Where we are now…
Where we are now
“Generally, there’s been lots of closures and overcapacity in the industry,” stated Craig Campbell, in charge of performance improvement for the global forest and paper practice at PricewaterhouseCoopers. “We’ve seen a slew of closures in the past six months, mostly in the east,” although, Campbell acknowledged that shutdowns have not been exclusively restricted to Quebec and Ontario. “The continuation of overcapacity on a global level is a real problem.” Campbell noted that cutthroat competition from market economies and regions such as South America, China, South East Asia and increasingly Russia, maintains a chokehold on our industry and any potential investments it might make in order to retake some of its claim. In an innovative attempt to keep up with this offshore competition, many companies have established partnerships in the southern hemisphere. Weyerhaeuser’s strategic positioning in Uruguay, a country that has no wood pulp whatsoever, is one example of this. (That it costs a staggering half the price to produce pulp in South America than it does in North America is only one aspect of a very complex situation.) However, as Campbell pointed out, this too is problematic. “Even if you invest in new projects in emerging countries, there is already an overcapacity situation, which is mostly being witnessed in North America, and so opening up all these new mills is just exacerbating the problem. Something has got to give.”
As Campbell highlighted, however, the situation currently characterizing the industry is not new. “The fundamentals are the same as they’ve been for years,” he said. “No one company has 10% of the industry; there aren’t even four to five players who control the industry. There’s no concentration. So if you combine this with overcapacity, making a decent return becomes a real challenge. 2006 will see a lot more of the same -likely a return on capital employed averaging about 5% for the 100 largest global companies (cost of capital is 10-12%, meaning investors don’t get too excited).”
Although Campbell doesn’t anticipate the announcement of any significant capital expenditure projects in the northern hemisphere, other than the Mondi mill recently announced in Russia, he views this as symptomatic of the industry’s current situation, and not necessarily a negative, but rather a necessary, phenomenon. “I wouldn’t expect to see a lot of capital expenditures in traditional regions,” he said. “Rather, the industry has to rationalize, it’s a situation of simple economics. The higher cost mills need to be permanently shut down. If you are in a high quartile mill, your costs have got to come down.”
This advice is obviously not new to Canada’s major pulp and paper players. As Campbell noted, many of them are striving to address the challenges knocking at their doors and most have proved relatively successful in their attempts. “Most Canadian companies are focused on cost reduction and are positioning themselves to reduce costs. Although Domtar and Abitibi have made some really hard decisions concerning closures, we’ve seen some creative initiatives. There has been a lot of innovative movement concerning wood products in British Columbia and a lot of companies have rebuilt mills in order to cater to the lumber business.” The softwood lumber dispute remains a dark cloud hanging over the industry, and as Campbell pointed out, in terms of companies restructuring their businesses along the lines of wood products, the importance of resolving this issue is growing greater. “There is no easy solution here,” Campbell said of the industry in general. “Solid wood companies have to be really focused on improving the bottom line.”
Where we’re headed
Projected capital expenditures in the pulp, paper and wood industry are forecasted to be in the ballpark of $1.2 billion for 2006. According to a report by Industrial Information Resources, that number is anticipated to creep upwards throughout the year, however, rising electricity rates, natural gas prices and the volatile Canadian dollar are expected to exert a detrimental force on investments, and will likely limit both the size and number of new projects.
The report indicates that in Western Canada, including Alberta, BC, Manitoba and Saskatchewan, early figures for 2006 point to a total of $624 million in capital spending, largely driven by projects in the wood sector, primarily in oriented strand board, as well as numerous initiatives to increase capacity of ‘super-sized sawmills.’
In Ontario, expenditures tally up to $405 million and are anticipated to be the most stagnant compared to other provinces. Quebec is expected to doll out a meager $118 million. “In a province where production cost, based on energy demand, is less capital intensive, expenditures should improve significantly,” the report indicated. “Business conditions have been improving and will lead some companies to reevaluate projects that have been on the shelf over the past few years. Rationalization of both paper and wood plants in the region, followed by modernizations geared towards ageing equipments, should drive spending in an upward trend.”
The combined capital expenditures for the provinces of Nova Scotia, New Brunswick and New Foundland, are not projected to be much more than roughly $96 million. “Issues related to labour and fuel prices, coupled with a shrinking demand for paper products will set the tone for spending,” the report said.” 1
Projected capital expenditures researched by FPAC, the Forest Products Association of Canada, are somewhat higher. However, as Andrew Casey, vice president of government relations and communications noted, the numbers are applicable to the entire pulp, paper, wood and forest industry.
“[Our projections] are $4 billion per year on capital improvements, with another $500 million to be spent on research and development. The number for the pulp and paper sector is about $1.8 billion per annum on average, a number which is provided by Statistics Canada, and the investments cover a range including machinery/equipment upgrades and replacement, new technologies, switching to bio-energy (burner boilers, etc).” Although Casey was not able to divulge information about particular companies, he indicated that, “the money is being invested at different levels by most companies in the industry.”
Although the numbers look positive on paper, as Casey highlighted, there are several key, domestic problems that hinder, and at times, prevent investment. “The present corporate tax structure does not encourage investment in Canada,” Casey said. “The tax system should reward investment in Canadian mills. Canada’s forest products industry is one of the most heavily taxed in the world, and more than any other rural resource sector in Canada.” According to Casey, the government should look to address the situation and thereby promote and encourage investment in the industry through several measures, including the implementation of a 10% refundable Investment Tax Credit, the elimination of Large Corporation Tax, by lowering the corporate income tax, and by getting rid of the Corporate Surtax altogether.
Casey’s views are akin to those expressed by PricewaterhouseCoopers’ Craig Campbell in that he contends some of the issues plaguing the industry are both complex and multi-layered. “The rapid rise in the value of the Canadian dollar remains one of the industry’s major concerns. However, investment on its own will not be sufficient to deal with a dollar that has risen some 35% in only two years. Investment will help the industry remain competitive with newer low cost producers in countries like China and Brazil. Investments will make the industry more productive and will provide for a competitively superior product.” Casey also pointed to the positive environmental offshoot of capital investing, in that putting money into new bio-technology will facilitate the industry’s quest to reduce its dependence on outside energy sources, thereby r
educing its costs.
Where is the money going?
A poll conducted by Pulp & Paper Canada of its pulp and paper mill readership solicited some revealing results. An impressive 69.2% of respondents indicated they feel their mill is investing sufficiently to retain its competitiveness. The significance of this percentage is not to be overlooked when news of mills constantly cutting costs at every level, abounds. A total of 33.3% of respondents indicated their mill was investing $500,000 or less for the upcoming year, 50% confirmed their facility will spend anywhere between $1 million and $50 million, whereas 16.7% responded that their mill would invest capital totaling between $50 million and $100 million in 2006. Of those polled, 33.3% indicated that these investments were less than the mill spent in 2005, whereas 50% confirmed the same amount was being spent in 2006 as in 2005, and 16.7% responded that they’re in fact spending more than last year.
For respondents who felt their mill was not, in fact investing adequately, 50% indicated the money should be directed towards new product research and development.
In a separate poll concerning projected upgrade or retrofit projects planned for the next two years, 20% of respondents confirmed their mill was planning a pulping initiative. The same percentage was recorded for papermachines. No plans for information technology or environmental control projects were indicated by our respondents.
When asked which factors pose the largest impediment to capital spending, respondents gave equal value to the challenges associated with the value of the Canadian dollar, fibre shortages, offshore competition, and a combination of these plus high energy and transport costs, as well as labour disputes.
The past year has witnessed a flood of news reports crawling with stories of mill closures, plant shutdowns and communities being ravaged by job losses. It can be difficult to extricate any sort of positive spin-off from such ubiquitous adversity. The hefty economic and social toll of the challenges the industry is suffering through are not to be diminished, or overlooked. However, as PricewaterhouseCoopers’ Craig Campbell noted, the situation characterizing the industry at present must be viewed in terms of economics, and as he said, “the high cost mills need to be permanently shut down.” If the string of closures the industry has witnessed over the past year is any indication, it can be safely said that this is exactly what’s happening. As a result, the players that are left are playing their cards and spending their dollars, carefully.
1 Report was researched by Industrial Information Resources
FAST FACTS: Who’s doing the spending?
There is a pervasive sense of secrecy that surrounds mills and their capital spending, however, given the competitive context of the industry, this is understandable. Although mills were not willing to disclose the salient details of their planned capital expenditure projects, here is a sample list of what some of them are doing.
As Abitibi-Consolidated’s mill in Fort Frances, ON works through the same challenges plaguing its competitors, plans for a hog-fuel boiler to be built and installed at the facility are underway. “I’ve been working a lot with Abitibi to ensure that it’ll be lobbying the province and some of the bureaucrats with respect to ensuring that a new hog-fuel boiler is built here in Fort Frances, which will take care of their energy needs into the future.” (Fort Frances Mayor Dan Onichuk, Fort Frances Times Online)
Cascades is investing in its Saint-Jrme facility. Although a definitive amount was not disclosed, the capital expenditure comes on top of an additional $20 million already invested in the plant since 2004. The company anticipates the cash infusion will ensure the facility remains competitive.
The Port Alice pulp mill, located in BC, not currently in operation, is target for substantial capital expenditures. BC Economic Development Minister Colin Hansen confirmed in a report by the Vancouver Sun that an agreement between Neucel and Victoria stipulates that Neucel will put at least $40 million in assets into the operation by September 2007, and plans to have the mill up and running no later than September 2006. Neucel CEO Richard Basset confirmed in the same report that his company plans to direct at least $108 million into the mill within the next three to five years.
Daishowa-Marubeni International’s DMI Peace River Division is also planning to invest in its operations. The company is focusing its attention on energy related issues and capital expenditures will be directed towards energy conservation initiatives.
Although Atlantic Packaging declined requests for interviews concerning their planned capital expenditures for 2006, mill manager Gerry Murray confirmed the company is building and installing a major machine into an existing mill, the opening for which is scheduled for late spring, or early summer.
Catalyst Paper has confirmed it will spend a total of $100 million throughout the year on various projects.
J.D. Irving, since January 2006, has installed “world first technology” at its New Brunswick mill to produce value-added glossy paper. The investment was made in order to counteract a 12.9% rate increase.
Cutbacks a sore spot for workers
Unfortunately, when capital expenditures are cut back, or in some instances, entirely restricted, it is often the workers who suffer the implications. A reader and mill worker in British Columbia who requested anonymity, confirmed that issues of maintenance have become a significant problem at his mill. “This company has been cutting back steadily in maintenance and now it is beginning to show. Yes, I realize that it is a money situation, but you can only patch and haywire things together before it all falls apart. Sadly, at the end of it all, it is going to cost you more in the long run. But this is what happens when production calls the shots along with the bean counters.”
Another issue that concerned our reader was that of personnel cutbacks, which contribute to the overall detriment of the mill. “The company is doing away with the masons as they retire and with the one lagger set to retire in October, there are no plans to replace him right now. When I started there were three laggers and two masons. The lagger here does a lot more than insulate pipes. He also makes strainers out of fabric instead of buying them, and he also makes insulating blankets. Right now there is insulation missing all over and all we need is one good freeze and we’re down. I have worked as a pipefitter for close to 14 years here and when I first started here, they didn’t hesitate to stop or slow down to fix something. Now it’s just production, production. There has to be a balance between maintenance and production.”
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