jan 04 update

PULP AND PAPER UPDATE

January 2006

Latest world market review from UNECE timber committee

In 2004 European production of paper and paperboard increased 4.1 % to 103.1 million tons. Pulp output rose 2.4% In North America production of paper and paperboard increased 3.3% to 104.2 million tons based on 4.2% increase in the U.S. and 2.3% in Canada. CIS production increased 6.6% to 8 million tons while consumption increased 6.5%. Pulp and paper forecasts for Europe, North America and Russian Federation are detailed in the full text of this paper by UNECE which can be seen by clicking here.

Western Forest Products shutting down Squamish Mill

British Columbia is the target of the next mill closure, this time initiated by Western Forest Products. The company will start shutting down its pulp mill located in Squamish during the week of January 23, 2006, and production will gradually peter out and completely stop on March 9th. The mill, which has an annual capacity of 275,000 tonnes of NBSK pulp, when it closes, will see 323 people lose their jobs.

Reynold Hurt, president and CEO of WFP, conceded the mill's performance has been lackluster for years and the more recent economic situation provides the impetus for carrying out the inevitable. "Financial results from the pulp segment of our business have been unacceptable for many years," he said. "Having considered the long-term market outlook, the impact of rising fiber and energy costs and the high capital requirements, we determined that the best long-term decision for Western was to exit the pulp segment and narrow our focus to our lumber business."

Hurt confirmed that the company has been active in its search for a buyer for the facility, but the fruitlessness of that pursuit made the shutdown the only viable option.

Wood chips that came from the company's four Vancouver Island sawmills to be used at Squamish, will now be sold under a new agreement. A partnership with Canadian Forest Products and Oji Paper Canada will instead turn those chips over to the Howe Sound pulp and paper mill for consumption there. Western will bank $35 million as a pre-payment against the future deliveries of chips, money it will use to fund closure costs at the Squamish pulp mill.

Northern Ontario's pulp and paper industry is scheduled to suffer yet another blow, with the closure of one papermachine at Weyerhaeuser's mill in Dryden. A total of 80 people will lose their jobs when the machine stops production in the next few weeks. Another 40 jobs will be eliminated next spring when the company scales back the processing part of its mill.

Although Ontario has borne the brunt of many mill closures, a Saskatchewan facility is on Weyerhaeuser's chopping block as well. The Prince Albert pulp and paper mill will stop producing paper at the end of this month, affecting 690 jobs. The facility churns out 280,000 tonnes of uncoated paper and 130,000 tonnes of market pulp every year.

The mill is being put up for sale, and will continue to operate until the spring in order to reduce the possibility of winter damage.

Weyerhaueser to close one paper machine operation at Dryden

The mill is being put up for sale, and will continue to operate until the spring in order to reduce the possibility of winter damage. (Pulp and Paper Canada).

Canadian Pulp and Paper industry shrinking as South America takes up the slack

The Communications Energy and Paperworkers Union estimates 10,000 job cuts were announced during 2005, some to take effect in early 2006.

The same challenges are hitting companies everywhere, to varying degrees: the higher Canadian dollar, declining demand for newsprint, heavy duties on lumber exports to the United States and competition in pulp and paper from emerging producers in Asia and South America.

This points to signs the pulp and paper sector is going the way of textiles - transferring to the Southern Hemisphere where trees grow faster and wages are lower.

An additional stress is hurting Quebec, where the government decreed as of April a 20-per-cent reduction in the amount of trees that could be cut, to allow the boreal forest to catch up to years of harvesting.

Analysts say Quebec, the leading pulp and paper region in Canada, now has the highest fibre costs anywhere in the world, due to a combination of stumpage fees, vast distances, and its smaller trees compared to B.C., the lumber leader.

In Quebec alone, the government estimates 3,800 direct jobs were lost in 2005 in the lumber, pulp and paper sector.

Ontario is also reducing the allowable wood cut, while electricity rates soar in the wake of deregulation. High gas and oil prices added to the industry's burden across the country.

Mills were also closed in the Atlantic provinces, and even the large Weyerhaeuser Co. pulp and paper mill in Prince Albert, Sask. will be shut down in the spring.

The only bright spot in the story is the solid wood industry of British Columbia, feeding trainloads of frame lumber to the housing boom in the United States.

Analysts say the B.C. lumber industry is more efficient, thanks to its large trees and because the B.C. government allowed the industry to consolidate into fewer sawmills that run flat out.

While newsprint has enjoyed seven consecutive price hikes since mid-2002, the additional revenue has been wiped out by factors like the rising Canadian dollar and a steady decline in newsprint consumption since 1987 in North America.

"The cost issue has been a very important factor this year," said Paul Leclair, chief economist at the Pulp and Paper Products Council.

"There's a bunch of factors combined that are hurting the industry significantly; I'd be extremely surprised to see profits this year."

Consultants Pricewaterhouse Coopers said earnings by the leading Canadian forest companies collectively fell to a paltry $71 million in the third quarter, compared with $883 million earned a year ago.

Economist Louis Theriault, who did a study on the industry for the Conference Board of Canada, sees a brighter picture in the long term, but for the moment "we're in a state of absolute disaster. There's overcapacity throughout North America; there's plant closures as we speak."

Theriault said the pulp and paper segment has been operating in the red for the last six to eight quarters. "Collectively in Canada, it can't get worse," Theriault said.

Based on the Conference Board's belief the dollar will stabilize at around 81 cents U.S., Theriault said recent efforts to limit overcapacity by shutting machines and entire plants will start to pay off.

Suzano Bahia Sul Mercuri mill expansion slated for second half 2007

Metso Paper will deliver a pulp drying line including three complete baling lines to Suzano Bahia Sul Papel e Celulose S.A. in Brazil. The world's highest capacity drying line is a part of Suzano Bahia Sul's expansion project at the Mucuri mill in the state of Bahia. The value of the order is approximately EUR 100 million. Start-up is scheduled for the second half of 2007.

Metso Paper's scope of delivery includes bleached stock screening, wet-end, dryer, high-speed cutter and three baling lines. The line will include the largest airborne dryer ever built, and the production of the line will be highest ever made on a single drying line. The trim width of the drying line will be 9,990 mm and the production capacity 3,340 tons of eucalyptus pulp per day.

Additionally, Metso Paper will provide engineering, procurement and construction services (EPC). A significant part of the delivery will be locally manufactured and pre-assembled in Metso's production facilities in Sorocaba, Brazil.

The Brazilian company Suzano Bahia Sul Papel e Celulose S.A. manufactures eucalyptus pulp, paperboard, as well as both coated and uncoated wood-free printing and writing paper. The company's current paper and paperboard production capacity is 820,000 tons per year and pulp production capacity is about 1.1 million tons per year. Suzano de Papel e Celulose is one of the largest Brazilian producers of eucalyptus pulp and paper. The company installed its first papermaking machine in the late 1930s in Ipiranga, a barrio of São Paulo City.

Suzano acquired CVRD’s stake in Bahia Sul Celulose in February 2001, with a pulp mill at Mucuri, southern Bahia (Suzano had itself been part-owner of Bahia Sul since 1987). The acquisition boosted the group’s aggregate production capacity to 1.2 million tpy. To strengthen its paper products business in October 2001 Suzano consolidated its management with that of Bahia Sul, involving two mills (at Suzano, São Paulo State, and Mucuri, Bahia State).

JK Paper of New Delhi is expanding packaging board production

J K Paper Ltd is following an expansion path. The company is investing a gross amount of Rs 400 crore into its offline blade coating plant and in the production of multi-layered packaging board.

While the offline blade coating plant would be funded through internal accruals, funds for the latter would be raised from the market.

The 46,000-tonne capacity expansion of the blade coating plant, which had been commissioned at its existing facility at Jaykaypur in Orissa, is costing Rs 180 crore.

The company has captured more than 20 per cent share of the coated art paper market in the last few months.

"We are looking to revamp our capacities and also hope to give a tough competition to the imports," Harsh Pati Singhania, Managing Director, JK Paper Ltd, said.

The company's second venture into the multi-layer duplex board segment would require an investment of Rs 235 crore.

The plant that would make use of `contemporary technology' is being set up at its Central Pulp Mill, in Gujarat, with a capacity of 60,000 tonnes per annum. "Production would commence by the first quarter of 2007," Singhania said. The project is being financed through debt and equity.

Singhania believes that with the packaging board segment witnessing a growth rate of 12-15 per cent, there is tremendous potential fuelled by the growing demand from FMCG companies.

Though the company is currently meeting its pulp and paper requirement with its own plantations, Singhania says he realizes the need for policy modifications from the Government.

Koch acquisition of Georgia Pacific is completed

Koch Industries, Inc. announced the completion of its $21 billion acquisition of Georgia-Pacific Corp.

The acquisition was finalized through the merger of Koch Industries' wholly owned subsidiary, Koch Forest Products, Inc., with and into Georgia-Pacific. Georgia-Pacific will retain its name and operate from its Atlanta headquarters as a privately held, indirect wholly owned subsidiary of Koch Industries.

"Georgia-Pacific is a highly respected company with great businesses and a strong history as a market leader," said Charles G. Koch, chairman and chief executive officer of Koch Industries. "We believe that as a wholly owned subsidiary, Georgia-Pacific can be even more successful by combining the capabilities of our two companies. As a private company, we have the flexibility and resources to pursue strategies and opportunities that we couldn't as a public company. Beyond viewing Georgia-Pacific as a high-quality investment, we view it as a new set of growth platforms.

2005 production of paper and paper board was 360 million tons

According to Finnish KCL, a research company owned by the Finnish pulp, paper and board industries, about 360mn tons of paper and paperboard will be produced in the world in 2005. About 60% of the total will be used by the media, and about 40% by the packaging industries. According to KCL, the share of packaging will increase in the future, and the focus of the paper and paperboard industry will be in products based on recycled fiber. Mills are required to have a higher degree of automation and artificial intelligence. Mills that cannot compete with volume can find new possibilities through specialization. MD Jukka Kilpeläinen of KCL forecasts that 60-70 of Finland's present 100 paper machines will be operational in 2020. Their combined production may, however, be higher than the present 13mn tons.

The main challenges for research in the paper and paperboard industry are finding ways to enable the continuous increase in productivity, supporting specialization, and promoting sustainable development. According to Kilpeläinen, raising productivity requires developing tools for process modeling and simulation and problem solving. Also supporting efforts to focus on the use of recycled fiber is a challenge for research as is developing raw material into products.

Kruger starts project to modernize corrugator at LaSalle plant

The carton division of Kruger announced the implementation of a $1.9 million project to modernize a corrugating machine which should produce 1.2 billion square feet of carton boxes every year for its packaging plant in LaSalle.

This phase includes the replacement of a single-sided post as well as the installation of a new quality control system for corrugated boards. This project will increase productivity, quality, and the uniformity of manufactured carton. This investment is a demonstration of the Kruger Company to reinforce its competitive position in the domain of packaging, part of the five-year investment program. To-date, $15 million has been allocated for upgrading Kruger's packaging carton plants in Quebec and in Ontario. "Our project will contribute towards improving our competitive edge in a market where response time, quality, and the performance of manufactured containers are key elements of success", said Michel Dubuc, Kruger's plant director.

Founded in 1960, the LaSalle plant employs 245 people and specializes in the manufacture of regular and cut carton boxes, including corrugated carton in sheets.

Kruger Inc. is a major manufacturer of special pulp and paper products such as newsprint, special printing papers, light weight coated paper, paper for telephone directories, paper for domestic and industrial use, as well as recycled liner board, built-in boxes and other wood products, including the recently patented DRIcore unique sub-floors.

Wausau Paper will temporarily close mills

Wausau-Mosinee Paper Corp. said that it now expects to lose money in the fourth quarter and will temporarily shut down two of its paper mills due to weaker-than-expected paper product sales.

The company, which now operates as Wausau Paper (NYSE: WPP), said it is projecting a loss of 13 cents to 15 cents per share for the quarter. It had previously expected to break even during the quarter.

The new outlook excludes gains expected from the sale of timberland and charges related to a pulp mill closure at its mill in Brokaw, near Wausau.

The Mosinee-based producer of paper products said the majority of the earnings shortfall is attributable to further weakness in uncoated freesheet markets, reducing sales for its printing and writing segment. As a result of the slowdown, the company will temporarily shut down its mills in Brokaw and in Groveton, N.H. The two mills will shut down for nine days beginning Dec. 24.

Also contributing to the revised guidance are operating difficulties associated with the sulfite pulp mill closure at Brokaw and a 2 cents per share charge related to the disposal of two idle laminators, Wausau Paper said.

RM988m wood pulp mill to be built in Sabah

Kuala Lumpur: Pandawa Sakti Sdn Bhd, an associate company of Gula Perak Bhd has awarded US$260 million (RM988 million) project to Changsha Engineering Co, Ltd of China Light Industry (CEC) to design, build and operate a wood pulp mill in Sabah," its managing director Lim Sue Beng said.

The project will be located in Mempakad, which is about two hours drive north of Kota Kinabalu, situated between the towns of Kota Belut and Kudat.

The deal was formalized between the two parties at a contract signing ceremony here Thursday.

Representing their respective companies were Pandawa Sakti's Lim and CEC's president (Ms) Fan Yan.

"Under the terms of agreement, CEC will provide the engineering design, civil construction, equipment & machinery including installation, technical service, commissioning and maintenance," said Lim who is also managing director of Gula Perak.

He said the turnkey project, expected to commence in mid-2006 and complete by mid 2009, would be capable of producing 300 metric tonnes of wood pulp per day.

On funding, he said Pandawa Sakti, a company was set up early this year to undertake the project, would be getting it from the Export Import Bank of China.

"We are in the midst of negotiation with the bank and hope to get the fund next month," he said.

A total of 800 people will be employed comprising 750 local staff and 50 engineers from China.

Under the agreement, CEC will also provide training and technology transfer to its Malaysian counterparts.

Lim said the pulp mill would be developed on a 63-hectare land, which currently housed a saw mill.

He said the wood pulp would be produced from Acacia trees, which are grown on a 25,000-hectare plantation near the mill.

"The wood pulp will be exported exclusively to China with an expected turnover of US$55 million in the first year of production.

Lim said the company hoped to double its production capacity in the next three years.

He said Pandawa Sakti's decision to partner CEC was based on their vast experience, engineering expertise and cutting edge technology.

A leading pulp and paper mill contractor for 50 years in China, CEC has also built and commissioned wood pulp mills in Egypt, Pakistan and Myanmar.

Meanwhile, CEC president, Fan said there was great demand for wood pulp and she was confident the project would be successful.

She said this project also received full support from the Chinese government

Two pulp mills in Uruguay slated for 2007 operation

On the outskirts of Fray Bentos, with the full backing of the Uruguayan government, two foreign companies - ENCE of Spain and Botnia of Finland - are both building pulp mills scheduled to enter into operation in 2007.

But the location of the plants has been questioned by Argentina, which shares in the management of the use of the Uruguay River.

The two companies, whose mills will be a mere 10 km apart, plan to invest a total of 1.8 billion dollars. But environmental organizations have pointed out that of this total, over 80 percent will be spent on equipment purchased in their base countries in Europe.

Botnia has confirmed that only 20 percent of its investment corresponds to domestic suppliers, while the rest will go towards imported materials. However, once the mill is up and running, local companies will be given a greater share of this business, the company maintains.

The two mills together are projected to produce around 1.5 million tons of pulp for paper production annually, double the amount currently produced by a dozen mills currently operating in Argentina along the Paraná River.

This high volume of output will require around 600 workers in total, most of whom will need to be highly skilled.

The small number of direct jobs generated relative to the huge investment involved is one of the aspects that has stirred up controversy.

The sectors that support the projects believe that the indirect employment created both during the construction of the mills and after they are in operation should be taken into account. But opponents warn that there will be greater losses than benefits for the local population.

Pulp production is one of the most highly polluting industrial activities because it releases dioxins and furans, carcinogenic chemical substances that have also been shown to weaken the immune system and cause hormonal and neurological damage to humans. The northeastern region of Argentina, bordering on Uruguay and Brazil, is ideal for the installation of pulp mills given the accessibility of river transportation and large plantations of eucalyptus trees, a favored raw material for pulp production.

But the severe environmental impact of ENCE plants in the northwestern Spanish province of Pontevedra and the southern Chilean region of Valdivia have led residents in the area around the future sites of the new mills to fear the potential water, air and soil pollution they will cause once they are operational.

Raúl Estrada Oyuela, director of environmental affairs at the Argentine Foreign Ministry, commented that his government "cannot prevent" the mills from being built in Uruguay. It can, however, demand that no damage be incurred by Argentina as a result, and if damages are caused, it can also demand compensation.

Of course, it would be preferable if this point were never reached, said the official, who added that Argentina's main concern is to ensure that no harmful pollution is generated. But up until now, he added, all efforts make in this regard have been in vain.

"Uruguay only wants to monitor the water, but what are we going to monitor? The disaster?" he asked.

Estrada Oyuela is a member of the binational joint commission created to study the impact of the mills being built on the eastern shore of the Uruguay River. But during the eight meetings that have been held so far, there has been no precise information supplied regarding the industrial process to be used, the water recycling system, or emissions of gases and solid wastes, he stressed.

Environmentalists recommend that the water be reused within the plant itself through a closed-loop system, but Botnia has found this technology unsatisfactory in Finland, according to company spokespersons.

Botnia has stated that it will use elemental chlorine free (ECF) rather than totally chlorine free (TCF) technology in the pulp bleaching process at its future mill in Uruguay.

While cleaner and safer than older technologies, ECF processes still use chlorine compounds, which are the source of the harmful dioxins and furans.

Estrada Oyuela believes that both Botnia and ENCE should use the cleanest technologies possible, since the mills will be located extremely close to human settlements and tourism areas. However, neither company has pledged to do so in the reports they have submitted.

The joint commission's first findings will be released in late January.

Ballarpur to double paper production at Bhigwan

BALLARPUR Industries Ltd (BILT) has kicked off its expansion-cum-modernization plans for which it had set aside around Rs 1,200 crore.

A part of the investment would go towards doubling the capacity of paper production at its Bhigwan unit in Maharashtra that manufactures coated paper. The unit currently produces 1,15,000 TPA and is poised to produce 3,00,000 TPA, post expansion. According to the company, the coated paper segment would grow at a fast rate helped by an improving GDP and rising literacy levels.

Shift to white copier paper: Furthermore, the company recently completed the Rs 65-crore modernization of machines at APR Packaging Ltd, its Ashti unit. The unit, which was previously producing Extensible Sack Kraft Paper, has now moved to producing white copier paper. The expansion would enable the plant to manufacture bleached writing and printing paper up to 60,000 tonnes per annum.

The rationale behind the shift seems to be the stiff competition from plastic bags in the packaging sector, which had resulted in reduction of margins and lower production volume of bags. Hence, the unit has moved to manufacturing bags made from outsourced sack kraft paper.

The shift to white copier paper has resulted in lower power and water consumption by the unit. While power consumption has been reduced from 900 KWH/MT to 700 KWH/MT, water requirement has fallen from 7,916 cubic meters to 5,891 cubic meters per day.

The company has charted out a target to produce 54,000 tonnes per annum at Ashti of copier paper and reach 100 per cent capacity utilization by the end of March 2006. The required pulp for the production is being imported from Indonesia and Sweden. Additionally, upon satisfying itself on the sustainability of the project, the unit is also thinking of setting up a captive power plant.

Mr Manjit Singh, Chief General Manager, Unit Ashti, said, "We might look to set up a 7.5 to 10 MW captive power plant for the unit."

Currently, most of the company's efforts are focused on expanding the copier and coated paper business, which the company feels will be high-growth segments.

Although the Ballarpur unit is reaching its saturation point in terms of production, no immediate changes are being planned.

In-house training center: However, the Yamuna Nagar plant would witness a reconfiguration of machines to produce stationery. An in-house training centre is also being set up at the unit. The Yamuna Nagar plant is slated to produce tissue paper (BILT's recent foray) in future, which is currently being sourced from overseas.

BILT has recorded an annual turnover of around Rs 1,790 crore and hopes to raise this to Rs 4,000 crore in four years' time.

Tamil Nadu Newsprit expanding pulp and paper capacity

Without no constraints on capacity and water availability, Tamil Nadu Newsprint is unlikely to face the situation of 2004-05 when it had to make an extended shutdown. Availability of bagasse could, however, pose a problem if the cane crop has suffered extensive damage in the rains over the past couple of months in Tamil Nadu. This is not likely to be a major negative, as the company has the flexibility to operate on wood pulp. Margins may slip slightly, with pulp prices firming up. As more capacities for hardwood pulp are likely to be commissioned next year, pressures on this front could ease and provide producers such as TNPL greater leeway in operations.

The company has shifted to printing and writing paper to steer clear of the pressures in the newsprint market and derives about 95 per cent of revenues from the former segment. It has also managed to make a mark in the branded products segment. Come 2007, the benefits of the expansion-cum-modernization plan are likely to be reflected in the revenues and earnings.

The company has embarked on a substantial expansion of its pulp capacity and will also expand paper capacity by six per cent to 2.45 lakh tonnes. This will ensure that capacity is not a constraint for at least the next two years. More important, this exercise will make it an environment-friendly unit and ease up pressures on that score.

The expansion is to be financed by cash flows from operations and debt. TNPL is well placed on this score. The rise in interest cost is likely to be largely neutralized by the gains in profitability. The stock trades at a dividend yield of 3 per cent. The downside risks appear modest. Buy with a one/two-year perspective.

The principal risks to our recommendation will be an adverse price cycle when the expansion-cum-modernization plans go on stream, over the longer term, and pressures of rising energy and raw material costs, in the near term.