EXECUTIVE WIRE
Paper mill revival how to break the cycle
and extend value
NORTH AMERICA / 2012 - 1.0
This issue’s hot topics
• Paper mill closures will continue.
• Old mills can find new life in adjacent
grades and new industries.
Each product or business model travels through the life cycle phases
of introduction, growth, maturity and decline. Paper markets, in
general, are in the maturity or decline phase in North America;
demand is declining, price is often the key differentiator, and industry
consolidation is rampant. Over the last five years, 81 mills have closed
in North America. After its paper making days are over, what will your
mill become?
Many of the mills were closed by market leaders
in the aftermath of industry consolidation or in
efforts to match supply footprint with demand.
The closures crossed companies, paper grades
and geographies:
•
Size didn’t matter - Large industry leaders,
such as International Paper, Resolute
Forest Products and Domtar, accounted
for half of the mills shut while smaller
companies that owned and operated only
one or two mills accounted for the other
half of closures.
•
•
Closures were across grades - No
major paper grade was spared from
the effects of the recession and decline
in demand. Across all grades,
newsprint fared the worst, with 18 mill
closures since 2007, followed by
uncoated freesheet (including
specialties) with 15 mill closures.
The U.S. was hardest hit - Of the 81 mills
closed since 2007, 57 were in the U.S.
However, in uncoated mechanical and
newsprint, 12 of the 18 closures have been
in Canada.
Figure 1 CAPACITY HEALTH MAP - PULP AND PAPER Companies in distress
4.0
Asset Restructuring Index
3.5
“Healthy zone”
3.0
“Gray zone”
1.5
1.0
“Distressed zone”
0.5
0.0
MILL CLOSURES WILL CONTINUE - 38 AT RISK
In contracting markets further consolidation
and asset rationalization are required to protect
value. More industry restructuring is needed
both in terms of number of companies and mill
closings.
The Capacity Health map (Figure 1) plots
total group pulp and paper capacity against
a restructuring index, which is based on an
adjusted Altman z-score combining five metrics
for liquidity, profitability, leverage, solvency and
activity, and can be used to assess a firm’s risk
of restructuring.
2.5
2.0
Understanding the real life options for pulp and
paper mill sites to either extend their life cycle in
adjacent uses or to continue creating value for
owners and communities in new ways, is
critical. Like any life cycle phase, the business
decisions around what to do with a closing mill
must be carefully evaluated and planned.
0
5,000
10,000
15,000
20,000
25,000
30,000
Total Group Pulp and Paper Capacity
(1000 metric t/a)
Executive Wire
USA 1 / 2010
35,000
40,000
An index score above 2.5 indicates a healthy
firm while a score below 1.5 indicates a
distressed firm.
The Capacity Health map shows:
• More than 20% of the publicly traded
North American paper and board
companies fall in the distressed zone.
• 38 mills located in both Canada and the
USA operate in the distressed zone.
• The mills in the distressed zone produce
both printing and writing and packaging
paper grades.
The owners of ailing mills should be focused
on understanding the options for the mill to
be revived and extend their life cycle with
complementary or alternative future uses.
Understanding the options
Over half of the 81 mills closed since 2007
have yet to find a way to extend their life cycle
in adjacent uses or to continue creating value
for owners and communities in new sectors.
Careful planning and developing a total life
cycle management plan for pulp and paper mill
assets and sites is required. The first step is to
understand the range of options available for at
risk or closed pulp and paper mills.
Table 1 summarizes some options for mill
life extensions being considered or already
implemented. It is not an exhaustive list, and
creative organizations are investigating and
inventing new ones.
Option 1 - pulp Conversion
Some mills have found mill life cycle extensions
in new paper grades or pulp markets. There
have been 44 pulp and paper machines
converted to new product grades since 2007,
seven of which eventually failed. Some mills,
such as Tembec’s former St. Francisville mill,
which made the switch from coated paper to
lightweight linerboard, changed ownership,
while others continued to operate in the same
hands but in new product markets.
Pulp has been the “go to” market in many
conversions. For example, IP is investing $83
million in its Franklin, VA mill to convert from
kraft pulp and uncoated freesheet
to fluff pulp and Domtar’s Plymouth, NC, mill
was repositioned with $73.5 million investment
on fluff in 2009.
Executive Wire
TABLE 1 Options for mill life cycle extensions
Revival Option
Opportunity
Risks
Who’s done it?
1. Pulp
Global market pulp
demand growth.
Growth in specialty
pulps.
Price cycles. Cost
competiveness
against global
capacity.
IP Franklin, VA
Domtar Plymouth, NC
Fortress Paper, Thurso, QC
2. Other paper
grades
Tap into more
steady markets.
Create highly
competitive entry.
Conversion cost.
Success difficult.
Mature markets.
Resolute (AbitibiBowater)
Coosa Pines, AL
IP, Pensacola, FL
Verso, Sartell, MN
3. Specialty
paper
Pockets of growth.
World of niche
markets.
Limited/small
markets. Asset fit
(scale).
Wausau Paper Brainerd, MN
NewPage, Escanaba, MI
Verso, Bucksport, ME
4. Green energy
- wood pellets,
biofuels and
bioenergy
European demand
for wood pellets.
Asian markets
growing.
New technologies
emerging quickly
(e.g. torrefication.)
Markets often
driven by
government
energy
regulations.
Smurfit Stone sold mills to
Green Investment Group
Inc.
Katahdin Paper’s Millinocket
mills sold to Cate Street
Capital.
5. Other
industrial use
New business
entry.
New business joint
venture. Real estate
value.
Community
employment.
Partner selection
and fit.
Can be a lengthy
process.
IP’s Terre Haute, IN mill sold
to the City.
Neenah Paper’s Ripon, CA
mill sold to pet food
processor.
Eurocan Pulp & Paper site
sold to Kitimat LNG, wharf
sold to Rio Tinto Alcan.
Option 2 - OtHEr paper grade conversion
Opportunities to add capacity in printing and
writing grades is limited, and conversions
in packaging grades have proved to be
challenging. Market leaders such as Resolute
Forest Products have struggled with paper
grade conversions and failed in their attempt
to convert the Coosa Pines newsprint mill to
lightweight linerboard.
Conversions to adjacent paper grades,
especially packaging grades is on the rise.
Sales and marketing are key to entry into
these markets. Establishing new channels of
distribution and having the right sales people
and programs in place is critical to success.
Forward integration into converting may be an
option to consider. Partnership opportunities
and off-take contracts can make or break the
project.
Option 3 –Specialty paper conversion
Conversions in various specialty papers have
extended some ex-commodity paper mills’ life
cycle. Wausau Paper recently invested $27
million in its Brainerd, MN, mill to produce tape
base stock. Also, NewPage converted PM 3 at
its Escanaba, MI, mill from coated freesheet to
produce specialty papers.
These opportunities are inherently limited by
the small market sizes and the challenge of
converting commodity scale machines to fit
niche specialty market demands. However,
these specialty markets can provide a strategic
platform for growth if the company can redefine
itself for a new mission. There is a lack of strong
global specialty paper players in most market
segments.
Option 4 – Green energy
One tenth of closed mills have found life cycle
extensions in the green energy space, with mill
sites acquired by alternative energy investors,
such as Green Investment Group Inc. (GIGI).
GIGI has worked with local and regional
government entities to help attract wood pellet
manufacturer Trebio to invest $19 million in a
130,000 ton per year pellet plant at the former
Smurfit Stone mill in Portage-du-Fort, QC.
Katahdin’s East Millinocket and Millinocket mills
were sold by Brookfield Asset Management
to Cate Street Capital in 2011, with a plan to
produce torrefied wood at both sites within two
years.
Not all green energy related initiatives with
old mill sites have been successful. UPM’s
Miramichi, NB, mill was sold to Umoe Solar
(solar & bioethanol) for $26.3mm. Citing
competition from China, Umoe Solar cancelled
the project and the New Brunswick government
was forced to buy the site back for $11 million.
Fiber availability, long term supply contracts
and technology advancements are all key
considerations for organizations considering
green energy options. Coordination and
collaboration with state/provincial and local
government agencies are critical to success.
Option 5 – OTHER INDUSTRIAL OR
COMMERCIAL USE
Many other types of organizations including
municipalities and manufacturers outside the
forest industry see value in pulp and paper mill
sites. M.O.P. Environmental Solutions worked
with numerous state and regional government
agencies to purchase Wausau Paper’s former
Groveton, NH mill, and reconfigure it for the
commercial manufacture of oil absorbent
products. M.O.P. was interested in the mill site
for its existing assets – including infrastructure
(rail, power, etc.), waste water and sewage, and
its proximity to market.
Part of IP’s Terre Haute, IN mill site was sold
to the city, who hopes to use the site’s existing
wastewater treatment pond to store combined
storm water and wastewater, and the rest of
the site to provide open green space for future
development.
Many mills have not been re-purposed and
the only source of value has been spare parts
or scrap metal. Resolute Forest Products sold
four of its paper mills (Fort William, Beaupre,
Donnacona, Dalhousie) to American Iron &
Metal Company for scrap for C$8.7 million (plus
40% of any proceeds from the sale of paper
machines on the site) in 2010. Smurfit-Stone’s
Ontonagon mill and Sappi’s Muskegon mill were
sold to American Iron & Metal Company and
Melching Inc. (respectively) for scrap metal in
2011.
Fraser Paper’s mill in Berlin, NH, was first sold
to North American Dismantling (NAD), which
demolished and sold for scrap all nonessential
assets on the site. Laidlaw Energy Group
purchased the site from NAD to develop a
75MW biomass-energy power plant. Laidlaw
has since secured a 20 year power purchase
agreement valued at $1.3 billion. Laidlaw plans
to be operational in 2013 after an investment of
about $67 million.
Pöyry is a global consulting and engineering company dedicated to balanced
sustainability. We offer management consulting, total solutions for complex
projects, and design and supervision. Our expertise extends to the fields of
energy, industry, urban & mobility and water & environment. Pöyry has 7000
experts operating in about 50 countries, locally and globally.
Finding a new potential industrial use for a mill
site requires coordination and collaboration with
state/provincial and local government agencies.
Compare the real life examples with your
current situation, in terms of both the assets
and hosting conditions. Are there any obvious
fits unique to your mill site, such as the
expansion of a neighboring business or a
desirable wharf or waterfront? The workshop
should provide you with a roughly defined set of
new options for the site and assets.
Screen options – Conduct fatal flaw analysis of
your options based on a set of viability criteria,
such as investment need, strategic fit with the
(old or new) owner’s goals, access to market,
and availability of inputs. The screening process
will yield a short list of initiatives for life cycle
extension with strong sense of their relative
probability of success.
Finding the RIGHT OPTION
Life cycle planning and understanding
opportunities for extension are as important
for industrial assets as they are for consumer
goods. At the end of every life cycle is the
opportunity for reinvention with a new path
forward, as proven by the hyper-speed life
cycles of the consumer electronics industry.
From VCRs to DVDs to BlueRays to 3Ds,
reinventing is both possible and profitable.
Based on Pöyry’s experience, the most
successful reinventions are guided by a
structured approach to planning. The following
key steps are necessary for revival planning of a
pulp and paper mill asset.
Take inventory – Assess what your location
and what you have inside the mill fence has to
offer for businesses – both incumbent or new
ventures. Establish agreement on the resources
and investment available.
Key technical dimensions include:
• Asset and site condition.
• Scale and infrastructure.
• Location (market access, input availability).
Measure local and regional government agency
support for redevelopment. This process
enables you to focus on realistic options for
asset revival.
Generate ideas – A proven approach is to start
with an idea generation workshop. Explore
local, regional and global ideas and solutions for
pulp and paper mill asset and site reinvention.
Understand what the key success factors in
previous mill revivals were and learn from your
peers’ failures.
Build a transition plan – Develop a road map
for your transition. The road map should include
specific actions, such as a blueprint for asset
conversion or re-purposing in new markets
(engineering plan, market strategy, financial
forecast, resource planning) or asset divestiture
(marketing plan, negotiations).
These steps will identify the opportunities and
construct an actionable plan for your mill revival
to extend value beyond the final days of its
current life cycle.
How Pöyry can help
Pöyry Management Consulting helps you make informed strategic decision, including
planning for the full mill life cycle and identifying extension opportunities. Pöyry’s experts
can effectively and efficiently identify alternative site uses and highlight the key success
factors and possible challenges. Pöyry’s extensive global experience, industry databases,
case study library and deep industry knowledge provide our clients with decision making
support services including:
•
•
•
•
Idea generation workshops, assessments and screenings.
Business case evaluation, feasibility studies and market sizing reports.
Divestiture plan development, marketing planning, and transaction support services.
Conversion plan development, marketing planning and implementation support
services.
Pöyry is a global consulting and engineering company dedicated to balanced
sustainability and responsible business. With quality and integrity at our core,
we deliver best-in-class management consulting, total solutions, and design
and supervision. Our in-depth expertise extends to the fields of energy,
industry, urban & mobility and water & environment. Pöyry has 7,000 experts
and a local office network in about 50 countries.
Pöyry’s net sales in 2010 were EUR 682 million and the company’s shares are
quoted on NASDAQ OMX Helsinki. (Pöyry PLC: POY1V).
Soile Kilpi, Director
tel. 646-651-1547
soile.kilpi@poyry.com
Sanna Kallioranta, Senior Consultant
tel. 646-651-1549
sanna.kallioranta@poyry.com
Pöyry Management Consulting
52 Vanderbilt Avenue, Suite 1005
New York, NY 10017, USA
www.poyry.us