The Current State of Maine’s
Pulp & Paper Industry
-- A Competitive Assessment -PIMA Northeast Division 83rd Annual Meeting
Kennebunkport, Maine – September 19, 2003
Jim McNutt
Center for Paper Business & Industry Studies -- CPBIS
1
OVERVIEW
„
„
„
Maine’s P&P Industry – Where Are We?
North America Printing & Writing Paper Market
Maine’s Primary Grades Review – Grade-byGrade
9 UCFS
9 SC
9 Directory
9 CGW
9 CFS
„
2
Where Can We Go?
Where are We?
„
In The Mind’s of Many – Maine’s Forest Products
Industry Has Entered The Beginning of The End –
Much Like Textiles & Steel
„
Yet – Others View Maine’s Forest Products Industry
As Being On A Doorstep To Revitalization
In Truth – Maine’s Forest Products Industry’s
Future Is In The Hands Of Those Who Do . . . Not In
The Hands Of Those Who Can’t & Won’t . . . Not In
The Hands Of Those Who Only Complain, Point
Fingers & Criticize!
„ Yet – The Challenges Are Real, & They Are Major
„
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So -- Where are We Now -- Really?
„
Maine’s P&P Industry Is An Industry in Transition . . .
Older Infrastructure & Dated Technology
Declining Capacity, Jobs, Taxes Paid
Older Workforce With Age Structure Imbalance
Higher Factors of Production Costs – Especially For:
Energy, Fiber, Labor, Maintenance
¾
Taxes, Worker Compensation . . . .
¾
9 Cost Competitive Pressures Are Severe
9
9
9
9
„
Markets In Transition & Under Great Pressure . . .
9 Global Competitiveness Has Escalated
9 Demand Growth Is Much More Constrained
9 Customers Are Stressed & More Demanding . . .
4
And – What Are Some Key Realities?
„
Maine Is Not Viewed As A Premium Place For Basic
Industry Operations & Investment . . .
9
9
9
„
Past Political Polarization
Tax Structures & Systems
State Regulations & Regulatory Processes
Site Permitting Requirements
¾
Environmental Arena
¾
Timberlands & Multiple Use Needs Balancing . . . .
¾
Industry Attention Seriously Strained
9 Management Focus On Maine’s Operations
9 Investment History And Patterns
„
5
Special Interest Groups Public Conflicts . . . .
So – Where Do We Start & Look?
„
The Key Today to Maine’s P&P Industry Is
Found in the Printing & Writing Paper Grades
9 Uncoated Freesheet -- UCFS
9 SC Grades
9 Directory
9 Coated Groundwood
9 Coated Freesheet – CFS
„
6
Let’s First Look At Key Printing & Writing
Paper Grades For North America As a Whole
Grade Outlook – N. Am. P&W Papers
Recent Economic Slowdown & Alternative Media Substitution
Have Impacted P&W Demand Negatively:
„
Uncompetitive Capacity Being Closed & Modest Demand
Increases Will Tend to Reign in Excess Capacity
„
CFS, CGW, UCFS & GW Grades Seemingly Collapsing Into
One Relatively Inter-changeable/somewhat Flexible Grade
Structure From Consumers’ Perspectives
„
These Changes Brought on by Collapsing Price Structures
of the Grades on Top of Each Other Is a Major Sea Change
„
In This Context -- CFS Quickly Becoming Commoditized -Displaced by Improved CGW Grades
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Grade Outlook – N. Am. P&W Papers
In Addition -- High End Uses -- Auto Brochures/annual Reports - Are Being Replaced by Website Versions
„ High Volume UCFS Under Pressure From Overseas
Competitors, and Newsprint Producers Are Converting
Capacity to UC and CGW Grades
„ Financial Returns & Growth Prospects Are Similar to
Industry Average & Room Does Exists for Continued M&A
Activity
Implications:
Implications:This
This grade
grade grouping
grouping is
is in
in major
major sea
sea change
change with
with
grades
grades collapsing
collapsing on
on one
one another.
another. Significant
Significant repositioning
repositioning
and
and redeployment
redeployment of
of assets
assets –– continued
continued M&A
M&A && financial
financial
constraints.
Certainsegments
segmentswill
willsuffer
suffernet
netcapacity
capacityreductions.
reductions.
constraints. Certain
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Grade Outlook – N. Am. P&W Papers
P&W Volume (Short Tons 000s)
43,500
41,000
38,500
36,000
33,500
31,000
28,500
26,000
1990
1992
NA Demand
9
1994
1996
NA Capacity
1998
2000
2002
Total Shipments
2004
2006
N. Am. P&W
Demand &
Capacity
Contracted
Between
2000 and
2002 – A
Moderate
Recovery
Has Begun In
2003
Grade Outlook – N. Am. P&W Papers
25%
4,387
4,500
4,187
4,116
4,000
3,500
20%
3,352
2,498
2,258
3,000
2,701
2,732
2,745
11%
10%
2,000
3,294
2,709
3,096
11%
2,427
1,191
10%
8%
1,500
8%
8%
7%
7%
6%
1,000
7%
7%
7%
8%
5%
6%
5%
500
3%
0
0%
1990
1992
1994
1996
Excess Capacity
10
15%
2,004
12%
2,500
2,955
3,059
1998
2000
2002
2004
% Excess Capacity
2006
P&W - % Excess Capacity
P&W - Excess Capacity (Short Tons 000s)
5,000
Significant
N. Am.
P&W Overcapacity
Should
Dissipate
By 2004
Grade Outlook – N. Am. P&W Papers
1,600
Real Prices ($2001 - Short Ton)
1,500
1,400
1,300
1,200
1,100
1,000
900
800
700
600
500
400
1990
1992
1994
1996
CFS No. 3 60lb.
UCFS No. 4 Xerocopy
11
1998
2000
2002
UCGW Average
CGW No. 4 50lb.
2004
2006
N. Am.
P&W Real
Pricing Is
At
Historically
Low Levels
– Grade
Prices
Have
Converged
Grade Outlook – N. Am. P&W Papers
1,300
Nominal Prices ($ per Short Ton)
1,200
1,100
1,000
900
800
700
600
500
400
1990
1992
1994
1996
CFS No. 3 60lb.
UCFS No. 4 Xerocopy
12
1998
2000
2002
UCGW Average
CGW No. 4 50lb.
2004
2006
N. Am.
P&W
Nominal
Prices Will
Likely
Improve
Some In
2003 &
2004
Now – Let’s Take A Look At Key Grades In Maine
„
„
All Mill Cost Competitive Data Here Are Provided By
Paperloop’s Pulp and Paper Benchmarking Services
Group
Data are:
9 Fourth Quarter 2002 Basis In 2003 Dollars
9 Mill Level Cash Manufacturing Costs
9 Based on Publicly Available Information & Data
9 Representative of Relative/Typical Operating
Configuration Assumptions at Each Mill Assessed
9 Based on Regional Unit Cost Data Inputs
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Our Competitiveness Assessment Approach
„
First – A Brief Macro Overview of Key Factors of
Production For Printing & Writing Paper Grades
9 Focus on Fiber, Energy & Labor
9 And Aggregate Cost Levels
„
Then A Grade-by-Grade With Key Mills Review
9 Uncoated Freesheet
9 SC Grades
9 Directory
9 Coated Groundwood
9 Coated Freesheet
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Key Competitive Issues – P&W Papers
Factors of Production Cost Comparisons For Maine Mills
[All Data in USD per Short Ton]
Cost
Element
Industry
Average
Mill
A
Mill
B
Mill
C
Mill
D
Mill
E
Mill
F
Mill
G
Mill
H
Mill
I
Mill
J
Mill
K
Mill
L
Mill
M
Mill
N
Mill
O
Fiber
156
180
134
101
93
104
150
93
78
78
159
134
70
97
202
384
Power
66
55
44
44
45
62
71
109
75
75
45
100
63
90
129
85
Manpower
71
81
88
125
138
164
114
118
137
137
161
198
178
198
192
139
All Other
123
137
195
218
216
169
168
183
300
241
225
162
299
229
211
206
Total
416
453
461
488
492
499
503
503
521
531
590
594
610
614
734
814
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Maine’s UCFS Competitiveness
„
„
„
Product Quality Is Rated as Competitive
Mill Cash Cost Competitiveness = Very High,
4th Quartile
Key Cost Issues Are:
9 Labor = High – Unit Costs & Efficiency
9 Energy = Very High
9 Materials & Chemicals = Generally Competitive
9 Fiber = Very Competitive
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UCFS Cost/Supply Curve
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UCFS Cost Curve
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UCFS-Value Added Cost Curve
19
Maine’s SC Competitiveness
„
„
„
Product Quality Is Rated as Very Good
Mill Cash Cost Competitiveness = 4th Quartile
Key Cost Issues Are:
9 Labor = Very High – Unit Costs & Efficiency
9 Chemicals = Relatively High
9 Fiber & Materials = Competitive
9 Energy = Very Competitive
20
SC Cost/Supply Curve
21
SC Cost Curve
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Maine’s Directory Competitiveness
„
„
„
Product Quality Is Rated as Very Good
Mill Cash Cost Competitiveness = Very High
in The 4th Quartile
Key Cost Issues Are:
9 Labor = Very High – Unit Costs & Efficiency
9 Materials = High
9 Fiber & Chemicals = Competitive
9 Energy = Very Competitive
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Directory Cost/Supply Curve
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Directory Cost Curve
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Maine’s CGW Competitiveness
„
„
„
Product Quality Is Rated as Good To Very
Good
Mill Cash Cost Competitiveness = Varied,
Ranging Across 1st to 3rd and 4th Quartiles
Key Cost Issues Are:
9 Labor = Somewhat High – Unit Costs &
Efficiency
9 Materials & Chemicals = Competitive
9 Fiber = Competitive to High
9 Energy = Very Competitive
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CGW Cost/Supply Curve
27
CGW Cost Curve
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CGW Cost Curve
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LWC Cost Curve
30
Maine’s CFS Competitiveness
„
„
„
Product Quality Is Rated as Very Good
Mill Cash Cost Competitiveness = Good,
Mostly in 1st and 2nd Quartiles
Key Cost Issues Are:
9 Labor, Energy, Materials, Chemicals, & Fiber =
All Competitive
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CFS Cost/Supply Curve
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CFS Cost Curve
33
CFS 60# No. 3 & 4 Cost Curve
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CFS-One Sided Cost Curve
35
CFS-Premium Cost Curve
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Current -- Typical CFS Commodity
$700
„
$600
„
$500
Matls/Maint
Labor - Sal
Labor - Hr
Electricity
Fuel
Chemicals
Fiber
$400
$300
$200
„
$100
$0
Asia
Europe
N. Am.
Maine
Cost Ranges
405-650
525-850
460-880
485-505
Product
105 gsm
115 gsm
60 lb #3
60 lb #3
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„
Data = Q2 2003 & USD/ST
Maine not as well positioned
9 Labor – Hourly
9 Materials & Maintenance
Maine very well positioned
9 Fiber
9 Energy
9 Fuel
9 Total Cash Cost
Note -- Asia/Europe Fiber
Costs = Purchased Pulp
Driven and Imported Chips
for Asia
So -- Where Can We Go?
„
„
„
Maine Is Blessed With Tremendous Potential . . .
9 Abundant Natural Resources
9 Wonderful Logistics Infrastructure
9 Superb Location To Largest Global Market
9 Very Experienced & Motivated Work Force
9 Substantial Dependency on P&P Industry
9 Renewed Attention of Political, Labor & Industry Leaders
9 Great Need of Local Communities To Rally
There Are Great Opportunities To Enhance The Competitive
Position of Maine’s Pulp & Paper Mills For The Right Grades
However -9 This Will Not Be Easy
9 It Will Require The Combined Attention of Government, Labor
& Industry Working Closely Together
9 Many Critical Factors Need Change . . .
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In Essence Then . . .
„
Maine’s P&P Industry’s Future Has Great
Opportunities To Seize -- In Reality -- It Is In
The Hands Of Those That Will Do . . .
9
9
9
9
9
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The Right Things . . .
In The Right Way . . .
For the Right Products/Grades . . .
At The Right Time . . . And That Time Is Now
Or Maybe Never. . . Choose Wisely With
Sense of Urgency – Your Future is At Stake!
And Remember . . . .
In Spite Of The Current State of Affairs
For Maine’s P&P Industry -- As that
Famous Arm Chair Philosopher Ziggy
Once Said . . . .
“You can Complain Because
Roses have Thorns, or you can
Rejoice Because Thorns have
Roses”
Visit The CPBIS Web Site – www.CPBIS.gatech.edu
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