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TABLE OF CONTENTS Jul 2000 - 0 comments

OPPORTUNITIES still exist in Asia, but take advantage of them NOW

Good times for pulp makers have returned, but a few speakers warned against over optimism

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By: Graeme Rodden, Editor
2000-07-01
As the lights dimmed and silence fell over the assembled delegates attending the opening of the PacWest Conference (Pacific and Western branches, Pulp and Paper Technical Association of Canada), the chairman stood up and said:

"Good morning, my name is Joe" and launched into a pulp and paper parody of the Molson Breweries television commercial that is so popular in this country now. Conference chairman Joe Costantino, Millar Western, ended by saying, "My name is Joe and I am a proud Canadian pulp maker." He received a rousing reception.

Pulp makers have lots to be proud of now as the good times have returned to the industry. However, conference organizers did not lose sight of the issues still facing the industry and chose the theme: Creating value -- investing in efficiency. Following its own advice, the conference program was expanded again this year with the inclusion of three short courses: process control sponsored by PAPTAC, pulp machine operations by Omni Continental and the AGRA Simons-sponsored Pulp and Paper MBA-in-a-day.

Along with the short courses, five technical sessions (pulping and bleaching, potpourri, environment, energy, papermaking) and a purchasing panel forum were scheduled. For the past few years PacWest has opened with a conference forum and in 2000 this always popular event featured six speakers from various segments of the industry discussing the topic, Perspectives on value.

David Thompson, Pricewaterhouse-Coopers, was the first speaker and he went right to The bottom line. Among western Canadian public integrated forest products companies, profits in 1999 reached $324 million compared to a loss of $255 million in 1998. Still, he cautioned, the news is not all good. For BC-based companies, the return on capital employed (ROCE) was only 6% in 1999. This was better than 1998 but still far below what is expected (10 to 14%), demonstrating that the industry is not competitive with other investments people can make.

The year 2000 is shaping up to be very profitable for the Canadian pulp and paper industry. First quarter profits for Canadian public forest product companies were in excess of CDN$400 million. Northern bleached softwood kraft is now selling for US$680/t and another $30/t increase is expected in July. He said the upturn could peak in 2001-2002 with the possibility of a downturn after that. (Some of the forum speakers cited the recently-held market pulp conference in Belgium, where some analysts were not so optimistic about the chances of a long-term boom in the industry. It was said that another downturn could come within two years.) Some of the trends and issues to look for include E-business, the influence of the Internet on demand, climate change (Kyoto Accord), mergers and acquisitions. There will be two types of successful companies in the future, Thompson said, the very large, who are able to spread out costs, or the very small and focused (niche products).

Other trends include continuing innovation, e.g., long-lasting paper, home decorative papers. With innovation comes challenge. As an example of innovation, he cited the latest Stephen King novella which was published electronically and which had massive first day sales over the Web.

"Business is not about beating the small, but beating the slow," Thompson said. When asked about the possibility of further mergers, Thompson told delegates to watch out, the "Scans are coming". He believes that Scandinavian companies are on the acquisition trail in North America.

Thompson was followed by Phil Crawford, AGRA Simons, who spoke about The Asian equation. "We have the trees; they have the people," Crawford noted. He then went on to describe how this will affect western Canada. World population will continue to rise, particularly in Asia. The pulp and paper industry's expansion into the Asian market will also grow significantly. For example, Crawford said that Chinese per capita consumption of paper and board products is about 25 kg/y but is growing at the rate 1 kg/y with 1.2 billion people!

He provided some details about the Asian industry. Ownership is concentrated (family style) but this will likely change. They have a long-term growth philosophy. Their fibre is low-cost. They build new mills, "good new mills". There is huge market potential and they are still thinking about building capacity.

Global economic growth is positive, more so in Asia, where it is expected to grow at 6%/y until 2008 compared to expected growth in North America of 2%.

Crawford provided three major opportunities for the Canadian industry tempered by three threats.

Opportunities: There is a shortage of market pulp. The region can't service its newsprint market. There are investment opportunities.

Threats: The region will have an increasing ability to service its own markets. It is able to ship to North American markets. The new mills are cost competitive.

Crawford added that by 2008, Asia will have near 40% of global consumption for paper and board, outstripping other global regions. Growth in newsprint consumption (1999-2000) will also shift to Asia where the increase in volume will be about 2.8 million tonnes (Mt). For printing and writing grades, it will be 7 Mt and for packaging, it will be 13 Mt.

The opportunities that Crawford cited exist now. "They are there to grab." Asia will soon have one billion middle class, young, well-educated consumers. There is tremendous scope for increased advertising. Literacy rates in China and India are increasing. And, there is large-scale spoilage of perishable goods in the region because of poor packaging and transportation.

Crawford then presented a demand pull:supply push picture in which increased population, trade, freedom, higher literacy rates and office automation are pulling demand while a increasing economic wood supply, competitive costs, improved expertise, a strong work culture and increased confidence are pushing supply.

There are some "red flags" of which to be wary: Chinese currency devaluation, political unrest in Indonesia, the India/Pakistan conflict and bank restructuring as well as some "undisciplined decisions" regarding capacity.

Crawford said that the Asian downturn created opportunities with their lower valuation and debt problems. There is huge market potential and low production costs, but investors "must be brave". The Asians need to acquire expertise and technology. "We need to improve performance and reduce cyclicality."

He added that the new timber will come mostly from hardwood plantations. This will replace mixed tropical hardwoods as a furnish and this, in turn, will help improve pulp quality. Crawford left the audience with some points to consider: mature North American markets vs. booming Asian markets, cost competitiveness, the Asian opportunity and willingness to use "leapfrog technology", environmental pressures at home and the Asian region's political/economic (in)stability. "For the next few years, the opportunities outweigh the threats." However, the window will probably then start to close.

Turning back to Canada, John Veysey, Allwin Technical Services, told delegates How to add value in the pulp and paper business. Allwin is associated with ABB Service. It was formed to create benefits that can be shared between ABB and Fletcher Challenge Canada Pulp Operations Limited (FCCPOL). ABB and FCCPOL each own 50% of Allwin. Simply stated, Allwin performs the maintenance operations in FCCPOL's three pulp mills in BC. Maintenance workers who formerly worked for FCCPOL now work for Allwin. It is the first Canadian example of a method used in Europe.

The aim of this type of partnership is to do business better with the money being spent. "Value can be created by developing partnerships," Veysey said. But, he added, the arrangement must benefit both sides. Before any partnership is agreed upon, an audit is done (by ABB). Cost per tonne is the driver. The aims are to reduce costs, increase production and to share the benefits.

Veysey said maintenance can usually be divided equally three ways: labor, materials and outside services. Allwin agreed to FCCPOL management to not reduce staffing levels. Rather, its goal is to make better use of labor so that some are freed to work on capital projects and other work currently done by outside contractors.

In the field of materials, Allwin prioritizes work orders so parts don't "hang around". Parts that are purchased will be used in the short term.

In the area of production, Allwin has guaranteed that the FCCPOL mills will see improved production over five years by increasing availability and reducing downtime.

In the first years of the agreement, the benefits come from cost reduction. By the fifth year, the major benefits come from production improvement.

Veysey said the "latest view" is that most of the first year's targets will be met. The production improvements, target for year two and beyond will be realized as the preventive maintenance programs and the ABB Full Service Concept are implemented.

Veysey said partnerships such as these create quite a culture change in a mill. Old habits are slow to change. Any polarization in a mill between maintenance and operations that previously existed can be exacerbated by the installation of a third party. When asked about the reaction of the union, Veysey said a great deal of preparation was done to inform the union of the reasons and benefits of the new arrangement. Also, as FCCPOL owns 50% of Allwin, all previous collective agreements and contracts are still in place.

It was time for a break following the third speaker as delegates digested all that they had heard. Once the session resumed, Jerry Sutherland, Alberta Department of Resource Development (Pulp and Paper Sector, Forest Industry Development), spoke about Adding value in Alberta -- working together. As could be expected, Sutherland sang the praises of Alberta.

Under the province's land use and tenure policy, over 90% of commercial timber is owned by the Crown. "This has allowed us to build long-term forest tenure," Sutherland said, adding that, "this has helped attract major capital investment. It is not a cut and run policy."

There are no or few aboriginal land claims in Alberta thanks to treaties signed in the late 19th century. "Therefore, we can offer an emphasis on economic development and partnership with aboriginals," Sutherland said.

Alberta also features less red tape and lower taxes than other provinces. This latter statement had the BC delegates shaking their heads.

Sutherland said that Alberta's stumpage policy reflects the belief that achieving a fair return for industry with a minimum of government interference is possible. He also said that fees track the market well.

He added that the province is moving rapidly to full utilization of the forest. The harvest is approaching 90% of capacity so major capital projects may not be in the offing. A new strategic plan for the forest products sector is now being developed. The province wants to increase the practice of enhanced forest management. It is establishing a permanent research body for the forest. It plans to strengthen the rural resource economy and it will strengthen capacity building with aboriginal groups.

Will there be a new paper mill? Sutherland answered with a definite not sure. There are two projects in the formative stages he added. Alberta Pacific is contemplating the potential to integrate its pulp mill and the Grande Alberta Paper project near Grande Prairie is starting the environmental impact assessment procedure.

Technology development, not R&D

Bob Eamer, Domtar, travelled from Montreal to present a very interesting and different view of research, Creating value from R&D. He said that unfortunately R&D has allowed itself to become isolated from mainstream business. "We need to get sales and marketing and the mill operations to look upon research as a vital part of the team." We should call it technology development, not research."

Wealth funds technology development and the paying customers (shareholders) have been unsatisfied, Eamer added. He cited Domtar's own case as an example. The company has closed its former R&D headquarters in Senneville, QC, and moved the staff into the company's mills or head office. "Buildings don't do research, people do. We will claim the same research tax credits that we did last year."

Almost everyone from the centre is still employed, save for a few who took early retirement or who found alternative employment closer to their residences.

The structure that technology development assumes is irrelevant to its success, Eamer said, noting that trying to measure the contribution of technology development is not only a waste of time, but is also counterproductive to teamwork. "We don't do it for other service departments such as maintenance, accounting or PR."

Technically trained people and supervisors are among the most resistant to change, leading to talent and knowledge being wasted. "There is strong resistance to technology and best practices transfers within companies," Eamer added. "This is the big challenge with all mergers. Support for technology development must come up through the organization, not down from the top." Companies need to stop the all study/no action symptoms with which they've been afflicted.

Eamer gave delegates some items he deemed present realities. Companies are increasingly owned by pension and mutual funds. The squeeze isn't over for technology development because the industry is not performing by the economic standards so often cited. Eamer noted that synergies worth US$400 million are being sought from the International Paper/Champion merger. Technology development is still in decline. Companies are still using only a fraction of the available brainpower. Markets or products are taking over from processes as the drivers of a company's technology development. The industry is closing its doors, i.e., becoming more secretive, so there is a need to develop internally. University and institutional R&D is evolving towards individual and directed project funding not across-the-board. A serious review of the value chain is underway.

To face these realities, Eamer then proposed some short-term goals. The industry needs to deliver results; the capacity and talent does exist to do so. "Use what's already been paid for." The industry should create 3% to 4% low-cost production increases annually. "Get the value ASAP; only applicable results will fund technology development."

Easier said than done? How to do it? Eamer also provided answers. "Create and capture the recipes for success. Implement the basics on the floor. Use multi-functional teams."

He also proposed the use of e-technology for training, troubleshooting and development. Also, he added, "Develop, support and use internal networks as well as customer/supplier networks."

Many times, companies spend a lot of time, effort and money re-inventing the wheel. Eamer suggested "relentless" literature searching. "See what's already been done."

Use the reservoir. "It's profitable. Focus on people, not equipment. Be good operators."

In the longer term, companies need to refill the reservoir. Goals include significant differentiation of product and product customization. "Thrive, don't survive," he stressed. "Use short-term success as a springboard to move forward."

How? "Go for value. Get the best return on investment from a tree that we can cut." Other suggestions: product orientation, even for commodities and create revenue streams along the way.

For pulp and paper mills, Eamer said there are some obvious "kick starters".

Pulp mills: Never pulp a whole tree. Look at the potential of oxygen delignification, recovery options and higher yield. Broaden the product mix.

Paper mills: Strive for 85% absolute efficiency on specialty machines. More grade changes and a broadened product mix must be studied. New surface treatments hold potential. Finally, Eamer said, "Learn to love plastics, exotic fibres and chemicals because often paper is used as a substrate for many new products."

Wrapping up a very full morning, George Ionides, Temanex Consulting, spoke about Performance-to-cost measure of market strength for mechanical printing grades. The spectrum includes newsprint, uncoated mechanical (machine finished for low and high brightness, SC and softnip calendered) and coated mechanical grades. In the uncoated mechanical range, there has been a large proliferation of grades -- SC-A, SC-B, SC-C for example.

In the last 20 years, there has been minimal growth in news print and machine finished (MF) grades. SC/softnip (SN) SC grades, on the other hand, have shown strong growth. Until 2010, Ionides sees further growth in these grades with newsprint and MF uncoated groundwood grades showing no or negative growth. There will be some growth in coated groundwood grades.

Clients ("your advertisers") want brightness, snap, faithful and fine reproduction. Ionides said using dollar per area not cost per tonne shows a truer value of printing paper. He said that papermakers want to add value while increasing profit at the same time. Value can be added by adding brightness and print gloss. He said that a five-percentage point increase in brightness can add $50/20 000 m2 to mechanical printing grades. Brightness increase depends primarily on raw materials (pulp and mineral pigments), whereas print gloss is mostly dependent on surface treatment, specifically coating and finishing.

Ionides said that newsprint basis weights are being reduced but North American producers lag behind their offshore competitors. And, the same holds true for LWC. In the last 15 years, the coated groundwood industry has been "hammered" by losses to coated woodfree papers. The price (constant dollar) of coated woodfree has dropped significantly during the last 10 to 12 years. That is, the performance to cost ratio has improved dramatically versus LWC.

Looking to 2010, Ionides said that woodfree grades will continue to gain in graphic paper markets. Producers need to improve their quality to cost effectiveness to regain lost ground. How? Higher brightness and print gloss at lower costs and lower labor costs.

More onus on suppliers

For the first time in a few years, PacWest featured a purchasing panel forum. Moderated by Jack Joys, Millar Western, the forum had six participants, four representing the mill side -- Joe Costantino, Russ Fulton, Howe Sound Pulp & Paper, John Low, Western Pulp, Andrew Melville, Fletcher Challenge Canada, Pulp Operations Limited -- and two suppliers: Pierre Chaloux, Westburne Electrical, and Alan Bird, Degussa-Huls.

Before the general discussion, Chaloux led off with Westburne's view on supply chain management. Westburne is a distributor of industrial and MRO supplies and equipment with four product groups: plumbing, refrigeration, industrial supply and electrical. Chaloux said that customers today want to reduce the cost of MRO supply processes. "The customer wants a supplier with a clearly identified, implemented and documented cost savings program."

The buyers have also changed. Now, buyers must understand a lot more -- e.g., technical analyses -- and must also do more supplier analyses.

Thanks to e-commerce, the purchasing cycle is now minutes and hours not days or months. "The supplier must be able to meet customer demands," Chaloux added. And, as most know, these demands have increased significantly over the past few years. "The customer wants suppliers to be able to do inventory analysis, minimum/maximum recommendations and implementation, inventory reduction and training," Chaloux explained.

Chaloux added that e-commerce will allow Westburne to reduce transactional costs. In its ISO-recognized cost savings program, Chaloux claimed that mills can save by product substitution, product standardization, reduced downtime, transaction cost savings, reduced inventory and vendor-managed inventory.

The first question was directed at the suppliers: What are you doing to help customers? Bird said that Degussa has developed a number of programs. "It is necessary to be competitive to offset price decreases over the years. We have a number of results-sharing programs with employees. We have to manage costs because we can't expect to pass on increases to our customers. We have been able to maintain our programs to customers." Degussa has an inventory management program in place for peroxide so the customer doesn't have to manage it.

Another question hit at the heart of a significant issue. How can suppliers provide good technical expertise at prices so low and so little technical expertise left in the mills? Mills are leaning on the suppliers more and more for product application advice, training and expertise yet are squeezing the suppliers harder on price all the time. Bird conceded that suppliers are "in a bind", that they still have to compete. "It is more difficult to supply value-added services. The customer wants the services but doesn't want to pay. The supplier must decide if it is just going to be a commodity or full-value supplier."

Western Pulp's Low said that mills often forget about the technical advice they receive because the industry is so concentrated on price. But, often, those who do go that extra step get a larger share of the market.

Costantino said it is a dilemma. "I am concerned that unless mills reassess the technical talent, we will fall further behind our competitors, particularly the Scandinavians.

"We will be able to succeed in the short-term, but in the long-term it will be a problem." Therefore, he added, suppliers with technical expertise do get preferential treatment.

Fulton said the industry is in a cycle, like a pendulum. "If the industry doesn't keep its technical people, we will be beholden to our suppliers. Reliance on suppliers is increasing all the time. We try to take a look at the total cost, not just the price. This includes a good rapport in the mill as well as the product, price and technical assistance."

What have the pulp and paper producers done to decrease costs as a result of working with suppliers? Costantino cited the example of Millar Western's new sawmill at Whitecourt. "In the past we dealt with a number of suppliers. But here we dealt with just three."

The reasoning behind this philosophy was to increase the likelihood of a quick start-up and to generate the "soft stuff" like pride in the system, as Costantino put it. "The new sawmill will be a showpiece for us and the three suppliers so they will take pride in it."

Fulton said that mills don't really set the price of their products. "We have to look inside the fence. Without the added value beyond price, we would not have been able to generate the cost savings we have." Howe Sound has a single source agreement with six suppliers with a little bit of flexibility built in. It takes a lot of discipline, he added, and Howe Sound is always looking to establish long-term relationships.

Where will purchasing decisions be made: head office or mill? Low said Western look upon this as a team effort now. "The supplier will come to me and I will go to the mill. I can look at the cost, but how will it work, and vice-versa."

From FCC's point of view, Melville said that the company was always basing decisions on price. However, four years ago, it looked at procurement. "This is strategic purchasing, total systems cost, long-term relationships. We have developed a large number of relationships. Single source is not the answer for all questions. We still see a need for buyers; it is also important to have skills in facilitation, to be able to look for new solutions. We restructured recently in Canada. We have the same number of people, but with different skill sets."

Speaking from a supplier's viewpoint, Bird said the way the procurement function is going, the industry is going in "two directions". He added that everyone sees the new for long-term relationships based on trust and value. He added that he wasn't hearing a lot about price. "This is good and matches what suppliers are trying to do, to go beyond supplying a commodity."

But, he added, "If a distributor like Westburne is supplying a mill, is it only based on price? Are other issues being studied? We all want to get away from the adversarial relationships of the past."

Chaloux responded by saying distributors like Westburne want to provide, and be recognized as, added value suppliers. He conceded that there are customers who only look at price. "To bring added value we focus on each case and the particular requirements. We will deliver the added value we promised."

"The Prozac industry"

Ida Goodreau, president of Fletcher Challenge Canada, Pulp Operations Limited, became the first woman ever to be the feature speaker at the conference luncheon. She was also one of the most interesting speakers to address the delegates. Having just returned from the market pulp conference in Belgium, Goodreau warned delegates that the structural changes seen in the industry do not bode well for Canadian producers. She called pulp making "the Prozac industry of BC and western Canada." Looking back at the dramatic shifts in fortune that have afflicted the industry in recent years, it must have seemed like taking a calming drug was the only solution.

Still, although there are challenges, there are also opportunities for the region. "We have to be aware that we are no longer part of the most promising or exciting part of industry, so we will have to do things differently."

The "glory days" have shifted to other regions -- Asia, South America -- with their plantation forests and low costs. "The only way to face the challenge," Goodreau continued, "is if we (suppliers as well as mills) find ways to work together to develop a competitive advantage."

The pulp making industry still "smells like money", she added, only now "it's the money we have to spend to take away the smell."

What has changed from the "glory days"? Goodreau listed a number of things: the growth of low-cost, fast-growth plantation forests close to the mills they serve; the use of biotechnology (cloned trees); the fact that western Canadian pulp has become high-cost, leading innovative papermakers to develop ways to find substitutes.

Finally, she said that Canada is also paying the price for not investing in its workforce the way the Europeans, for example, have done. Goodreau did propose some answers. She said that most industries/companies look upon the issue as having a three-pronged solution. The first is to grow the business, i.e., consolidation. Norske Skog has recently taken over FCC and US$100 million in synergies are expected. Most of this is expected to come from changes in buying behavior. Other synergies can be realized through global marketing and product rationalization. Still, if a company hasn't become part of the merger mania affecting the industry, there is an answer. "If we are not part of consolidation, we have to find a way to get the benefits of consolidation," Goodreau added.

The second step is to concentrate on costs. She said that the industry cannot influence price. Therefore, get the costs down. Goodreau cited FCC as an example of this. The company went through a nine-month strike with no effect on pricing. Technical and capital use are also part of the cost factors. "We have lost our technical edge and we have to get it back. We lag behind others in technical and capital utilization." Goodreau cited the agreement recently signed with Allwin and ABB for maintenance services at the FCC pulp mills. "It's unfortunate we had to go overseas to find the technology."

The third part of the answer is marketing. "The Europeans did what we should have done. With research and technology, their pulps are equal to or better than ours despite inferior fibre. We have to market our fibre better and to create pulp and paper that is better than our competitors."

E-business will have some effect, but on different paper grades. "Newsprint makers and their pulp suppliers are most vulnerable.

"There is significant opportunity for us based on our fibre but we have to go beyond what we accomplished in the past. This is where agreements with suppliers, etc come into prominence."

In conclusion, Goodreau said that the industry in BC has lost its competitive advantage. "The real issue is what will happen after the next couple of years" which look good in terms of financial results.

She added that partnerships/ alliances/agreements will be critical. "If both sides get value, then you have to win. Look to suppliers to help create value."

Labor is the most critical area that has been neglected. There is an urgent need to invest in manpower training and education, for operators and supervisors. "You can't allow operators to think that they can leave their brains at the gate."

And the winners are

The magnificent H.R. MacMillan Trophy (The Eagle) for best paper given at the conference was won by Larry Cross and Bob Ericksen, Pacifica Papers, Alberni Specialties Mill, for their paper: Use of tire derived fuel (TDF) in a fluidized bed hog fuel power boiler at Pacifica Papers Inc., Alberni Specialties Mill. Cross delivered the paper at the meeting.

The first runner-up was Jeff Bennett, Canfor Prince George Pulp and Paper Mills, for his paper: Carbon dioxide use at the Canfor specialty pulp and paper mills. Second runner-up went to Peter Pang and Peter Englezos, University of British Columbia, and Yves Deslandes and Stephane Raymond, National Research Council, for their paper: Inhibition of the dissolution of papermaking grade ground calcium carbonate filler. Pang delivered the paper.

Photos

The evolving relationship between mills and suppliers was studied in depth at the purchasing panel forum. Speakers, from left, were Russ Fulton, Joe Costantino, Alan Bird, moderator Jack Joys, Pierre Chaloux, Andrew Melville and John Low.
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Jeff Bennett, left, accepts the first runner-up award for papers from conference chairman Joe Costantino.
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Bruce Morrison, left, accepts the best novice paper award from Costantino.
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The industry has lost it technical edge and needs to get it back: Ida Goodreau, president of Fletcher Challenge Canada, Pulp Operations Limited, was the guest speaker at the feature luncheon.
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