Features Equipment & Systems Technology
Financial experts promise better days ahead
By Pulp & Paper Canada
When is more better? When both are named Pat. Two speakers -- Patrick Moore and Patricia Mohr -- captivated delegates attending the 1999 annual meeting of the Midwest Branch of PAPTAC (Pulp and Paper ...
When is more better? When both are named Pat. Two speakers — Patrick Moore and Patricia Mohr — captivated delegates attending the 1999 annual meeting of the Midwest Branch of PAPTAC (Pulp and Paper Technical Association of Canada), held in Thunder Bay, ON, September 29 to October 1.
Patrick Moore is the founder of Greenspirit and also does work for the Council of Forest Industries in British Columbia. He was one of the original founders of Greenpeace but has since left that organization and has been subject to heavy criticism from it and other environmentalist organizations for his views. As Moore said in his talk, "Environmentalism is such a big subject and it's too bad it's become such a black and white issue." On one side, he noted, there are those who are convinced the Apocalypse is upon us while on the other are the technical optimists. Neither position is valid; there are some serious environmental problems and they need some serious solutions. However, in many cases the environmental movement is doing more harm than good, Moore said.
Sustainability must be socially acceptable, economically feasible and technically possible. How to create policies that adhere to these three principles is what Moore has worked on the last few years. He said that the environmental movement has veered sharply left in the last few years. It has, so to speak, continually raised the bar, whenever it seems industry has responded to environmental concerns. "A lot of environmental positions is disguised political activism."
Turning to forestry specifically, Moore said there is a head-on confrontation against people cutting trees. Addressing species extinction, he said that there are three main causes of species extinction based on human action. These are hunting; deforestation of vast areas for agricultural purposes; and, the introduction of exotic predators and diseases. The latter is the main culprit. "No species have gone extinct because of forestry." The main causes of deforestation have nothing to do with forestry. There are three ways to stop deforestation.
1. Population management;
2. Intensive agricultural production — more food on less land;
3. Urbanization — stop urban sprawl.
One of the environmental movement's main thrusts is to cut fewer trees and use less wood. This, Moore stressed, is actually anti-environmental because it is contradictory to practices that would be good for biodiversity and climate change. The more society moves to renewables and away from non -renewables, the better it is, especially solar renewables such as wood and hydro-electric power.
"We need to manage the global population," Moore said, but stressed that he did not mean control. "The correct approach is the education and empowerment of women in society." Education equals literacy, which equals paper consumption.
"There is an inextricable relationship between poverty, population growth and deforestation. It is a myth that the throughput of materials and energy is related to a negative environmental impact."
Eating less meat is another part of the answer. A lot of the deforestation that occurs is the result of the need to raise animals for food. In conclusion, Moore said that trees and population management are the answers to using more renewable and fewer non-renewables sources of energy, to pulling more carbon dioxide out of the air and to improving soil and water conditions.
In response to a question about hemp and alternative fibres, Moore said that many questions remain. He said that hemp does not make better paper and it is myth to believe that it does not need pesticide or fertilizer. Also, after harvest, it needs to be dried and stored under cover or else it can go moldy.
Another delegate asked about public relations. Moore said that the industry still operates with a "wholesale" mentality and needs to shift to a "retail" mentality. It is necessary to "communicate with the masses, not your clients." The average retail business spends about 3% of its sales revenue on advertising. "If we spent that, we could do a lot." Moore said what has been said often before: the industry has a good story to tell but it's not telling it. The environmental movement, however, spends millions to say the industry is destroying the environment.
A tough act to follow, but the organizing committee did well with its Presidents' Panel featuring Bill Gaynor, president and ceo of Weyerhaeuser Canada, Joseph Wright, president and ceo of Paprican, and Frank Schmeler, president and ceo of Albany International. Frederick Gilbert, president and chancellor of Lakehead University in Thunder Bay moderated the panel, which discussed the theme: Strategies for future success.
Gaynor spoke first. Weyerhaeuser Canada is an integrated forest products company now spanning four provinces since the purchase of the Dryden, ON, fine paper mill from Bowater Canada. The acquisition of MacMillan Bloedel doubles Weyco's size in Canada and is part of the strategy for future success, Gaynor said. To address the theme, Gaynor said the industry must improve its competitive position, develop forest productivity and manage in the context of a more complex world.
He said a company must meet three bottom lines in terms of improving its competitive position. These are practicing environmental sustainability, remembering the role a company must play in its community and improving profitability.
Some further consolidation is necessary to be competitive and, obviously, is part of Weyerhaeuser's strategy. Gaynor noted that MacMillan Bloedel was a near perfect fit for Weyco in almost all its product lines. "MacMillan Bloedel came through some traumatic times. It developed and implemented innovative forestry strategies. We will step into their shoes and continue forward."
Paprican's Wright spoke about Technology — The key to survival. Technology, he said, is the critical complement to other components that will lead to success. There are various sources from which to access technology: in-house, suppliers, institutes, universities and consultants. The global trend has been a reduction of in-house technology initiation. Also, Wright added, technology is being managed on a global corporate strategic level. And, there is an increased reliance on suppliers.
The Canadian industry faces numerous challenges. These include faster growing fibre in the southern hemisphere, the fact that the newer paper machines are in Finland and Sweden, the "patient" capital available in Indonesia and the limited, expensive softwood sources available in Canada.
"We need to shape the future, not respond to outside forces," Wright said. This can be done by building upon the country's strengths: fibre, environmental know-how, low-cost and plentiful energy and an educated workforce.
Wright offered some scenarios for enhancement.
Products that maximize inherent fibre quality;
Develop new fibre sources;
High-quality virgin fibre used as a make-up for recycled products;
World leadership in higher value-added paper and products;
The strong growth in packaging products;
Extend the range of products into areas served by petrochemical products;
World leadership in environmental friendly products and processes.
Wright returned to the topic of sources of new technology and asked if companies rely on suppliers for it, where is their competitive advantage? If universities are the main source, is there the expertise available in the mill to use the technology?
The same question can be asked if research institutes are the main source. Also, Wright added, "Is your company a Paprican member?"
Paprican has many strategic initiatives underway: fibre, pulp and product properties, quality control, system closure, fibre, chemical and energy cost studies. "Successful long-term strategies cannot ignore technology," Wright concluded. "Know where you will get it and understand why it will help you succeed." Paprican recently developed its own web site. It can be accessed at www.paprican.ca.
Albany International's Schmeler noted that the paper machine clothing business worldwid
e is worth some US$2.5 billion annually. He cited the current situation as being one of economic growth, low inflation and unpredictable currency markets. He said companies must answer shareholder concerns and that shareholders want change.
As with the rest of the industry — supplier and producer — the clothing industry has seen a spate of consolidations recently: Appleton Mills/Scapa, Geschmay/Albany and Asten/JWI.
What are Schmeler's strategies for future success? First, there is a need for restraint when it comes to expansion plans. Companies also need to shut down non-performing assets. He believes the "production mentality" will change, because "marginal tons to not contribute to the bottom line." Schemeler also feels there will be more consolidation by grade and alliances that will fit long-term strategies.
"There needs to be a sense of urgency in the short-term," he concluded. "The speed of decision-making is the role of leaders. Some hard decisions need to be made." Because of this, there will be a tolerance of risk, he said.
In response to a question, Schmeler said Albany's business is now 75:25 in favor of the papermaking industry. In the future, the paper industry's share of Albany's business will drop to 60% as the company moves into high-tech textile applications in other industries with "good margins". This will be done through acquisitions.
Joseph Wright was asked if Paprican's move to allow members outside of Canada would be a detriment to the Canadian industry. He said that Paprican moved to serve the "global needs of our member companies. We want to expand our reach and build a global presence. We cannot put up artificial borders if a company has half its assets outside Canada."
After delegates had a change to digest all the information and forecasts given to them, the first session after lunch was the Market Forum featuring Patricia Mohr, vice-president, economics, ScotiaBank (and PULP & PAPER CANADA columnist, The Bottom Line) and Ross Hay-Roe, Equity Research Associates, a well-known analyst and newsletter author. The Forum was chaired by Shaun Campbell, Thunder Bay Packaging.
Mohr spoke about delivering shareholder value in the new millennium. The topic of shareholder value has been much discussed recently and Mohr said it came to the fore in the late 1990s because of poor performance by the Canadian forest products industry. Mohr defined shareholder value as share price appreciation, dividends and other benefits. Institutional investors went "on strike" against the pulp and paper industry in 1997. Interest in investing in the industry was nil.
The paper and forest products index did well versus the TSE 300 (Toronto stock exchange) in the late 1980s but 1995 was the start of a significant lag behind the 300, particularly 1997-98. Return on equity in the 1990s averaged less than 1% annually, 0.2% to be exact. However, in the last six months there has been a major rebound — particularly lumber and oriented strand board (OSB) — and the forest products interest has returned 37.5% versus 6% for the rest of the TSE 300.
R&D pays off
As the industry moves up the value-added ladder, the return for shareholders has been better, Mohr added. She noted that this type of comparison is also true for R&D expenses; the more a company spends, the better its returns.
Earnings have been very weak because of the industry's volatility. Mohr explained that investors don't mind cycles, but they need to be able to predict them. General economic conditions — stop/start — were also not supportive of strong pulp and paper prices.
Addressing coated groundwood papers specifically, Mohr said that US advertising pages have climbed continuously, but prices for coated groundwood went up and down severely. "Aggressive industry pricing tactics hurt the industry and investor confidence."
The industry needs to adopt more moderate pricing to keep investor confidence. Newsprint and pulp prices mirrored the coated groundwood experience. Mohr had this advice for the industry: Get the prices up to a profitable level but don't overdo it.
Mohr then addressed some possible strategies to adopt to boost shareholder values. These include:
Assessing one's global competitive strengths and focusing on core assets while disposing of non-core assets.
A more disciplined approach to capacity expansions. Do not chase market share. There should be more emphasis on new product development and specialized customer services.
More consolidation to reduce market fragmentation and increase international market presence.
A shift to more value-added, "differentiated" products away from commodities. Mohr noted that the Canadian share of the US market for SC-A and SC-B grades is now 52%, up from 37% in 1997.
The increased use of Economic Value-Added (EVA) principles in setting management compensation. That is: net operating revenues after tax exceeds the cost of capital times the total assets less current liabilities.
Identifying and unlocking hidden asset values, e.g., private timberlands, hydro producing capacity.
Direct investment abroad in rapidly growing markets.
Look for a rebound
Mohr had some encouraging words for delegates about the future. She said the prospects are good for a synchronized pick-up (pulp and paper) in global growth from 2000 to 2002. Pulp prices should go up to US$600/t and paper will rebound in the second quarter of the new year in response to increased Asian demand.
There will be a slowdown in US and European newsprint and printing and writing (P&W) until 2001. There will be increased consolidation among newsprint producers. The top five producers now make 37% of world capacity and the top 10, 57%. This compares to mid-1997 when the top five only produced 27% of world capacity. The same holds true for P&W grades. The top five graphic paper (newsprint and P&W) producers now make 20.6% of world capacity. Mohr said that the industry has cut costs and has better inventory management practices.
The improvement in investor confidence has a lot to do with feeling that the industry should do well globally in the next few years. However, the confidence is fragile and the Canadian industry still has some challenges to face. These include:
Increased competition in the US market from new freesheet paper machines installed in China and Indonesia;
The need to work with advertisers and publishers to develop new print media products in the era of the Internet and e-commerce;
The tightening fibre supply in Canada and the need to move to more intensive silviculture;
Increased competition from new mills in Latin America and the Far East based on low-cost plantation fibre.
Mohr then described manufacturing strategies ranked by R&D intensity. At the top is Performance Maximizing. This includes the pharmaceutical and semi-conductor industries where R&D is a major item and a large percentage of sales is spent on R&D.
Second is Sales Maximizing, e.g., personal care products. Mohr cited Kimberly-Clark as one company in this bracket.
Finally, there is Cost Minimizing, and this where most of the forest products industry finds itself.
Mohr said, "The more you spend on R&D, the higher the return on shareholder value and the better the range of value-added products. "You can link R&D funding to shareholder value creation."
In his talk on Changing world markets, Hay-Roe concentrated on those Canadian staples, newsprint and market pulp. One of the reasons for the real decline in pulp prices over the last 50 years is the increase in hardwood pulp production. Hay-Roe noted that the US, Brazil and Indonesia have dominated market pulps markets in recent years, due in no small part to the rise of hardwood pulp. Hardwood pulp capacity is growing twice as fast as softwood pulp because of wood costs. Its market share has grown from 28 to 45%.
Canada is participating in this rise of hardwood. In 1985 hardwood pulp accounted for but 12% of total pulp capacity; in 1995, it had grown to 21%. But, Hay-Roe cautioned, the potential is limited because the principal driver is low cost and Canada cannot compete with
Brazil or Indonesia in that respect.
He noted that CPPA projections have shown Canada's market pulp production has hit the ceiling. In the US, capacity is declining. "The North American market pulp industry is shrinking," Hay-Roe added, "but still dominates world capacity. Next year it will be at 44%, down from 51% just five years ago."
However, world demand will continue to grow and he said, "Last year's surplus is turning into next year's shortage."
The growth in offshore markets has kept Canadian newsprint "in the game", according to Hay-Roe, as US demand for our newsprint has declined over the last decade. The US is becoming more self-sufficient in newsprint since the southern pine newsprint industry developed. It is now up to 50% and this trend will continue.
Asia is the key to future exports. From 1986 to 1997, demand grew about 13% annually, from less than one million tonnes to 3.5 Mt. However, demand dropped by 25% in one year, 1998.
European demand for newsprint will continue to grow but as it is self-sufficient and promises to remain so with increased capacity, it will not be a bigger market for Canadian newsprint.
Globally, Hay-Roe believes our share of world markets will continue to shrink. North America used to account for more than 50% of total world capacity. In 1998, it was just over 40%. The globalization of world newsprint production will continue. The Canadian pulp and paper industry cannot rely on newsprint, Hay-Roe declared.
He added that pricing has not received enough attention. It is a matter the industry needs to address seriously or many paper machines and mills will need to shut. "The 1990s has been the industry's worst period since the 1930s and 1999 will be one of the worst years. Management must carry the responsibility for this."
Excess capacity is not the problem, Hay-Roe said. The North American operating rate in 1999 will be over 95% and it is shipping out at 95%. "What other industry can run at 95% and still lose money?" The problem has arisen because prices are depressed and only top management can solve the situation. A profitable pricing philosophy must be given a much higher priority with less focus on volume. Otherwise, Hay-Roe added, we will see a forced shrinkage of capacity. He was not confident the $50/t price hike announced for October would hold because although the fundamentals are in place for the price raise, the industry is lacking in determination and conviction.
And he plays piano too
Conference organizers scored quite a coup when they enticed the president and ceo of Aracruz Celulose S.A., Carlos Augusto Lira Aguiar, to travel from Brazil and address the delegates at the banquet. He spoke of the industry's challenges from a Brazilian perspective. The country's economy enjoyed solid growth of 4%/y from 1994 to 1997, but has suffered recently. Aguiar said a rebound is expected in 2000 with 4% growth again expected. The country devalued its currency by 40% in 1999 in a bid to make its products more competitive. Inflation of 3 to4%/y is expected.
Brazil produces 7.5 million (M) t/y of pulp and paper, 3.5 Mt of which is market pulp. Its eucalyptus pulp production accounts for 50% of the world's capacity. Domestically, paper consumption has enjoyed a 5.6% annual growth rate recently and this is expected to jump to 7%+ in 1999 and 2000.
Aracruz makes 1.2 Mt/y of market pulp, just over 90% of it is exported with Asia, Europe and the US taking almost equal amounts.
Aguiar "reassured" delegates that the situation for the industry in Brazil is much like it is here; investors are shying away from it. Despite cutbacks in staff and R&D, cost cutting and concentration on core businesses, results are still "dreadful."
He said that the government has not allowed inefficient mills to close because of (un)employment concerns. Also, Aguiar added, if a mill closes, a "mega" mill is built in its place, adding too much capacity for the market to absorb. The devaluation of the Brazilian currency allowed many inefficient mills to continue to operate.
He noted that the industry has done a lot of work to improve its situation, e.g., cutting costs, etc. But, he added, it's time to look at the other side of the equation — price — which stems from the supply:demand equation. Aguiar said there is a need to guarantee a long-term price of $500/t.
The industry has a wide range of knowledge but it must be used wisely to guarantee a good return on investment. He said he hoped that the weave of consolidations in the industry did not mean a loss of intelligence. "We must prepare for the new generation of people coming into the industry."
Despite the difficulties of the past decade, Aguiar is optimistic about the next few years, especially in light of actions the industry has taken to improve its situation. He expects that by 2005, world paper consumption will reach 365 Mt/y with the demand for market pulp reaching 45 Mt.
Aguiar is also an accomplished pianist and once his talk was over, the chairman of the Midwest Branch and host of the dinner, Ajoy Chatterjee, prevailed upon Aguiar to entertain the delegates, which he did with an excellent rendition of Somewhere Over the Rainbow.
West coast winner
Along with the all the special presentations, delegates had a host of technical sessions from which to choose: pulping papermaking, process control, management, drainage, environmental management, workplace awareness and new technology to name a few. The Hercules Canada Award for best paper presented at the conference went to Ken Wiltshire, Filter Innovation, Vancouver, Slime control in paper machine shower water systems with unique chemical-free electrotechnology. (See Pulp & Paper Canada, July 1999, p. 18.) Honorable Mentions went to: John Lyotier, Weyerhaeuser Canada, Making sense of major change: Dryden mill safety transformed into industry leader for two consecutive years; Angela Wensley, Bacon Donaldson, Hot topics in corrosion in the pulp and paper industry; George Velema, Domtar Papers, Domtar land application program; and, Mike Robichaud, Bretech Engineering, In-situ roll balancing: An innovative method for improving dryer section performance. Delegates also enjoyed ample time during breaks and lunches to visit the sold-out exhibition where over 50 suppliers demonstrated their wares.
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