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TRANSPORT: MONSTER MUTANT PULLS ITS WEIGHT


April 1, 2000
By Pulp & Paper Canada

SAINT-VARISTE, QC — Deloupe Inc. has designed a logging trailer that it says is “the only high-tech adjustable semi-trailer available [for] the North American forestry market.” The company, which in…

SAINT-VARISTE, QC — Deloupe Inc. has designed a logging trailer that it says is “the only high-tech adjustable semi-trailer available [for] the North American forestry market.” The company, which invested $330 000 in research and development to bring the trailer to market, said that end users can expect to recover $15 000 in direct operating costs over five years. Among the futuristic-looking vehicle’s main benefit is its strength-to-weight ratio. “We produce a stronger, more expensive trailer, but one that is as light as ever,” said president Camil Martin. “Maintenance is inexpensive, the components are higher quality and safety has been significantly improved.”

Circle Reader Service No. 2.

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showed a return of 2.4%,

– 20 participating European companies showed a return of 9.1%,

– 17 participating Canadian companies returned -3.7% on equity,

– 13 participating Japanese companies returned -1.4% on equity, and

– 14 participating Asia Pacific, South American, South African returned 6.2%.

In what analysts agree was a particularly difficult year, the Canadian industry provided the lowest yield for shareholders.

Other studies show that over the past 10 years the average return on shareholder equity has been half that of non-financial industries.

Our top priority, said Lise Lachapelle, president and ceo, Canadian Pulp and Paper Association, is to improve shareholder returns. Restructuring and rationalization will continue to be a main focus in the effort to bring greater returns to shareholders. Mergers, acquisitions, divestitures and alliances will also continue to increase cost-efficiencies, she maintains.

Pierre Monahan, CPPA chairman and Alliance Forest Products president and chief executive officer agrees. “The fewer number of players, the more stability in the marketplace,” he said. Monahan said that the larger, consolidated companies would be in a better position to keep the supply and demand ratio in balance.

“We must have better returns for our shareholders,” said Monahan.

The interest of the shareholders has to be the priority not only for the ceos, said Jack Hartery, president and general manager of Stora-Enso Port Hawkesbury, but also for all workers at all levels. “We have to do a better job of economic education. Understanding what happens in a business is very important.”

High-end products

The industry, analysts say, has to look at the way it does business and make some strategic changes. Competitive advantage will be an easier goal to attain if we look at scale effects, moving to higher value chain products, and strategic cost reduction, which includes optimization and supply chain management. The industry must also put greater emphasis on key partnerships with research institutes and suppliers.

Len Eddy, global forest & paper practice, PricewaterhouseCoopers, said that the Canadian industry needs to break its reliance on commodities and move to more products at the “higher end of the value chain” where pricing is less cyclical.

“The economic viability of higher end products is not as grievous an issue,” he said.

Eugene Williams, a forestry analyst with the Canadian Bond Rating Service agreed, noting that, in general, prices for commodities remain low, whereas value-added products have seen price improvements.

For Alliance, making the company a global competitor means tapping into niche markets. In the recent past the company has reinvested extensively in modernization, transformation and optimization of its facilities to improve yields and quality.

The company spent $177 million on PM 5 at its Dolbeau, QC, mill, which manufactures the SCB grade Eminence and Eminence-plus papers.

The company is also replacing two ageing machines at its Donnacona, QC, mill. The investment will give Alliance a stronger presence in a higher-value-added segment, with SC-A type paper, which is superior in quality to the Eminence and a higher-margin product than newsprint. The new machine, scheduled for start-up in September 2000, will cost the company $240 million and have a production capacity of 152 000 tonnes per year. “SC is a growing market…appropriate for the type of mills we have in Quebec,” said Monahan.

These investments will give better performance and long-term profitability to the mill.

But Monahan insists that “newsprint still has a future in Canada…. We are good at making a (varied) spectrum of grades.”

Cutting costs

While analysts strongly advocated moving to higher end products, watchdogs within and outside the industry stressed the importance of keeping expenditures down.

St. Laurent Paperboard has upgraded its product mix towards higher value-added products. As part of a major restructuring plan for the West Point, VA, mill, up to 280 000 short tons of kraft linerboard capacity will be converted to white top linerboard. Furthermore, the company announced in May a project to convert 50 000 short tons of existing white top linerboard production capacity to higher margin coated white top linerboard. The company also introduced a cost-reduction program throughout the primary and converting operations.

Strategic cost-reduction has been a prime concern for St. Laurent as it has been for many Canadian companies. In September 1998 a dedicated supply chain management team was formed to direect and coordinate effforts aimed at reducing costs and optimizing efficiency in purchasing, transportation, warehousing and logistics. Considering that St. Laurent purchases over $500 million in produts and services each year, potential savings could be quite substantial. Richard Garneau, chief financial officer, said that it was important for the company to address efficiency throughout the supply chain. Already the team has identified potential savings and the company has started to see the benefits in areas like chemicals, machine clothing, and maintenance materials. This year the company will work toward optimizing delivery to customers in order to reduce shipping cost. The customers also benefit because they get the product faster, allowing them to reduce inventory. Optimizing fibre use is also on the workbench for this year. A refocused long term supply strategy to deliver high-quality, low-cost pine and hardwood chips as well as pine sawdust to its primary mill located in West Point was developed to substantially reduce the mill’s fibre costs and enhance its competitiveness of the West Point mill.

Process optimization is the most important step. The process, says Lachapelle, now has decision points where technicians can look at the fibre, virgin and recycled, the additives, the clints’ needs and decide on an optimum mix.

Technology

Getting the best from your system is one thing, but you have to be playing on a level technological field. The Canadian industry is falling behind in technology. One of the clear setbacks of weak financial returns is the inability to spend sufficiently on technology improvements. Asia, South America and Europe are paces ahead of us in terms of modern equipment now in use.

Hartery said that a lot of good technology is being developed in Canada but not fully utilized. Canada is falling behind Europe and Asia in adopting newer systems and technologies. Hartery said that we are seeing Asian producers selling newsprint and SC grades as far away as the North American east coast. He proffered that this was possible due to the larger, more modern machines.

At his Port Hawkesbury mill, the goal is to get the SC-A+ machine to its design capacity of 1700 m/min. “We will be close to that by the end of next year,” he said.

Adapting technology is essential, Monahan said. “If we don’t upgrade the systems and technology, we cannot be leaders,” said Monahan.

Timing

Two years ago at the Pricewaterhouse- Coopers Montreal Forest Industry Conference panel Lachapelle said that if consumers are going to choose Canadian forest products they will have to be competitive: an innovative product that competes on the basis of price, quality, availability, effect on the environment, etc.

“Innovation and workmanship” are what will keep
the industry’s products competitive, according to Lachapelle. You have to create the next product that the market wants, she said, and your market research will allow you to keep abreast of that. “Take 3M Post-it notes…innovation and timing (came) in to play,” to make the products successful, said Lachapelle. “Look at all the medical uses for paper.” The industry has to consider all of these innovations and try to anticipate what the market will need. There will be no “technological leap of the century” but more subtle changes on a continuum, said Lachapelle. “We have to work hard at it…. Timing is everything.”

Missing the boat

Most will agree, from a management perspective, the steps to take to stay in the global race are clear: consolidate, cut costs, foster new ideas and develop new products.

There are external factors, however -intangibles as Lachapelle calls them- which interfere with our industry’s market competitiveness. Taxation and regulations detract from the industry’s ability to generate foreign revenues. Lachapelle recounted an invitation by the American Forest and Paper Association (AF&PA) to participate in a study regarding taxation. She refused, wary that since the AF&PA would do the study, the results would be interpreted to show that the US industry was at a tax disadvantage. In fact, the AF&PA study showed that the Canadian industry is the most taxed in the world.

Apart from taxes, Lachapelle is also concerned about user fees exacted by the government for services that have become antiquated or obsolete. Maritime transport, for example, includes piloting fees. Merchants are required to pay for pilots to guide your ships to the port. However, technology is better than when these systems were instituted, said Lachapelle. A study done to look at the number of accidents with or without pilots show that there is a negligible difference. “We don’t need (this service), but they want us to pay for it,” she said.

These kinds of fees, says Lachapelle, are exacted in all areas where the government wants to privitize. She cited ice breaking as another example, a function that the government has to do for security purposes. “We’ve (already) paid for this with our corporate taxes…. (The government imposes) fees on us that increase our cost structure. If we are a captive customer we want a say in how these operations are run,” she insisted. The CPPA is currently very active in lobbying for amendments to this system.

Transportation can pose many disadvantages for the industry. Costs come not only from these types of fees, but also from the basic delivery costs. Canadian mills are farther from their markets than US competitors, and while Canadian mills are working to reduce this outlay, it remains significant at more than 30% higher than their US competitors. The distance from the market is but one disadvantage; the lack of competition also concerns Lachapelle. She said that we need legislative provisions that will foster choice and competition, particularly in rail transport. “The more you promote full competition, the better we will be,” she said. “We want to make sure that we are not left with one alternative.”


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