To view the full version of this article with tables, please click here to download it in PDF format.The Perfect Storm. It was a Hollywood blockbuster some years ago, with Geor…
To view the full version of this article with tables, please click here to download it in PDF format.
The Perfect Storm. It was a Hollywood blockbuster some years ago, with George Clooney’s character and the rest of his crew battling the worst storm in recorded history while aboard a fishing vessel. True story.
The Perfect Storm is also what the pulp and paper industry is currently facing. True story.
But while the movie did not survive the critics and the characters went down with the ship, the industry is proving it can handle even the fiercest weather.
In 2003, the industry survived a massive power failure and natural disasters — the raging wildfires and torrential rains. There was also pestilence out west, with pine beetles attacking an equivalent of two million truckloads of timber. The trade dispute with our southern neighbor is still ongoing and the Canadian dollar is climbing higher.
Within this climate, economics play a big part in the decision-making regarding capital spending.
The big surprise this year is the actual increase of capital spending for 2004. Although the total projected cost declined by 26%, from $801 million in 2003 to $635 million this year, the total 2004 allotment increased by 25%, from $428 million last year to $535 million in 2004.
It is not comparable to the investment of the ’70s and ’80s, but it was not as bad as the industry anticipated.
“We have to find ways to do more with less,” said John Weaver, president and CEO of Abitibi-Consolidated. “(The year) 2001 was not a good year, but compared to 2003, suddenly 2001 seems to be a great year,” he reminisced.
The current investment situation in North America is stagnant at best because of the low return on investment in the short term.
Scotiabank’s vice president of economics, Patricia Mohr, agreed. “Capital investments will be limited because profitability does not warrant it,” she said. “Any capital spending now is geared towards productivity and lowering costs.”
The industry, particularly the paper sector, has been waiting for the tide that will pull the industry to shore. Mohr said it almost came during the fourth quarter of 2003.
“The super-calendered paper, which is the best performing sector last year, had a 6% increase in demand. There was supposed to be a price increase in the fourth quarter, which didn’t happen,” she said. Mohr explained there was an increase in magazine advertisements at the beginning of 2003, but it faltered in the fall.
“Demand for ads in the fourth quarter was weak and it was quite disappointing. In order for companies to feel comfortable again to spend money, the market condition must first improve,” she added.
Although industry leaders see the long-term benefit of mill upgrades, it is hard to spend the money that mills don’t have.
“It’s tough to invest if the money is not there,” said Rob Wood, executive director of the Pulp and Paper Technical Association of Canada.
Ironically, the soaring loonie, which should give Canadian mills more leverage and buying power, is creating more tidal waves instead.
“The forest products industry, particularly pulp and paper, is one of the hardest hit as more than 85% of production is exported, all in U.S. dollar,” Mohr explained. “The appreciation of our dollar has reduced competitiveness.”
The Canadian dollar was at 64 cents against the U.S. dollar in the beginning of 2002. It was at 76 cents during the fourth quarter of 2003, even reaching 78 cents at one point. With the upcoming U.S. presidential elections and the ongoing war in Iraq, as well as other economic factors, the U.S. greenback will likely move down a bit in the coming months, which means the loonie will move up once again.
“There’s a possibility that the Canadian dollar will move to 80 cents against the U.S. dollar in six months or more,” Mohr said. “It really depends on what happens to the U.S. dollar,” the economist added.
According to PAPTAC chairman Peter Tyne, Product Manager for NorskeCanada Campbell River, whether the loonie is strong or not, “the industry would see substantial investment allotted towards the conversion to market grades.”
Newsprint giant Abitibi-Consolidated is indeed spending around $262 million, most of which will go to the completion of the mill in Alma, QC, as it exits newsprint and begins producing Equal Offset.
The company’s annual report stated Abitibi-Consolidated expects capital spending to be at the same level as 2003, excluding the joint-venture project in China. The report said total capital spending for 2003 was $262 million.
“At a certain point, you can’t do with nothing. It’s difficult to compete with international companies if their machines are more efficient,” said Wood.
As the industry proves it can survive even the perfect storm of 2003, it is ready to set sail again.
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