes increasingly important for log exporters in Russia. Through the end of August, 40% of Russia's hardwood log exports and 84% of Russian softwood log exports went to China.

To date, any measurable impact of Russia's log export duty has been difficult to detect, in part because of the weak global wood markets over the past year. Through the end of August, Russia's exports of softwood lumber are up slightly (+2.2%), but this does not begin to offset the much larger decline in Russian softwood log exports. In total, Russian exports of softwood logs + lumber (on a roundwood equivalent basis) in 2009 will be more than 30% lower than in 2007 (Figure 2). Even with substantial new investment in log processing in Russia, it will likely be the middle of the next decade, or later, before Russia's importance in the global softwood markets even returns to the levels of 2007.

(Figure 2 Source: Global Trade Atlas, RISI)

The new controversy about cash-register receipts and the emergence of "biolatex" underscore the growing concern about the chemicals that papers contain.

ScienceNews revealed recently that many carbonless copy papers, which are typically used for cash-register and credit-card receipts, contain high levels of bisphenol-A (BPA). Research showing that the estrogen-mimicking chemical was leaching out of plastic bottles has led to calls for tighter regulation, but ScienceNews quotes a researcher who says the BPA exposure from carbonless copy papers is far greater.

Meanwhile, the folks at Better Paper, an environmental-advocacy organization, are touting the benefits of a new corn-derived biolatex known as EcoSphere as a replacement for traditional petroleum-derived latex in coated paper.

"Several major paper manufacturers are already testing EcoSphere® biolatex^TM binder in their coating formulations," writes Jeff van Leeuwen of EcoSynthetix, which manufactures the product, at Better Paper's blog. As far as I know, none of the paper makers have gone public with their use of EcoSphere.

The product has a lower carbon footprint, is friendlier to recycling operations, and costs less than traditional latex, the company claims. It's also biodegradable.

Other chemicals that are frequently used in papers include various plastics, titanium dioxide, and calcium carbonates.

Calcium carbonates are a mixed bag environmentally. Some people have promoted rock-based papers (which are mostly limestone-derived calcium carbonates) as being green because they are "tree free". And precipitated calcium carbonate (PCC) is sometimes considered a "carbon sink" because it is produced by combining carbon-dioxide emissions with lime.

But limestone doesn't exactly grow on trees; it has to be mined. And its transformation into lime for shipment to PCC plants doesn't exactly sound like an environmentally sustainable enterprise.

Then there's bleach, which is commonly used to brighten papers but is also really good at killing just about everything. That leads me to Stupid Question #1: When you use white toilet paper, are you putting bleach on your derriere?

And that leads me to Stupid Question #2: Why do we insist on having such white toilet paper - or, for that matter, TP that's been dyed, decorated, or perfumed? Do you really want those chemicals, how shall we say, traveling to Uranus? Or dumped into the sewer system?

This article originally appeared at Dead Tree Edition (http://deadtreeedition.blogspot.com), which is written by a magazine-industry manager who goes by the pseudonym D. Eadward Tree. Comments made in this blog are the opinion of the author and do not necessarily reflect that of RISI, Inc., its parent company or sponsors.

For other toilet paper and magazine paper commentary at Dead Tree Edition, see "Marcal Challenges the Green-ness of Greenpeace" and "Rethinking the "Green" Magazine Issue".

The supply gap is now closing thanks to a partial recovery in demand combined with capacity shuts and shifts to other grades. In fact, the PPPC recently reported that operating rates in North America during September were at 99% for coated freesheet and 95% for coated mechanical. The market will never return to its previous levels of demand, but it has come back to some degree because buyers are no longer reducing inventory as they were earlier in the year. September may have been a bit of a fluke and operating rates will not stay at 95-99% for long, but the fact remains that much of the oversupply is now gone. Operating rates were in the low 70s earlier in 2009.

We have estimated that for coated mechanical, the current capacity base is 4.5 million tons, and for coated freesheet the current capacity base is 4.4 million tons, which includes 568,000 tons of coated Bristol capacity. In order to maintain a 95% operating rate, we only need to shut a further 100,000 tons to 150,000 tons of coated mechanical capacity and a further 400,000 tons of coated freesheet capacity. This latter number may end up being less if large tariffs are placed on Chinese and Indonesian coated freesheet paper and cause much of this tonnage to go away (the subject for another RISI Viewpoint later this year). These shuts may be announced in early 2010 if rescinded black liquor credits make it difficult for some marginal mills to survive.

The story in Europe is completely different. Primarily because of a huge collapse in exports, European mills have a much larger oversupply situation to deal with. The capacity closures in 2009 have been small compared to the drop in demand, only 150,000 tonnes of closure for coated mechanical (Plattling) and 400,000 tonnes for coated freesheet with various closures in Spain and Sweden. This led to European operating rates that also dropped into the low 70s, but they have yet to return to the upper 90s as North America did in September. In fact, the market needsto have about 1.5 million tonnes of further shuts in coated mechanical and 1.0 million tonnes of further shuts in coated freesheet to even come close to balancing the market. This assumes no miraculous recovery in exports, which seems like a safe assumption given the strength of the euro. In fact, we expect the Chinese to begin exporting more to the European market in 2010 and 2011 because of the new capacity in China and the problems that may arise with tariffs into the US market. Thus, there will be no easy fix for the coated paper oversupply in Europe in 2010 and it will be a very difficult environment for the selling side of the market.

John Maine, RISI Vice President for World Graphic Papers and author of the monthly Paper Trader, works out of RISI's Charlottesville, VA, office.

Tel: 434 978 2927 Email: jmaine@risiinfo.com

Stay updated on graphic paper markets with RISI's industry news, prices, forecasts, analysis and mill intelligence. Visit www.risiinfo.com and click on "Pulp & Paper."

But one thing this trip has really taught me from the outset, it is not just jungles on the ground in Indonesia, the companies and mills themselves also have their own fast growing dynamic internal jungles as they apply entrepreneurial flair on mass, attacking just about every sector where pulp, paper and even print are needed.

APP is actually the brand under which a cluster of large, independently owned and operated mills get their products to market. These mills are spread throughout the rapidly developing nation, which is widely thought by economists and analysts as the fifth BRIC country, along with Brazil, Russia, India and China. Indonesia is expected to be the sixth largest economy in the world over the next 5 or so years.

Under the APP Indonesia umbrella, the mills themselves employ a combined workforce of 70,000 people, produce in the region of 7.5 million tonnes/yr of pulp, paper and converted products, and generate around US$4.5 billion in sales worldwide.

Jewels in each crown

It seems that each of mills I visited had an individual jewel in the crown which sets itself apart from what we might think of as a 'normal' paper mill.

The first I visited was Indah Kiat Pulp & Paper, Parawang, in the resource rich Riau province in Sumatra. The integrated mill is not far from the thriving provincial capital Pekanbaru and makes pulp from both acacia and eucalyptus fiber to the tune of 800,000 tonnes/yr and makes a variety of papers including copy paper and churns out around 1.2 million tonnes/yr of paper and board. The mill employs around 13,000 people.

But the highlight of this mill tour was a helicopter flyover which included not only the massive 2,400 ha mill site, but perhaps the jewel in the crown in this region, the Bukit Batu Biosphere Reserve, a recently appointed UNESCO Man & Biosphere site for special interest. We flew for a full hour over the 172,000 hectare site, which is made up of completely untouched pristine jungle and tropical rain forest. Since 2004, APP's pulpwood supply companies here set aside more than 70,000 ha of core conservation area and help to protect the zone from illegal logging by creating a buffer zone of plantations around the reserve which makes it all but impossible for illegal operators to access the high value trees.

Another day, another island, another mill

Our next mill visit was on the island of Java, and to Tjiwi Kimia, close to Surabaya, the country's second largest city. The mill is a non integrated paper mill and converting facility, making well over 1 million tonnes/yr of all types of printing and graphic paper and board, and generated an income of US$1,350 million in 2008.

The jewel in the crown of this particular mill is it's technologically advanced converting and printing facility which brings in close on a quarter of the site's financial turnover. Using its own paper and board, it prints a variety of high quality products for customers all over the world, including fashion retail outfits and major publishers.

Pindo Deli was the last of the Indonesian mills visited, around a two hour drive west of the capital Jakarta. The specialisation here is focusing on non commodity, high value products. The mill produces tissue and high quality copy paper, as well as carbonless papers. It generated a turnover of US$1,300 million in 2008.

The jewel in the crown here? Another environmental one. APP Indonesia's pulpwood suppliers have invested in around 1500 ha of denuded wasteland close to the mill, which was all but useless due to its poor soil. Work has been done over the last few years to develop a plantation that as well as supplying wood, acts as a local resource for the grazing of cattle and other domestic animals, and there is a proposal to open it up as a recreational facility for people in the area.

The BIG questions answered

On the last day of my visit, I spent the morning with some of the top management at APP Indonesia's headquarters in the center of Jakarta, the country's capital, where some of the bigger questions about strategy, and the future of APP were addressed. Let's just say the answers are revealing and we will be running a series of articles on the Asian giant over the next few weeks both in PPI magazine and online.

APP has had its critics, and comes in for a hard time on a regular basis as regards the environment, but on my visit, I can categorically state that there is an inter-company spirit flowing here of environmental, social and commercial sensitivity that would make any paper producers in the West proud. Perhaps some of those arm chair critics should do the same as me, get on a plane and come and see for themselves the hard work that is being done by not only APP Indonesia, but plenty of other like minded companies in this rapidly growing region.

As I was getting ready to leave the country after a quite amazing glimpse into the unique way that APP tackles the challenges of producing pulp and paper on a colossal scale, a reminder of other challenges the country faces came in the shape of a 6.4 magnitude earthquake that rocked the capital city. Although terrifying, once the panic had subsided among the city dwellers, it was clear to see that Indonesian people are survivors, whether it be in the giggling relief that comes after a big fright, or the way they tackle business issues that involve commercial survival, this nation is going to be a serious one to be reckoned with in the future.

Some producers, acting proactively, feel that this new governance is the wave of the future and are creating either board with ultra-low emissions or changing their bonding agents. Some have now gone to isocyanate resins, in an attempt to secure markets in advance of the change to more restrictive rules on a national scale.

Most producers do have special formulations for low or no-formaldehyde board, but they have been charging some hefty premiums for such stock. Now, at least one producer is offering isocyanate board at very nearly the same levels as urea-based boards. This will likely result in some interesting market confrontations, as purchasers consider the options.

What's being called Son of Black Liquor dwarfs the original black-liquor loophole that created such a stir in Congress and among Canadian officials earlier this year.

Son of Black Liquor, officially known as cellulosic biofuel producer credits, could generate $50 billion in tax credits for U.S. kraft pulp mills before it expires at the end of 2012, Dead Tree Edition estimates. Tax expert Martin A. Sullivan, writing at Tax.com, more conservatively forecasts that "this credit will provide the paper industry with $25 billion of additional tax benefits that Congress never intended."

The program, part of the 2008 farm bill, was supposed to benefit "companies that use expensive, cutting-edge technologies to distill ethanol from plant materials instead of corn," Sullivan writes. "But these new technologies developed by fledgling companies will get peanuts compared to the windfall pulp manufacturers will get from the new credit."

IRS Ruling

Despite Congress' intent, the Internal Revenue Service released a memorandum in the past few days ruling that black liquor qualifies for cellulosic biofuel producer credits because the fuel is produced and used in the U.S. and is "derived from lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis." Black liquor is an energy-rich byproduct of the kraft pulping process and the main power source for pulp mills worldwide.

The memorandum says black liquor cannot be used for both the original black-liquor loophole -- the 50-cent-per-gallon alternative fuel mixture credit -- and the $1.01-per-gallon Son of Black Liquor credits. Though it is twice as generous, Son of Black Liquor is also harder to use because it is not refundable, notes Sullivan.

As an example of how easy it is to collect the original black-liquor credits from the IRS, International Paper is on track to earn nearly $2 billion in alternative fuel mixture credits this year from its kraft pulp mills. The company paid less than $200 million in U.S. income taxes last year and had less than $400 million in earnings during the first half of this year.

U.S. pulp producers, therefore, may continue milking the original black-liquor program until it expires at the end of this year and then switch to Son of Black Liquor next year.

Doing the Math: $25 Billion or $50 Billion

Here is Sullivan's math: A Congressional committee reported that the pulp industry received more than $2.5 billion in alternative fuel mixture credits during the first half of this year. With Son of Black Liquor being twice as generous and essentially lasting three years, that indicates it has a potential for $30 billion. But because the credits are not refundable, Sullivan figures companies will only be able to claim $25 billion in benefits.

Here is Dead Tree Edition's math: As explained in Black Liquor Credits Top $3 Billion So Far, U.S. companies probably earned more than $3 billion in black-liquor credits during the first half of this year (though some were not received until later). Because some companies were late to the black-liquor party, the credits in the second half seem likely to approach $4 billion.

As companies learn to take advantage of these credits, they are no doubt tweaking their operations to maximize their output of black liquor. A paper-industry insider tells me, for example, that a mill can create more black liquor and less (though brighter) pulp by "cooking" the wood fibers longer. So it seems likely that, with a payout double that of the original black-liquor loophole, Son of Black Liquor will be worth more than $8 billion in a six-month period, which equates to $50 billion over three years.

Although $50 billion may be greater than the taxable income of U.S. pulp-mill owners during the next three years, I have enough faith in the American accounting profession and consulting industry to believe that somehow the available credits will not be wasted.

This article originally appeared at Dead Tree Edition (http://deadtreeedition.blogspot.com), which is written by a magazine-industry manager who goes by the pseudonym D. Eadward Tree. Comments made in this blog are the opinion of the author and do not necessarily reflect that of RISI, Inc., its parent company or sponsors.

For other Black Liquor commentary at Dead Tree Edition, see "Canadians Belly Up to the Black-Liquor Bar" and "Pulp Fiction: Eco-Credits for Black Liquor".

Most market players were just too busy trying to keep their head above water - and some couldn't even do that.

But now, most industry observers share the view that the economic outlook, in general, is improving. There are many positive signs. The stock market appears to have bottomed and, as of this week, the Dow was closing in on the 10,000 threshold.

Maybe with these positive economic indicators, M&A activity will pick up.

Times are a changing.

Several industry analysts think the time is ripe for consolidation - especially in the containerboard sector - as a way to help stabilize the market.

In August last year, International Paper (IP) bought Weyerhaeuser's containerboard assets in a $6.0 billion deal that created the No. 1 player in North America with an approx. 29% domestic share. Earlier, RockTenn also extended its reach in containerboard by buying Solvay Paperboard in upstate New York in a $1.0 billion deal.

IP and RockTenn are not widely expected to participate in the next go-round of deals - but hey you never know. Industry observers think likely candidates are Smurfit-Stone Container, Temple-Inland, and possibly Georgia-Pacific. Analysts have bantered around a lot of different scenarios and synergy numbers and no can precisely say when the next move will happen.

But happen it will - maybe even coinciding with the expected shut of capacity rumored for the past few weeks.

The program will help finance investments to "improve environmental performance through increased renewable energy production or improved energy efficiency" at 38 mills owned by 24 companies, said a news release from Natural Resources Canada. The funds were assigned based on each company's production of black liquor, an energy-rich byproduct of the kraft pulp process. But eligible companies can use the funds at mills that do not produce black liquor.

The largest beneficiary is Domtar Corp., with $143 million. Domtar has already received $183 million this year in U.S. black-liquor credits, while its main American competitor, International Paper, has received $1 billion.

At least three of the Canadian recipients -- AbitibiBowater, Fraser, and Smurfit-Stone Container Corp. -- are in bankruptcy reorganization, while several others are struggling to avoid bankruptcy court. (Click here for a list of the recipients, the amounts granted, and the mills getting the investments.)

The Canadian govnerment is scheduled to pay out the money late this year or early next year, about the time that the $6 billion-plus U.S. program is slated to expire.

This article originally appeared at Dead Tree Edition (http://deadtreeedition.blogspot.com), which is written by a magazine-industry manager who goes by the pseudonym D. Eadward Tree. Comments made in this blog are the opinion of the author and do not necessarily reflect that of RISI, Inc., its parent company or sponsors.

For other Black Liquor commentary at Dead Tree Edition, see "Pulp Fiction: Eco-Credits for Black Liquor" and "Paper Companies Getting Liquored Up".

From the auditorium it was time to hit the exhibition floor, where 90 companies had set up stall, attracting the interest of the many delegates from major pulp and paper companies (including from key growth countries such as Brazil and China). Despite the downturn, TS18 has managed to attract a higher percentage of pulp and paper producers than the last two Transport Symposia in Mobile and Antwerp.

Following lunch, I was one of 300 delegates to join a fascinating boat tour of the Port of Liverpool, a historic port that, as MD George Hudson noted, "Has really embraced the multi-modal concept." Proof of this was offered by the Stanton Grove Langdon forest products terminal. This 100,000 sq. ft. (9,300 m2) facility - one of two that the company has at the Port of Liverpool - handles a range of products from major customers such as Stora Enso and International Paper. Delegates were able to see at first hand paper being loaded into railcars and trucks at the terminal before returning to the convention centre for the cocktail reception and the evening's entertainment. A successful start to what promises to be a great event.

Rod Young: "A bit more optimism"

Leading the conference program, titled "Steering the Right Course to the Future," Rod Young, RISI Economic Advisor, portrayed a much more optimistic picture overall for the forest products industry over the next 2 - 3 years than had been projected only six months ago. In some sectors, such as fiber and recovered paper, the improved forecasts signals good news for the transport industry. However, much of the growth will be in fiber imports driven by the Asia and other developing countries, with North America and Europe leading exports for recovered paper. In other sectors seeing lagging or slow growth, such as paper and board in the developed world, the bread-and-butter for the traditional trade lanes, many companies will need to make drastic modifications.

What else are you doing?

Taking advantage of these new global changes means more than just cost-savings. "What else are you doing?" was a question asked to many of the conference speakers. Flexibility was one answer. Being able to react quicker to fluctuations in the market, instead of waiting too long or hoping things turn around. And being able to handle a wide diversity of forest products, instead of tied to only one or two. But in such asset-intensive industries as forest products and transport, turning on a dime is not as easy as it sounds. While improving flexibility is a realistic short-term goal to achieve for producers and logistics companies, shipping companies must have a longer vision.

A better approach to investments was another answer. All of the speakers agreed that access to capital has dried up for the near future and the era of cheap money may be at an end. Investments must now be directed to the processes that directly lead to improving efficiencies of existing structures, such as reducing fuel consumption and optimizing operations. And in many cases, apart from the expected cost-savings, these optimizations can lead to a distinct competitive advantage.

Finally, sustainability is no longer just a buzzword. Speakers from across the board pointed to their company's plans to add or increase sustainability initiatives. Although some complained the current market is actually hindering many companies from going green, most realize that the new order expects sustainability to be included in any strategy. And this extends not just to the ports or the vessels, but across the entire supply chain. On this front, new technologies still hold the best promise. But many speakers admitted that those technologies must prove themselves before companies will be able to incorporate them anytime soon.

More collaboration

Change is hard, especially for the specialized industry of forest products transport; a phrase mentioned more than once during PPI TS18. Forest products and transport are notoriously unstable industries. Peaks and valleys are merely part of the cycle. All agreed it will take an industry approach to put most of these answers in place. If the mistakes of the past are to remain in the past, the industry's players must find better ways to collaborate through the good times and the bad.

The exhibition and conference attracted more than 600 delegates from 30 different countries

You cannot see the future by looking in the rearview mirror, but something interesting can be found from history books: Leonardo of Pisa (c. 1170-c.1250), also known as Fibonacci, was one of the most talented mathematicians of the Middle Ages. He discovered that if, beginning with 0 and 1, you add the two preceding numbers to get the next number, you will end up with the following sequence: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, etc. (known as the Fibonacci sequence). Additionally, the higher up you go in the sequence, the more the figures approach the golden ratio (approximately 1.6180339887), which is widely used in Renaissance paintings (two quantities are in the golden ratio, if the ratio of the sum of the quantities to the larger one equals the ratio of the larger one to the smaller). Since then the golden ratio and the Fibonacci sequence have been found everywhere in nature, from the arrangement of leaves on a stem to the fruitlets on a pineapple.

Today technical traders in the stock markets are also using this beauty of nature. In technical analysis, Fibonacci retracement levels are created by taking two extreme points on a stock chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%. These levels are used to identify possible support and resistance levels, i.e., the point where the curve will turn back. The key Fibonacci ratio (the golden ratio) is 61.8%. The 38.2% ratio is found by dividing 55 by 144 = 0.3819 and the 23.6% ratio is found by dividing 34 by 144 and so on. These ratios work surprisingly well in the stock markets and are used to find the points where a stock price will turn up or down. My theory is that too many traders believe that these ratios work and thus they put a sell (or buy) order close to the retracement levels and the actual market correlates with the Fibonacci´s findings.

But is there anything natural in the paper markets? Can ancient secrets and the golden ratio be used for forecasting the paper demand?

The drop in demand started sharply after the millennium. The crash of dot-com companies also started during the same time and pushed print advertising into free-fall. The marked turned upward two years later after a drop of 14% or 4.5 million metric tonnes on an annual level. Demand went through the 23.6% retracement level, showed some resistance at the 38.2% level, but turned downward after touching the golden ratio (61.8%). Apparent consumption swung down to the support level of 38.2%, bounced up to the resistant level at 61.8% and then turned downward again to the 38.2% level and below... easy, isn't it?

So what will happen in Europe during the next two years? We believe the bottom has been reached and the next direction is up. Since October 2007 graphic paper apparent consumption in Western Europe has declined by 25.4% or 11.1 million metric tonnes on an annual level. Based on the golden ratio the market should rebound up to the retracement level of 61.8% indicating a 9.5% (4.2 million metric tonnes) decline from the top level. I say that is the best-case scenario. Structural changes due to changing consumer behavior, the aging of the baby boomer generation, the digitalization of the world and crucial advertising mix are reflecting that the resistant level will be either 38.2% (-15.7% or 6.9 million metric tonnes) or even 23.6% (-19.5% or 8.5 million metric tonnes).

So people in the 13^th century already knew how the paper market would behave in 2010 and 2011. There is something left for the future too: the capacity in Europe is not down to the level of future demand. And by the way, the worst-case scenario is that we are not at the bottom yet.

More about Fibonacci from: http://en.wikipedia.org/wiki/Fibonacci

More about Fibonacci retracement from: http://www.investopedia.com/ask/answers/05/FibonacciRetracement.asp?&viewed=1

More about RISI's analyses from: http://www.risiinfo.com/