Forest, paper and fiber-based packaging companies face a changed world requiring fundamental transformation within the industry, according to a recent PricewaterhouseCoopers survey of 33 industry chief executives based in North and South America, the Middle East, Europe, Africa and Asia.

The 2010 edition of PwC's annual CEO Perspectives report showed that while some North American and European CEOs believe the worst is over, they anticipate a long road ahead and a slow recovery. All CEOs in the mature markets agree that it's unlikely that demand will return to pre-financial crisis levels due to the rise of digital media and other factors.

For executives in the emerging markets such as China, perspectives differ widely from those in mature markets such as Canada and the U.S. Emerging markets face continuing strong growth for wood and paper products. Every Asian CEO interviewed was bullish on the future. Executives reported demand is already recovering somewhat and they see forest products as a growing industry in their regions.

"The economic crisis exacerbated structural market declines in the paper sector and precipitated steep drops in demand in lumber and panel markets," said Bruce McIntyre, leader of PricewaterhouseCoopers' Canadian forest, paper and packaging practice. "In Canada a fundamental condition for success is to position the industry to generate financial returns in line with the cost of capital, which it has not done for many years. And it's not about shrinking your way to success; the industry needs to innovate and grow."

CEOs reported a need to:

- Adjust capacity as the first step to long term survival. Consolidation may be a precondition to achieving significant reductions.

- Improve cost structures and increase process innovation and efficient use of raw materials such as through alternative uses of wood fibre to produce energy and fuels, to reduce costs in existing business and generate new revenues.

- Continue changing existing business models to maintain or restore the health of core businesses.

- Become far more innovative in every realm of existing operations and in developing new businesses and collaborations.

McIntyre added: "A number of CEOs also felt that the industry needs to do more to attract bright young graduates with business and technical educations to help develop solutions to today's issues and ensure a solid future for the sector."

Copies of CEO Perspectives and related publications can be downloaded at www.pwc.com/fpp.

U.S. Papermaker’s ‘Black Liquor’ Tax Credit Expired, Other Subsidies Available

The recent expiration of the huge black-liquor subsidy, an alternative fuels tax credit in the 2005 highway bill, isn’t stopping the U.S. forest-products industry from tapping taxpayers' money in other ways.

Three-fourths of the pulp and paper companies that received U.S. black-liquor tax credits are signed up to benefit from another biofuel subsidy, the new Biomass Crop Assistance Program (BCAP).

Various paper companies are also getting government help to reduce reliance on fossil fuels, using state grants funded by federal economic-stimulus programs. Recently, Maine awarded $2 million to Verso Paper’s Bucksport mill and smaller amounts to five other paper companies for investments in such projects as heat recovery and biomass boilers. Also, Wisconsin made similar energy-efficiency grants totaling about $5 million to four paper companies.

BCAP is nowhere near as generous as the black-liquor credits, and the benefits to paper mills and other buyers of biomass will be indirect and uncertain. Last year International Paper earned more in black-liquor subsidies than it made from selling actual products. Boosted by a $517 million appropriation for the first quarter of 2010, the program provides subsidies to suppliers rather than users of biomass.

By being BCAP-approved sites, biomass users – such as paper mills that burn bark, limbs and sawdust to fire their boilers – will presumably be able to buy at less-than-market prices. As with the black-liquor credits, critics are already complaining that BCAP will distort markets in a way that unfairly hurts some businesses without doing much for the environment.

AMERICAS

Tembec Negotiates New Five Year Collective Agreement for Chetwynd Pulp Mill

Tembec recently announced that negotiations for a new collective agreement with CEP local 448 representing workers at its Chetwynd, B.C. high yield pulp mill have been successfully concluded. The new agreement will be for a term of five years and was reached following what the Company termed “very straightforward negotiations”. Tembec also indicated that, with this new agreement in place and market conditions for pulp improving, the Chetwynd mill would restart in January.

“This is an important agreement for all parties associated with the Chetwynd mill. The last couple of years have been extremely challenging for the pulp industry and, while we are seeing positive momentum relative to demand and pricing, the stability that this five year agreement will bring is critical for employees, suppliers and customers, “said Yvon Pelletier, Executive Vice President and President, Pulp Group. “With this agreement in place and with the ongoing support from the majority of our key suppliers, it is our intent to restart the Chetwynd mill in January and have it ramp up to full production by February.”

The Chetwynd mill, which produces high yield pulp and has an annual capacity of 240,000 tonnes, has been shutdown since February of this year due to market conditions. It employs roughly 160 people, of whom 115 are covered by the new collective agreement. The mill also provides employment for 35 First Nation workers through their company, Three Nation Ventures.

Hampton Affiliates to Buy Weyerhaeuser Warrenton Mill

Hampton Affiliates recently said it has agreed to acquire a Warrenton lumber mill from Weyerhaeuser Co. But the Portland, OR based forest products company said it intends to idle the mill for up to a year in order to make upgrades to its sawmill equipment. The Warrenton mill employs 94 workers that will be affected by the closure.

In a news release, Hampton CEO Steve Zika said the company regrets the effect the temporary closure will have on the families of its workers. “However, the significant capital we put into the facility will improve recovery and add flexibility, which will benefit all stakeholders in the long-term,” he said.

Terms of the acquisition from Federal Way, Wash.-based Weyerhaeuser were not disclosed. Both companies said they expect the deal to close in January.

Zika, in the news release, said the Warrenton facility was appealing due to its “excellent log sourcing location and its reputation as a quality supplier.”

The Warrenton facility will become the eighth mill owned by the family-owned Hampton, which employs about 1,400 people principally in Oregon, Washington and British Columbia.

The company’s other seven sawmills have a production capacity of more than 1.9 billion board feet.

California Samoa Pulp Mill Pursuing Funding to Reopen

Freshwater Tissue Co. said it has abandoned an offer to liquidate the Samoa pulp mill and is instead pursuing funding and permitting to reopen the closed plant by July 1.

Company President Bob Simpson informed the Humboldt Bay Municipal Water District recently that it would accept a counteroffer by the district to supply water to the mill for 10 years, with a five-year fixed-price agreement. Simpson also said that he has reached option agreements to buy wood chips -- the raw material in making pulp -- from suppliers.

”We're pursuing funding to operate the mill,” Simpson said.

Simpson said that a potential equity partner had asked for water and chip contracts as some of the conditions that need to be met for funding.

The mill has been closed since October 2008, when previous owner Evergreen Pulp shut it down and laid off 215 workers. Freshwater bought the mill in February, but has been unable to find financing to restart the chlorine-free mill or to perform a huge retrofitting that would have allowed the mill to produce both pulp and tissue paper.

Simpson said that the mill's air quality permits are in place, and the company is pursuing state water quality permits.

In a letter to the North Coast Regional Water Quality Control Board, Freshwater asked for an interim permit to discharge wastewater through its 11/4-mile-long outfall line into the Pacific Ocean during plant maintenance and inspection.

The water quality board wrote back recently saying that no such permit exists and that the mill must comply with the National Pollutant Discharge System process. That is likely to take several months, Senior Water Resource Control Engineer John Short wrote.

The company intends to raise $10 million by selling 50 percent of its outstanding membership, according to its business plan. Thus, $5 million in short-term debt would be eliminated, the plan said, and $5 million would be used as needed for operating capital. Freshwater will borrow $50 million to meet environmental and capital needs.

Simpson has pledged not to operate the plant if it can't meet all pollution guidelines, which over the past several years and during multiple ownerships it has failed to do. Simpson said that Freshwater, as part of the new funding arrangement, would spend about $50 million over two years on equipment and process changes to ensure compliance with air and water quality regulations.

Botnia Pulp Mill in Uruguay Yields Profits for UPM

A large pulp mill set up by the Finnish company Metsä-Botnia in Fray Bentos in Uruguay two years ago was recently transferred to another Finnish forest industry company, UPM.

Pertti Hietaniemi, who was in charge of Botnia’s mill in Uruguay through the autumn, says confidently that the financial crisis has not decelerated their annual production rate of a million tonnes of pulp. In fact, the Fray Bentos mill that started operations in November 2007 has been the most profitable of all Botnia mills.

The anniversary of the prosperous pulp mill coincided with a maintenance stoppage. Since the start-up in 2007, the aggregate output of the Fray Bentos mill has been more than two million tonnes of eucalyptus pulp. In addition, both the demand for pulp and the global prices of pulp are on the increase.

”The mill is on the march again. We can sell as much pulp as we are able to produce. There is light at the end of the tunnel. We hope that the trend continues”, says Hietaniemi, who will leave Uruguay in January.

At present, UPM is breaking in its new pulping line. Jussi Penttilä, UPM’s Director of Asset and Pulp Steering, will take over the reins of the company’s new acquisition, which has been renamed the UPM Fray Bentos Mill.

According to the company, all customer relations remain the same as before. At present, two-thirds of Fray Bentos’s pulp production goes to European paper mills, while the rest goes to China.

In November, Argentina received its first delivery from the Fray Bentos pulp mill. Initially, the construction of the Botnia mill was a subject of passionate confrontation between Uruguay and Argentina, as Fray Bentos is situated on the Uruguayan side of the Uruguay River between the two countries. The protesters said that they were primarily concerned over the mill’s possible negative impact on the environment.

For UPM, the Uruguayan mill means a more established position in the global pulp markets than before. However, no extension of the mill is of current interest, says Senior Vice President Jaakko Sarantola who is in charge of UPM’s Pulp Business Area. ”The mill has set a world record in bringing up the production capacity, which is the trend we plan to continue. We will concentrate on trimming our magnificent mill and on running at full capacity”, Sarantola notes.

”The strategic significance of the investment is that all our eggs are not in the same basket. Our presence in South America gives us an opportunity to learn something new which can lead to other things. At present, the most visible change is that the pulp bales carry a UPM label”, Sarantola adds.

The Fray Bentos pulp mill has a production capacity of 1 million t/a of bleached eucalyptus pulp. The project is the largest foreign industrial investment in the history of Uruguay. It is also the largest ever Finnish industrial investment abroad.

The profitability of the factory is based on the use of a new raw material - the fast-growing eucalyptus.

EUROPE

SCA Upgrades Pulp Mill in Sweden

SCA is investing SEK 500 million in a new lime kiln at the Östrand pulp mill in Timrå, Sweden. The investment will increase production at the Östrand plant by 10,000 tons of pulp per year and reduce its fossil-based CO² emissions by 80%. The investment makes a future increase in capacity possible.

The new lime kiln will replace two existing oil-fired lime kilns and will use fuel pellets from SCA’s BioNorr plant in Härnösand. Lime kilns play an important role in the production process at sulphate pulp mills. The process produces lime sludge, consisting primarily of calcium carbonate. The lime kiln converts this to calcium oxide (slaked lime), which is then reused in the pulp production process.

The Östrand mill’s two lime kilns consume approximately 17,000 cubic metres of oil per year and significant savings will be made when the oil is replaced with biofuel. The new lime kiln will also lead to lower chemical and maintenance costs.

“The new lime kiln will enable us to increase our production and at the same time, we will achieve a dramatic drop in Östrand’s greenhouse gas emissions,” said Ingela Ekebro, site manager at the Östrand plant.

The Östrand pulp plant produces 420,000 tonnes of chlorine-free bleached kraft pulp, which is used in the production of printing paper and hygiene products, plus approximately 90,000 tonnes of chemically treated mechanical pulp (CTMP), which is used for the manufacture of hygiene products and packaging products.

The new lime kiln is expected to be operational by the end of 2011.

Lenzing Invests Euro120 million in Fibre Expansion in Europe and Asia

The Lenzing Group will continue to expand production capacity in 2010 by investing a scheduled EUR 120 million in its European and Asian sites.

The projects will be realized over the next two years. The key elements are the further extension of pulp production at the Lenzing site (Upper Austria) and a further extension of fiber production at Heiligenkreuz (Burgenland, Austria) as well as remodeling the TENCEL® site at Grimsby (UK).

Peter Untersperger, chairman of the Lenzing management board, comments on these latest strategic decisions: “We are expecting continuing strong demand for Lenzing fibers over the coming years. By these projects we as the world market leader intend to secure and enhance our lead in terms of quantity as well as quality. And the message is clear: the Lenzing Group is going to shape fiber future jointly with its customers”.

Soon the fourth production line of the Indonesian subsidiary PT. South Pacific Viscose (SPV) will go operational. After two years of construction activity and a total investment of about USD 150 million, fiber production capacity will be increased from about 160,000 to 220,000 tons per year. But Friedrich Weninger, management board member in charge of fiber production, notes: “Already today we expect that demand will exceed Indonesian production capacity. We will therefore begin with debottlenecking production right after start-up, with the aim to increase SPV production capacity by another 18,000 tons to 238,000 tons per year”.

In the special fibers sector Lenzing plans to expand production at the TENCEL® site at Heiligenkreuz (Austria) by 10,000 tons to 60,000 tons per year. Friedrich Weninger: “The market has fully come to realize the superior quality of our TENCEL® special fiber for lingerie as well as for home textile applications. Exports of TENCEL® fibers from Heiligenkreuz to China, South Korea and India just keep on growing.“ Moreover, the TENCEL® site Grimsby will be remodeled to produce a novel TENCEL® special fiber.

And lastly, the site for the production of special fibers at Lenzing, the biggest fiber producer of the Lenzing Group, will be enhanced by an eco-friendly ozone bleach facility for pulp production in 2010 as part of its continuous expansion, thereby maintaining the current degree of self supplydespite increasing fiber production. In addition, pulp production will be increased to an annual capacity of 260,000 tons.

Nordea Considers Controversial Pulp Mill Project Investment

Nordea Bank has not yet decided over investment in an Australian pulp mill which environmentalists say is unsustainable

The Wilderness Society, Aawaz.org and Danish organisation Nepenthes have criticised Nordea, as the mill would be operated by Australian timber company Gunns Limited.

Environmental organisation Avaaz, as part of an email petition to persuade Nordea CEO Christian Clausen not to invest in the project, says the company is notorious for its ‘destructive practices’. Another forest protection organisation, Nepenthes, said Nordea should not involve itself with the project.

‘Gunns Limited clears woodland by using napalm to burn huge areas to make room for their plantations. That Nordea is considering investing in such a company is outrageous,’ Jacob Ryding, spokesman for Nepenthes, told the newspaper.

But Gunns have vehemently denied the allegations, which they describe as unsubstantiated and false.

‘Napalm is not used by the company. Gunns Limited adheres to the strictest environmental standards set down by the Australian Government, and in contrast to the false claims regarding deforestation, the company is actually the largest planter of trees in Australia,’ said the spokesman. ‘Gunns Limited is fully certified by the Australian Forestry Standard, Australia’s leading sustainable forest use standard,’ he added.

Nordea emphasised it had not made any firm decision yet as to whether it would invest in the mill. But a company spokesman said that the bank would not finance projects whose operations went against internationally accepted norms.

UPM to Restructure Plywood and Timber Operations In Finland

In November 2009, UPM announced plans concerning significant restructuring of its Plywood and Timber operations to ensure their competitiveness in Finland. The measures now decided include centralising operations and investing in the more competitive Finnish units.

In negotiations with the employees, financial prerequisites could not be found to continue the operations at the plywood mills in Heinola and Kaukas in Lappeenranta, the sawmill in Heinola, and the further processing mill in Parkano. UPM will permanently close these mills during the first half of 2010. In addition, UPM is prepared for temporary production curtailments at all of its plywood mills and sawmills in Finland in 2010.

Furthermore, to improve the efficiency of the Plywood business, UPM will discontinue weekend shifts in most of the Finnish mills as well as streamline the organisation of office employees. In the Timber business area, UPM will restructure the production of the Kaukas further processing mill in Lappeenranta.

As part of the measures to improve the competitiveness of the Plywood and Timber operations in Finland, UPM will invest approximately EUR 25 million in the expansion of the Savonlinna plywood mill and the development of the production at the Kaukas sawmill and the Aureskoski further processing mill in Parkano. After the investment, the Savonlinna plywood mill will be the world's most efficient birch plywood unit.

UPM estimates the restructuring costs to be approximately EUR 44 million, including impairment charges of approximately EUR 11 million. The restructuring costs for the fourth quarter of 2009 are estimated to be in the Plywood business approximately EUR 30 million, including a cash impact of approximately EUR 24. In the Timber business, the cost is estimated to be approximately EUR 14 million, including a cash impact of approximately EUR 9 million.

Implementation of these measures will decrease the amount of UPM employees by approximately 830 persons, of which approximately 650 work in the units to be permanently closed. UPM's Plywood business employs currently 2,450 persons in Finland whereas Timber employs around 900 persons. As a result of the measures, the number of employees in the Plywood business will decrease by around 680 persons and by 150 in the Timber business.

ASIA

China's Pulp Imports Rose 44% in 2009

China's pulp imports in December totaled 1 million metric tons, the General Administration of Customs said, as Dow Jones informed Lesprom Network.

Imports rose 44% from January-December, to 13.68 million tons.

The country also imported 20,000 cubic meters of plywood and 310,000 tons of paper and paper board in December. In 2009, plywood imports fell 36% to 150,000 cubic meters while paper and paper board fell 6% to 3.31 million tons.

Indonesian Firm Medco to Produce Wood Pellets

PT Medco Energi, Indonesia's largest private oil-and-gas producer, has scaled back plans for a large pulp and paper mill and other forestry investments in Indonesia's remote Papua province at a time of growing global concern over the impact of deforestation on climate change.

Last year, Jakarta-based Medco, which is looking to diversify its revenues, said it was planning a 500,000 ton-per-year pulp and paper mill in Merauke district, on the southern tip of Papua, a sparsely populated California-sized Indonesian province that is covered in rainforests and home to only 2.5 million people.

Medco has dropped plans for its pulp and paper mill and instead is focusing on a smaller-scale $70 million facility to produce wood pellets, a potential "green" fuel, said Aradea Arifin, the finance director of Medco's Papua operations, in an interview.

The company is also working with Conservation International, the U.S.-based environment group, on a sustainable land-use plan for its mill that will set aside forest conservation areas inside Medco's concession.

"A pulp mill is very difficult in terms of the environment, so we changed," Mr. Arifin said in an interview.

Among other concerns, Mr. Arifin said the company wants to avoid social problems with Papuans, who use the forests for hunting and have in some cases attacked palm oil and forestry companies operating in the province. Medco also hopes its sustainable approach will allow it to get further forestry concessions from Papua's local government, whose governor, Barnabas Suebu, has declined to hand out large parcels of land to companies and says he doesn't want the province to be destroyed by rampant development like other areas in Indonesia.

Jatna Supriatna, the head of Conservation International's local office who began working with Medco last year, said he told the company's senior management that a large pulp and paper mill was going to cause "a problem with all the international NGOs" because of its impact on Merauke's eucalyptus forests. A wood pellet mill uses all parts of a tree, including branches, meaning it needs fewer inputs compared to a pulp and paper mill for the same production, Mr. Supriatna said.

Medco says it's hoping to cash in on increasing demand for wood pellets from companies in Europe and Asia that are under pressure to reduce their carbon emissions. Wood pellets are rising in popularity as a source of fuel to replace carbon dioxide-emitting coal in power stations and for heating.

Medco has teamed up with LG Corp. of South Korea, which has taken a 32% stake in Medco's Papua unit and will market the wood pellets overseas.

To be viable as a "green" fuel, Medco will need to prove that its wood pellet production doesn't lead to widespread forest destruction. Rainforests and peat lands are efficient absorbers of carbon dioxide, and their destruction through fires, forest-clearing or drainage releases the heat-trapping greenhouse gas back into the atmosphere.

Medco's Mr. Arifin said the company has hired consultants to look at how it could protect forests in return for carbon credits, which can be sold to polluters in developed countries or traded on international exchanges.

Conservation International's study of Medco's 170,000-hectare forest concession in Merauke should be completed in the next couple of months, Mr. Supriatna said. The study, which is being prepared with input from a consultant from the University of Texas-Austin, will advise Medco on which areas it can selectively log and which should be protected for environmental or social reasons.

Medco says it is waiting for the study before it begins to cut trees in its concession area but is looking at setting aside at least 70,000 hectares of the total area for conservation. It is planning to build up industrial-wood plantations on the remainder of the land it clears, which take six years to grow.

A Medco mill has begun limited operations, using wood felled to make way for its production facilities, Mr. Arifin said. It plans to produce 100,000 metric tons of wood pellets in 2010 and 300,000 tons within two years.

McIlvaine Company

Northfield, IL 60093-2743

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