CAPITAL SPENDING

P&P's annual capital spending survey shows that while paper markets are expecting an upturn, companies are guarded on their expansion plans

BY KARL P. JENSEN

Controlled Spending is Watchword for North American Paper Industry

As the North American pulp and paper industries continue to rebound from the sharp drop in prices and profits following the 1994-1995 peak, reported U.S. capital spending plans for the 1997-1999 period show a decrease of approximately 16% from last year's survey for 1996-1998, while Canadian plans show a larger drop of approximately 25%, according to preliminary results from our exclusive mill-by-mill survey. A summary of reported expenditures at U.S. and Canadian pulp and paper operations for 1997-1999 is reported in Table 1, with data broken out by project type and region. This second consecutive year of reduced capital spending illustrates that producers have become more cautious on large capital expenditures for new mills and machines, especially considering the burgeoning growth in capacity that has occurred from Asia during the past several years and that is expected to continue through the year 2000.

In 1997, numerous companies focused on increasing their financial performance by improving return on investment (ROI). Strategies announced include closing underperforming production facilities, divesting noncore businesses and facilities, and reducing working capital and debt. As a result, 1997 was a year filled with major restructuring and downsizing announcements by numerous companies, including Champion International Inc., International Paper Co., Kimberly-Clark Corp., Louisiana-Pacific Corp., Repap Enterprises Inc., Simpson Paper Co., and Union Camp Corp.

The North American industry also saw several large mergers take place: Abitibi-Price Inc. and Stone-Consolidated joined to form Abitibi-Consolidated Inc.; Fort Howard Co. and James River Corp. formed Fort James Corp.; and Wausau Paper Mills Co. and Mosinee Paper Corp. formed Wausau-Mosinee Paper Corp. In Canada, Domtar Inc. and Cascades Inc. agreed to merge their containerboard and packaging operations to form an equal joint venture, becoming Canada's largest producer of linerboard, corrugating medium, and corrugated boxes.

With this much emphasis placed on corporate repositioning, it is no surprise to see that capital spending plans have been scaled back for the 1997-1999 period. Companies have found it more financially attractive to buy additional production capacity than to build it from the ground up. Last year, the industry struggled to absorb the capacity that came online in 1995 and 1996, especially in the linerboard, corrugating medium, and deinked pulp markets. Consequently, more capital expenditures are being slated for smaller-scale, lower-cost projects to improve product quality and lower production costs. These projects tend to add only small, if any, incremental gains in production capacity, typically 5% to 15%. Increased flexibility in the manufacturing processes is also a driving force for ongoing capital investment. For example, newsprint manufacturers continue to install advanced calendering equipment to produce enhanced-quality newsprint while also providing the technology to produce supercalendered (SC) grades of paper as well. This increased product range allows a mill to adjust its production more easily to meet market conditions.

Promulgation of the long-expected Cluster Rule, signed in November 1997, is expected to cost the U.S. pulp and paper industry at least $2 billion in capital expenditures to bring existing mills into compliance. Mills must convert to elemental chlorine-free (ECF) bleaching technologies within three years under the new federal regulations, which will become law in mid-January unless challenged. While some companies have already invested to comply with the new regulations, many have yet to make the process modifications necessary to meet the stricter emissions guidelines. Therefore, spending on environmental projects is sure to be higher in the next two to three years than the current survey indicates. One challenge that mills will face is how to tie the required investments with other capital projects to obtain a positive ROI.

P&P SURVEY RESULTS: UNITED STATES. Overall U. S. spending was reported to be only $8.4 billion for 1997-1999, down from last year's survey total of just over $10 billion. Spending in the 1996 survey totaled $13.6 billion. The current survey marks the first time that reported spending has dipped below $10 billion since 1988's survey total of $8.0 billion (Figure 1). Spending peaked sharply in 1990 at $18 billion but dropped steadily to $12.0 billion by 1994 before rebounding in 1995 and 1996. Prior to 1990, capital outlays peaked at only $10.5 billion in 1982.

Spending for new paper machines is currently reported at $2.3 billion, down from $3.1 billion in the 1997 survey. Table 2 and Table 3 present a list of new machines and mills slated for startup in 1997 and beyond. Six new paper machines began production in 1997 while eight are slated to be put into operation in 1998, most for tissue production. Beyond 1998, there are currently six new machines scheduled for installation, including two new machines by Procter & Gamble Co. at its greenfield mill in Cape Girardeau, Mo. The greatest area of capacity growth is in tissue production, with over 550,000 tons of annual capacity being added from 1997 through 2000. This growth will be offset somewhat by Kimberly-Clark's announcement in November that it will be restructuring. K-C has indicated that up to 240,000 tons of tissue capacity will be sold or shut down, with just under two-thirds of this in the U.S. One estimate predicts that K-C may remove around 100,000 tpy of tissue capacity from the North American market.

The backlog of proposed projects listed in Table 2 and Table 3 totals over $5.1 billion, as announced. Despite the financial difficulties experienced by the flood of new market deinked pulp mills that began production in 1995 and 1996, several of the proposed projects that are being studied are for additional market pulp production, including a unique project proposed by Heartland Fibers to produce pulp from cornstalk residue. Newsprint producers could potentially face a glut of production capacity if many of the proposed newsprint mills and machines are actually constructed, especially since North American newsprint consumption is slated to remain steady or decrease slightly through 2000.

At less than $1.67 billion, spending for paper machine rebuilds is also reported down from the 1997 survey total of almost $1.78 billion. However, rebuilds represent almost 20% of total spending, up from 17.6% from last year. The emphasis on capital projects announced in 1997 focused more on improving production quality and reducing costs, instead of being primarily for additional production capacity.

Not surprisingly, spending for pulp projects is down significantly, over $1.1 billion from last year's survey, as market deinked pulp mill projects have been completed or canceled. Two projects were completed in 1997 following the startup of three new mills in both 1995 and 1996. However, a number of these mills have encountered financial and operational difficulties and have been operating well below design capacity.

Areas that will see increased spending from
the 1997 survey include wood/fiber, energy, and other/miscellaneous. This reflects corporate efforts to install newer technology for improved quality and operational performance while reducing production costs and positioning mills for future capacity growth. As noted earlier, environmental spending will likely be significantly higher as mills develop and implement process modifications to comply with the recently signed Cluster Rule. Final survey results will be presented in the January issue of Pulp & Paper Project Report and are expected to give a more complete picture of anticipated spending plans.

P&P SURVEY RESULTS: CANADA. In Canada, spending is expected to decrease by over C$1.2 billion from 1997-1999 to total over C$3.5 billion. As can be seen in Figure 2, capital spending by Canadian pulp and paper companies has generally mirrored the pattern shown by their U.S. counterparts, with peak spending reported as C$13.1 billion for the 1989-1991 survey period.

Major spending areas are for paper machine rebuilds (C$1.18 billion) and pulp mill projects (C$949 million), representing about 60% of spending reported for 1997-1999. This is not surprising as cash-strapped companies look to invest in smaller projects that offer greater returns.

The only new paper machine or mill scheduled to be completed in Canada by 2000 is the new 350,000 mtpy supercalendered (SC) paper machine scheduled to begin commercial production at Stora Port Hawkesbury, N.S., in April 1998 (Table 4). All three of the proposed projects still undergoing active study and/or review are for lightweight coated groundwood (LWC) production, with two of them slated for the province of Alberta. It seems unlikely that all three projects, with an estimated total cost of C$2.1 billion, will be financed and implemented in the foreseeable future. The proposed installation by Daishowa-Marubeni Intl. Ltd. has been announced with a tentative completion date of October 2001.

Environmental spending is down from C$500 million for 1996-1998 to C$200 million for 1997-1999. This drop reflects completion of a number of projects to address changes in effluent regulation, which led to a huge surge in projects in 1995 and 1996 that added secondary treatment systems such as aeration lagoons.

ABOUT P&P'S ANNUAL SURVEY. Now in its 34th year, Pulp & Paper and Pulp & Paper Project Report'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 covers spending by project. Dollar figures represent the total cost of reported projects and often include supporting equipment. The total cost of multiyear projects is assigned to the startup year and is not divided among the years of expenditure. Each survey primarily covers the three-year period, but projects with firm startup dates beyond that time-in this case, the year 2000-are also included.

KARL P. JENSEN is associate editor, Pulp & Paper Project Report, published by Miller Freeman, Inc., San Francisco, Calif., and assistant editor, Pulp & Paper magazine.