November 29, 2012

As society sheds paper, an industry shrinks

With 117 mill shutdowns since 2000 and many more expected, companies try other products.

Star Tribune

(Continued from page 1)

As society sheds paper, an industry shrinks
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Finished paper is stored in rolls at the UPM Blandin paper mill in Grand Rapids, Minn. Demand for paper has been falling for years, and analysts predict another 18 percent dropoff by 2024. In Maine, the industry employs roughly 7,400 people, about half the number of a decade ago.

Richard Sennott/Minneapolis Star Tribune/MCT

Created in 2006 when the private equity firm Apollo Global Management broke off a division of International Paper, Verso has lost money every year but 2009. That year, it got $239 million in federal tax credits for using a paper-making byproduct as an alternative fuel.

If not for the explosion, the mill would have kept running for a time, but it had already shut down two machines and cut 175 jobs in late 2011. Verso stock was trading at $1.12 a share when the explosion happened. When the mill closed permanently, leaving another 260 jobless, it was no surprise to the industry.

In Maine, the industry has been shrinking for years. Pulp and paper manufacturing employs roughly 7,400 people, about half the number of a decade ago. The weak demand for coated paper and rising production costs led Verso to shut an older paper-making machine in Bucksport last October. The move eliminated 120 jobs and took 90,000 tons of paper off the market.

"Demand is declining, and you could make a case that demand decline is going to accelerate going forward, so we're going to see even more shuts at a more rapid pace," said Paul Quinn, a paper and forest products analyst at RBC Capital Markets in Vancouver.

The poster-child of struggling American paper companies is NewPage Corp., which owns a mill that employs 285 in Duluth. Created by the private equity firm Cerberus Capital Management in 2006, NewPage acquired the North American operations of Finnish company Stora Enso for $2.5 billion in 2008, then closed several mills and filed for bankruptcy in 2011.

Three mills in Wisconsin fell victim, including one in Niagara, a town across the Menominee River from the Upper Peninsula of Michigan. The mill made coated paper like the type made at UPM Blandin and had been operating there since the 1890s.

"It was a very impressive operation," said George Bousley, the town's mayor. "The people who lived here and worked here, they were very proud of it."

The foreign-owned paper mills in Minnesota -- UPM Blandin and Sappi Fine Paper in Cloquet -- are both working toward a future in which they produce something other than paper.

The companies, like their American counterparts, struggle against the overcapacity that plagues the industry. But they're trying to find new business models.

South African-owned Sappi is spending $170 million to convert its pulp mill to produce chemical cellulose that can be turned into thread for textile mills. The Finnish parent company of the Blandin mill has invested in research of cellulosic nano-materials, which chemists believe could be blended with other materials to make car and aircraft parts, and maybe body armor.

But the clock is ticking, and government efforts to prop up paper mills can only temporarily rearrange the industry.

In October, a mill in Nova Scotia abandoned by NewPage a year ago started back up under Canadian ownership, thanks in part to $125 million in provincial incentives.

The paper industry in Maine cried foul at the subsidy because the mill can produce 360,000 tons of supercalendared paper each year. In 2011, that would have equaled 17 percent of North American capacity for that type of paper.

But subsidies are neither new to the industry nor exclusive to Canada. U.S. mills got a gift during the recession when a favorable Internal Revenue Service ruling lavished them with $8 billion in federal tax credits for using "black liquor" -- a byproduct of the paper-making process -- as fuel. That's how Verso achieved its only profitable year. Quinn, the analyst, said Canada followed with a billion dollars in new energy-efficiency credits.

"All you're doing is you're moving around the mills," Quinn said. "The reality is the demand is going down. Some mills are going to have to come out."


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