Currency tops 2004 paper industry issues

U.S. pulp, paper, and board prices rebounded significantly last year-and overall output of paper and board in the U.S. was on track to total 91.7 million tons, the highest year since 2000's 94.6 million tons and up nearly 4% over 2003.

As a result of the increased demand, prices shot up on almost every grade of pulp and j paper by roughly 10 to 30%. Northern bleached softwood kraft market pulp hit $680/tonne in June-a 40-month high. The 42-lb kraft linerboard price in the U.S. East jumped $95/ton over six months to $445-$455/ton in July, its highest since 2000. The 20-lb repro bond 83/84 bright cut-size paper rose to $840-$860/ton in October-up from $720-$740/ton in December 2003.

A weaker U.S. dollar aided U.S. paper and board exports, which rose 5.1% year-todate through October last year, according to the American Forest & Paper Assn. U.S. imports rose 3.9% year-to-date through October. j

The weaker U.S. dollar against a stronger Canadian dollar hurt Canadian producers for a second straight year since it meant higher production costs at mills in Canada while Canadian producers almost completely sell their paper and board in U.S. dollars. The loonie appreciated 6% vs. the dollar, from the beginning of last year to year-end, and was at a near 10-year high. The dollar weakened 7.5% vs. the euro during the year.

Canadian paper and board production was flat year-to-date through June, compared with output year-to-date through June 2003, according to the Pulp and Paper Products Council.

By year-end, NorskeCanada planned a newsprint machine conversion in Port Alberni, B.C.; Kruger Inc. shut three machines temporarily in Quebec and Newfoundland; and Domtar Inc. shut machines in Cornwall, Ont., and Ashdown, Ark. The stronger Canadian dollar required producers in Canada to restructure in some cases. Other mill shuts included Parsons & Whittemore Inc.'s Nackawic, N.B., operation, and UPM Kymmene's pulp line at its Miramichi, N.B.

Overall, the combination of the higher prices for pulp and paper and improved demand, both for printing and writing papers and containerboard, drove up earnings for pulp and paper companies, despite rises in costs for chemicals, recovered paper (prices up 14%), and energy. Income for 16 publicly traded U.S. producers combined increased 82.5% in the second quarter, compared with second quarter 2003, signaling the recovery. In the third quarter, income for the 24 publicly traded companies increased 82%, compared with income in third quarter 2003.

Pulp & Paper Week editors selected the currency issue-Canada's strongest dollar in almost 10 years vs. the U.S dollar, and the dollar's weakening, especially against the euroas 2004's top industry story/issue. Other top stories included China's ongoing build of paper and board capacity and its impact on global trade flows, as well as the string of linerboard and market pulp price increases in the U.S.

Consolidation and asset sales remained another industry theme last year although in smaller terms than in previous years-as did reductions in capital spending.

Major producer Georgia-Pacific Corp. (G-P) sold off $1.4 billion in assets last year, including its building products distribution business, and two pulp mills to Koch Cellulose, which for the first time entered the pulp and paper industry. Although G-P continues to face asbestos liabilities and lawsuits, the company has redefined itself in the consumer products/tissue sector, and reduced its debt by year-end to $8 billion.

Boise Cascade Corp. officially left the industry in a deal with OfficeMax and sold its remaining paper, board, forest products, and timberland assets for $3.7 billion to Chicago investment company Madison Dearborn Partners, which has become a major industry investor. Madison Dearborn already has stakes in Jefferson Smurfit Group, Packaging Corp. of America, Graphic Packaging Corp., and Buckeye Cellulose Corp. Former

Macmillan Bloedel Ltd. head Thomas Stephens took over as CEO for the Boise Cascade LLP paper and board assets, under the company name Forest Products Holdings LLC. At year-end, the company announced plans to reduce employees at its International Falls, Minn., uncoated freesheet mill and reached agreement to sell 2.2 million acres of timberland in Washington, Oregon, Idaho, Louisiana, Alabama, and Minnesota to Boston-based Forest Capital Partners LLC.

U.S. companies continued to funnel more cash flow from operations to reducing debt and making their current operations as efficient and low cost as possible. The three major pulp, paper, and board producers in the U.S. had large debt levels by the end of last year: International Paper Co. ($13 billion debt, with annual sales of about $26 billion), Weyerhaeuser Co. ($10.9 billion debt, with annual sales of about $22 billion), and G-P ($8 billion debt, with annual sales of $20.5 billion).

Compared with capital spending in 2000, IP, Weyerhaeuser, and G-P combined reduced their combined capital spending by 36%, based on the spending estimates for last year. IP spent $1.4 billion in 2000 and $1.27 billion last year; Weyerhaeuser (with Willamette) spent $531 million last year and $1.43 billion in 2000; and G-P $678 million last year and $1.24 billion in 2000.