GLG News by Dave Hillman

Implications: There is a huge amount of cellulose in municipal sewage and represents enormous potential for producing an energy source from a current discarded material.  What would it take to make this commercially feasible? If a process could be proven effective, every municipality in the US could incorporate this into their strategy. Which companies are willing to tackle this project?  Is anything being done currently?  The capital investment might be less than some might estimate.

Analysis: The Gulf Chemical Co, back in the late 70's and early 80's set up a pilot plant in Louisville, KY to reclaim the cellulose in the city's sewage.  Separating it from the human waste and other contaminents had evidently been solved.  The recovered cellulose was then going to be processed to produce methane gas.  After two years the project was abandoned for (a) lack of interest (b) lack of funds and (c)the price and availability of methane was not a concern at that time.

However, much has changed!   The public would not embrace a project like this and the revenue from the methane produced would help any city's finances.   We believe it would be worthwhile to investigate just what Gulf Chemicals (a division of the then Gulf Oil Co.) was able to accomplish and what unanswered questions remained when the project was cancelled.  We believe there's much to learn.

Implications: China's growing middle class has developed a strong appetite for both Uncoated FreeSheet (A4 Copybond, Offset Printing paper, envelope, tablet, thermal imaging papers etc) that has exceeded the PRC's expectations.  How much more will it grow?  The Government has already said by 2010 their country's total demand for fiber of all kinds will be an enormous 81-84 million mt.  In 2006 when this estimate came out it was considered an exaggeration but now it looks like it might be too conservative.   India already had the world's largest middle class at 250 million.  They, too, have developed a growing appetite for printing and writing papers as well as more sophisticated graphic arts papers.   Huge, world-class-size paper machines are already being proposed by Indian paper companies.   Can the world's market pulp mills expand fast enough?  Where will all the financing come from?  A new pulp mill now costs US$1.4 billion.

Analysis: Whereas the world's mature societies today are reducing their consumption of uncoated freesheet and replacing it with the internet and other IT means, emerging countries are just the opposite.  Their purchases of home computers & printers are increasing rapidly, their need for envelopes, paper for text books and thermal imaging papers (receipts from store purchases) is growing rapidly.  Just the need for students' textbooks, novels and reference books is enough to keep many paper machines running 24/7.  China is experiencing that first hand and to a large extent  was not anticipated by the Government  who now has the unenviable  assignment of trying to estimate what the next 5 years will bring (not many people can see past 2012). But, recent experiences would indicate that actual numbers will exceed their estimates.   Because a new market pulp mill takes about 28 months to get operational and requires at least US$1.4 billion dollars, all the world's major market pulp companies should already be planning their pulp mills.   Reference is made primarily to those companies in the three low-cost pulp producing countries - Brazil, Chile and Indonesia.   Plantations must be planted and expanded, environmental restrictions must be considered (water is an excellent example) as well as logistics.  Will enough dedicated vessels be available to haul another 5-7 million mt/year of market pulp around the world?
The problems facing the world's pulp and paper industry are very complicated and involve Governments,  environmental watchdogs, restrictions on the amount of old growth forests which can be clear cut, acres of farmland that can be made available for huge plantations, fresh water available, logistics to the port as well as port facilities....the list goes on and on.  And, on top of all this is the need for money....large amounts of capital that must be spent by companies who are not discouraged by past  low returns on investment and cyclical demand.   But, perhaps those depressing days are all in the past....it might be that China and India alone will be enough to bring stability and regular growth to an industry that has never had that luxury.

Implications: Russia has now realized the value its Spruce, Pine and Larch trees have and has imposed a 20% tax on any logs greater than 25 cm (10").  It is these larger logs that are so valuable to processing into Newsprint and also for Kraft cooking to produce the highly regarded NBSK market pulp.  Did they impose it because they realized how dependent China and Finland has become and would continue buying despite the new tax? China had embarked on a Government subsidized scheme to greatly expand its newsprint production with new world-class sized paper machines.  Low cost logs would have enabled it to produce a  lower cost newsprint which could be exported to the US's western states. Now this marketing plan seems to have been abondoned....could this be a direct result of the new 20% tax? Also, Finland was drawing fully 50% of it logs from Russian forests...especially Birch which was not being harvested at home. How will this effect the production of Birch NBHK market pulp?

Analysis: While the new 20% tax has serious implications to those countries who were counting on importing huge quantities of birch,  spruce, pine and larch, the other implication is that it rewards those companies who have chosen to build pulp and paper mills within Russia's borders.  This would be International Paper (who entered into a joint venture agreement with Ilim back in 2006) and before had purchased a large integrated fine paper mill new St. Petersburg,  and Mondi of South Africa who bought into the Syktyvkar mill in Northern Russia and now owns a controlling interest.  Mondi reports that this mill's earnings grew 13% last year to US$68 million dollars.   With the Russian paper industry one of the two fastest growing countries (2nd only to India) the future would seem to hold great promise for any company owning mills within Russia.
IP has announced plans to invest an additional US$500 million in Ilim Pulp and no doubt is considering expanding the paper division.  Growth rates in Russia have been reported to be 5.5%. By contrast, growth rates in Western Europe and the US are less than 1%.
These recent events has caused Stora Enso to announce plans to build a greenfield (integrated) pulp and paper mill in northern Russia in Nizhny Novgorod.  They previoulsy announced plans to build a similar mill in the southern Brazilian State of Rio Grande do Sul.   Stora Enso obviously sees the value of building and operating mills where the trees are or grow fastest.  By the same token, Russia's new tax has reminded them that buying from other countries can be very risky.  
So....now looking at Stora-Enso's Finland operations - what will be the effect?   With cheap wood no longer available they have already shut down, within just the past few years, several mills and fired workers. Other Finnish companies like UPM Kymmene are faced with the same problems.   With the harvesting of Birch in their own country and the importing of Russian logs now so expensive, this means the supply of Birch hardwood NBHK will be very limited in the future.  No doubt its place will be taken by Iberian, Brazilian and Chilean eucalyptus.  But, what about the pulp mills that formerly cooked Birch?  They will of course keep running - but now on NBSK which will be applauded by all those paper producers who have learned to appreciate this high quality pulp over the years.
Now, in closing, what about the future?   With 22% of the world's forests and growing domestic paper demand, we can expect several other global producers to announce plans to build mills in Russia.

Implications: At a time when contraction seems to be the rule (Smurfit Stone having shut down 20 boxplants over the past few years), does IP really see the value in growing their container division by an additional 72 plants? IP's management believes it can cut expenses within 3 years by $400 million including $175 in the first year.  To do this means moving very quickly to incorporate the Weyerhaeuser plants into their own well established plants.  It's questionable whether this is possible since a great deal of analyses will be required (i.e. logistics, corrugator utilization, shedding unattractive pieces of business etc.) How will the financial community view this acquisition?  IP's stock has declined 13% and today trades around 27.  IP has said it will borrow $2 billion as a term loan and  $4 billion as a bridge loan.  Many analysts believe this is a great deal of debt to be taking on when the country appears on the verge of a recession.

Analysis: There are currently 7 major container companies - Smurfit Stone has been the largest with 120 box plants, Weyerhaeuser #2 and IP #3.  Now IP becomes #1 and it will remain to be seen if bigness is the highway to profitability....this at a time when Smurfit Stone is heading in a different direction - that of spending $2 million (each) in installing "super corrugators" at their LA and Chicago plants.
Admittedly IP has acquired a considerable number of attractive properties which includes: 9 fully integrated containerboard paper mills (linerboard, corrugating medium, folding boxboard), 72 box plants, 10 specialty packaging plants, 4 kraft bag/sack plants and 19 recycling plants (of considerable importance in a society where environmental conscientiousness is highly regarded).  IP also inherits 14,300 more employees at a time when many corporations are seeking to reduce employment levels.
IP has announced that it expects to realize a cost savings of $175 million in the first year.   It will be nothing short of a miracle if this can be accomplished since experience has shown that weaving a new acquisition into a huge existing structure takes at least a year for top management just to figure out what are the essentials.  Most cost savings today come from reducing transportation costs, reducing manpower, consolidating similar grades/products on more efficient equipment and shutting down the less efficient plants, etc. While some of this can be accomplished by computer analyses, much of it must be done through group discussions and teamwork.  For example, one of the big questions will be "do we expand our national accounts business or go after the more profitable local, smaller accounts where JIT service can bring higher prices?".  Small and nimble versus big and cumbersome!
But the big question really is whether economy of scale is always the road to greater profitability.  Is there an upper limit?  And then add to that the burden of paying back the $6 billion dollars IP intends to borrow.  Having that big a payback will likely influence many future decisions such as weighing Greater Cash Flow versus Higher Profitability.  Many capital intensive companies have, in the past, have opted to maintain cash flow even when there were no profits.   The market pulp business in Canada is a good example.  Within the past 5 years many mills have shipped pulp at a loss just to keep the money coming in.  This is unpalatible but absolutely necessary when the Banks are putting on pressure.
Now, having said all that about IP, what about Weyerhaeuser?  Why were they anxious to sell this huge, well established division?  According to their management they believe it is to their advantage to concentrate on fewer product lines.  In this case it means focusing primarily on pure timber, wood products and real estate....along with their high volume and profitable Fluff Pulp market pulp business (where list prices are at a heady $900/admt).
It will be most interesting to look at these two companies down the road to see if these decisions were really in each one's best interests!

Implications: The major implication is that major North American assets are coming under the complete control of Asian (mostly Chinese) companies and there is no secret that 100% of these mills' production will be going straight back to China.   Current global customers of these mills are already scrambling to find alternative suppliers - and, in a tight market, this is not easy! Will the new Chinese owners be willing to keep the mills updated with new technology and environmental regulations or will they be run into the ground until they literally fall apart? How many more market pulp mills will China seek to purchase to feed their enormous appetite - estimated this year to be 8.5 million mt of virgin market pulp?  Several mills have reported huge losses for 2007 with little remaining cash reserves.  Will the Chinese pounce on these mills like hungry vultures - buying them at greatly distressed prices and far below their replacement costs?

Analysis: Asia Pulp & Paper has just announced the purchase of Pope & Talbot's three market pulp mills at Halsey, OR, Harmac, BC and MacKenzie, BC plus a number of saw mills.  The purchase price was about 15-20% of these mills' replacement costs.  However, with the strong dollar, high wage costs, high wood costs and escalating freight costs, these 3 mills all lost a great deal of money in 2007.
Several years ago the PRC created the Sun Wave Corp. to purchase REPAP's shut down Prince Rupert, BC NBSK mill - a large mill located right on the water capable of producing 1500 mt/day of high quality  northern softwood pulp.  The smaller pulp dryer was quickly dismantled and shipped back to China but the larger pulp dryer still sits there and the mill has not been reopened even though there is a worldwide shortage of NBSK.  Why hasn't it been restarted?   The Union and the Province have already made enormous concessions.  A good question!
A smaller (700 tpd) NBSK mill located just east of Vancouver and shut down since 2006 was dismantled piece-by-piece and shipped back to China.  Is this a portent of things to come?   Will other smaller, uneconomical mills also find their way back to China?  Another good question.
Three years ago Lee & Mann, China's #2 containerboard and box manufacturer purchased the shut Unbl. Softwood mill at Somoa, CA with the expressed plan of shipping 90% of the mill's production  back to China to produce high quality linerboard.   Lee & Mann is also reportedly ready to purchase the shut down dissolving pulp mill at Cosmopolis, WN which Weyerhaeuser had deemed too small and too technologically out-of-date to be viable.   Dissolving pulp for rayon is currently very tight with spot prices running several hundred dollars above list prices.
Lastly, back in 2006 Asia Pulp & Paper (APP) which operates 12 paper and board mills in China purchased the Meadow Lake BCTMP mill in Saskatchewan.   This mill is able to produce 325,000 mt/year of Aspen  BCTMP but was having difficulty marketing their pulp either in North America or overseas.   APP has several SBS board mills which use this kind of pulp in the middle ply of packaging board (cigarette cartons, dry food products and frozen food cartons)  and has announced plans to ship 100% of the mill's production back to China.
Who could have foresaw these developments a decade ago?   And, who can foretell what the landscape will look like 10 years from now?  Will China (joined by perhaps Indonesia and India) have purchased another 5, 6 or even 10 North American mills?  We've got an abundance of trees and fresh water, an experienced/dedicated work force and major production facilities that can be purchased for as little as 10 cents on the dollar.  Does this not seem like a situation they can't ignore?

Implications: Demand for papermaking pulps over the next 5 years is projected to increase by 5%/year which translates to almost 3 million mt/year.  Where will all this pulp come from?   This demand translates to 3 new world-class market pulp mills being built each year. Ideally market pulp should be (a) low cost, (b) produced from fast growing trees and (c) desireable for producing high quality printing and specialty papers.  This greatly limits the potential locations for new mills. Government regulations now require all new mills to be non-polluting and environmentally friendly.  When will this message finally get through to the environmentalists and the local population?  Are they not aware of the considerable benefits one of these world class pulp mills will mean to the local economy?  

Analysis: Stora-Enso already is operating a joint venture  1 million mt/year mill (Veracel) built in cooperation with Ara Cruz in Brazil.  Their Chinese papermills are planning to expand and will be requiring huge amounts of additional hardwood pulp.  Realizing this S-E has already announced plans to build at 3000mt/day BEKP (eucalyptus) mill in the southern state of Rio Grande do Sul.   Plantations must be planted 7 years prior to the mill's start-up.  Therefore it is imperative that upwards of 50,000 hectares should already have been planted.  Last week some 800 women demonstrated against the company claiming S-E wanted to create a "green desert" from the countryside.  Is this so bad?   Hasn't it occured to these women demonstators that the soil has been worn out by the constant planting of the same crops year and after year and that the Government encourages the planting of euclayptus trees to help restore the soil?    So....who is organizing these demonstrations?  That's a good question!  
In the case of the "workers" demonstations in Argentina last year when they laid across the bridge carrying steel and equipment to Metsa-Botnia's huge new mill in Uruguay it was suggested that these demonstrations were orchestrated by Argentina's then-president Nestor Kirschner as a means of gaining publicity to compete with Venezuela's Hugo Chavez. 
If this is true, it has nothing to do with preserving the environment!  Eventually, though, the mill did get built and is now up and running....but, nine months later than scheduled.
Then there's the case of the Green Party in Tasmania doing everything it can to stop the Gunn's company from building a 3000 mt/year (world class in every respect) BEKP mill at the northern end of the Island.  Aren't they aware that Gunn's has been maintaining E.Nitens plantations for the past 25 years and shipping the chips to Japan and Taiwan for them to make pulp?   Gunns will not be cutting down old growth natural forests.....that was already done 25+ years ago.  It's much too late to complain now!  Are they demonstrating because they think this new mill will pollute the air and water?   They only have to check existing Government regulations to see that restrictions are already in place to prevent that.  It's obviously impossible for them to believe that a new market pulp mill can be a responsible good neighbor. Gunns already announced their plans to ship most of their BEKP to the emerging (and huge!) new pulp market in India.
Going back a decade we can recall the "tree huggers" in British Columbia who were so violent in their demonstations against the logging companies condemning  them for logging "old growth natural forests". The question invariably comes up "how many old growth trees do you tree huggers need in order to be satisfied"?   The US national park service tells us that an old growth natural forest is actually an unhealthy forest.  Many of the trees are dead and decaying....leaning up against healthy trees.  The overly dense canopy overhead keeps out sunlight so no small trees can grow underneath.   Consequently, as a remedy, God sends lightning to "clear cut" that old forest so He can start over again with a new, vibrant, healthy forest!   Makes sense, doesn't it?
To summarize - why is there always such a furor over any new market pulp mill?   Each will employ thousands of well-paid workers, the company will be paying taxes to both the community as well as the State, worn out soil will be restored and the best part is that the world's societies will have the papermaking pulp  needed to produce the necessary papers such as cut-size copybond, offset paper for novels and textbooks, envelope paper, tablet paper for students etc etc.  Can any society get along without these kinds of papers?

Implications: Standard grade newsprint annual tonnage has been declining since 2000 as circulation goes down, advertizing pages drop and classified ads decrease.   Could anyone have predicted that the Internet would have such a profound effect on newspaper circulation?   Supposedly no one under the age of 35 reads newspapers any more.   Can this direction ever be reversed?  What would it take? AbitibiBowaters claims it has already shut down 1 million mt of high-cost capacity.  Will this be enough?  How many of their  remaining 27 paper mills are now "at risk"?

Analysis: The North American newsprint industry has seen demand drop from a high of 15 million tons/year in 1999 to its current level of two-thirds that amount.  Will the move to "groundwood specialties" or SC or "coated groundwood"  be enough to keep all the mills running at 93% capacity?  These are very difficult problems to face since it's so impossible to predict what absolutely essential price increases will have on publishers' circulation when they are forced to raise single copy prices by 25 cents.  Newsprint's transaction prices last summer were as low as US$540 for the biggest conglomerates (vs. a list of $565).  Two price increases have been grudgingly accepted bringing the current list to $625 for most buyers.  The $60/st price increase had to be implemented $20/month through the first quarter.  Producers are now telling N.A.customers that they must get their prices up to the European level of $725-750/st in order to be profitable.  Many industry observers believe this price level will be achieved by the first quarter of 2009...but, what will the effect be on demand as publishers begin to charge $1/copy?  Dailies in the UK now sell for the equivalent of US$1.20/copy and the public has apparently accepted this as "normal"  Will North American readers react similarly?
AbitibiBowaters' stock took a hit last week after the company announced a 4Q loss of $250 million and a full year loss of $490 million. Part of this loss can be attributed to the closing of almost 1 million mt of capacity as mills in New Brunswick, Ontario and British Columbia were shuttered.  Certainly, to their credit, A-B has quickly set about to correct the imbalance between supply and demand but now the question is "how many more mill closures are needed"?
The DOJ forced the company to sell its well situated mill at Snowflake, AZ which they owned jointly with Smurfit-Stone.  The fact that they were able to get $180 million from Catalyst attests to its profitability.
A-B also has a number of other profitable mills - their market pulp mills along with the pulp and paper mill at Catawba, SC just to name a few of the "jewels in their crown".
Most observers believe the company has a bright future and will ultimately be very successful as well as reasonably profitable.  But for now it's a very painful process but one that can't be avoided.

Implications: With a worldwide recession looming, the market pulp industry continues to be operating at peak capacity with quarterly price increases becoming the norm.   China has been the engine driving the world's  business but can it continue on and on?  Will China's domestic demand ever be satisfied in the next decade....especially for Uncoated FreeSheet? India has the world's largest middle class estimated at 250 million.  Their paper industry is in dire need of upgrading and now their larger companies have begun ordering big, high speed, high tech paper machines from Germany and Finland.  Will an expansion in India further tighten an already tight market?   What will this expansion mean to non-integrated paper mills in the industrialized nations who are already claiming exhorbitant pulp prices combined with energy, labor and transportation costs are forcing them to consider shutting down?  The answer may be forthcoming soon!

Analysis: For the past several years China has been buying market pulp as well as recovered papers such as OCC and ONP at record levels resulting in tight markets in all sectors.  In packaging papers alone (linerboard, medium, sack kraft, tape etc) Nine Dragons and Lee & Mann have been starting up new machines almost monthly over the past 8 months.  The Government has mandated the closure of hundreds of old, small relatively inefficient paper mills all over the country which will result in a tight market for all the new production coming on stream in 2008.  This means that OCC and ONP as well as virgin unbleached Kraft pulp will find a ready market in China for at least the next 4-5 years.
On the pulp side the Gov't has also mandated the closure of almost 1700 small "mom and pop" pulp mills which have been processing wheat straw, rice straw and bagasse.  The reasons given are to improve the environment by reducing the untreated effluent going into lakes and streams.  While this may be true it's also true that all the new paper machines which have started up since 1999 really don't like these soft, weak non-wood pulps.
This presents a fascinating picture.....while paper demand is expanding rapidly (just consider the rise in consumption...from 22 kg/pp in 2002 to 50 kg/pp in 2006 with projections it will rise to 70 kg/pp by 2010), the Government is shutting down old inefficient polluting pulp mills and also shutting down old small inefficient paper machines.  One is tempted to ask "what's wrong with this picture?".   What it means to the world is that China is destined to be a huge consumer of pulp and recovered paper at an ever increasing rate and at higher and higher levels.  Is the world prepared to continue to satisfy China's voracious appetite?  The answer lies in the word "profitability".   As demand grows, prices will increase and as prices increase supplies are bound to increase.  Mayor Bloomberg in NYC has recently announced a campaign to increase the amount of paper/board being recovered.
But now, what about India?  Many industry observers believe they will soon become another China.  Older smaller paper mills will be replaced by new high speed paper machines which require higher quality market pulps such as NBSK, Radiata Pine, Eucalyptus, Acacia, Birch etc.   This will eventually cause the closure of India's smaller non-wood pulp mills. One of these huge modern machines (400" wide  running 4000 fpm) can consume over 125,000 mt/year of market pulp....and as much as 140,000mt.  Eight of these new machines will consume the entire output of one of the new pulp mills in Uruguay or Brazil....or the new Gunns mill in Tasmania.   Many observers believe the market pulp industry is going to have to continue to expand as fast as it can just to keep up with the demand of emerging markets in China, India and Viet Nam (mentioned as an "under-the-radar" emerging market). 

Implications: Abitibi-Bowaters has recently shut down four newsprint mills: one in New Brunswick, two in Ontario and one in British Columbia.  Catalyst has shut down one machine as have several other major producers.  Will this be enough to bring supply in balance with demand? 85% of newsprint production is now controlled by 7 large multi-mill companies located throughout Canada and the US.  Demand continues to diminish as circulation drops and advertizing of homes, cars and classified drops.  How much more will demand drop before it levels off....or, will it continue to drop with each passing year? White Birch is the 2nd largest producer of newsprint in North America with production totalling 1.35 mmt.  SP, a general partnership of three major newspaper publishers, was sold for only $350 million - a deeply discounted price for two major papermills and a recycling subsidiary. Is this a tell-tale indication of how dimly publishers see the future of newspapers?

Analysis: Newprint demand has been falling annually since 2000 and it's been said, half-jokingly, that "no one under 35 reads newspapers anymore".  From over 15 million tons/year to less than 12 million there seems to be no light at the end of the tunnel.  January, 2008 showed a decline of almost 10% as home and car advertizing plus classified all dropped.
To reduce their paper costs publishers have reduced the weight of the paper and reduced the size of the paper itself (i.e. the new WSJ).  These publishers grew accustomed in 2007 to paying as little as US$540/st for their paper requirements.   List was $565/st.  Then, in the 4Q producers announced a $25/st increase followed by the year end announcement that 1Q prices would be $60/st higher.  Publishers fought bitterly and got suppliers to agree to implement the increase in $20/month increments through the 1Q.  However, with so much curtailment, publishers had little choice but to go along.
And...lastly, when newsprint prices finally get to $725/st and the mills are in a position to make a profit, what will Publishers do?  Raise the price of their daily newspapers to $1.00?  And what will that do to circulation?   Only time will tell how these problems will resolve themselves....not many people are willing to predict the outcome.

Implications: Three important industry segments, newsprint (and its related grades of SC and mechanical specialites), Uncoated FreeSheet (UFS) and Coated FreeSheet have all experienced significant declines in overall North American demand.  Something has to be done if prices are going to keep up with rising costs (energy, labor, wood costs and transportation).  However, without a consolidation among producing companies and a contration in the number of paper mills and machines, supply will continue to exceed demand. Has the Internet been soley responsible?   Not entirely.  With the case of newsprint, both circulation and advertising space is down....some of which is blamed on the slump in home building, car sales etc. The Newsprint industry is now largely controlled by the merged Abitibi-Bowaters giant who controls about 70% of the business. Uncoated Freesheet is controlled by Domtar, IP, Boise and GP. Coated Freesheet may soon be int he hands of NewPage and Verso. Is containerboard next?

Analysis: Newprint pricing reached a high this decade in 2006 when its list price was US$675.  By the summer of 2007 its transaction price had fallen to US$540/st and most Canadian mills were losing money.  Abitibi-Consolidated and Bowaters agreed to merge and soon after announced the closing of enough mills to reduce supply by 600,000st.  The machines at these shut mills had cash costs US$60/st above the other machines in the company.  As a result of these shutdowns,  producers immediately announced a 4Q US$25/st price increase as well as a 1Q $60/sh increase.  Publishers were upset but had no choice but to accept these new prices.  With European newsprint selling for the equivalent of US$750/st, some industry observers are predicting this is where the N.A. price is headed by 2009.  The same "consolidation and contraction" is happening with the Uncoated FreeSheet market.  North American UFS grades consist of cut-size copybond, envelope paper, offset (mostly for books), tablet, carbonless and thermal imaging papers along with Text & Cover.  With the exceptiion of Thermal Imaging grades, all have been in decline.  In 2005/06 this market shrank by 856,000short tons and 2007 will see another 200,000 sh/year reducing the overall market to slightly under 12 million.  Domtar, after taking over all the Weyerhaeuser mills found itself with 16 properties and 35% of the N.A. UFS capacity.  In short order they curtained the paper machine at Baileyville, ME, shut down Hull,Quebec and the two mills in central Wisconsin.  This reduced supply be 250,000st.  IP then announced it was changing Pensacola, FL from a UFS mill to one producing lighterweight packaging papers.  IP also changed Bastrop, LA from a UFS mill to one focusing more on papergrade market pulp and Fluff Pulp. The other two major players, Boise and GP, did their share by  transforming West Coast machines into specialty business (Boise-release papers) or else changing them over to tissue and towelling machines (GP).  These companies, considered the "big 4" now account for about 90% of UFS business and are in an excellent position to control the "supply" in the supply/demand equation.Coated FreeSheet (CFS) is currently predominently in the hands of NewPage, Verso and SAPPI.  NewPage has recently acquired the six mills of Stora-Enso and it's being rumored that Verso is in talks with SAPPI to acquire their three mills (two in Maine, one in Michigan).  Should this become a reality, the bulk of N.A. CFS capacity will then be made by just two companies.  The question now will be "will this consolidation now lead to contraction?".  With costs constantly rising (wood costs, labor, energy and transportation), it is inevitable that the higher cost paper machines will soon become "at risk".To conclude, the industry is now waiting to see what will happen when Weyerhaeuser divests itself of its containerboard mills and box plants.  Will the purchaser when seek to become even larger by buying one of the smaller players?  Time will tell!

Implications: The global fluff pulp market now measures 4.5 million mt with the US enjoying a dominant position.  Can we maintain that position or even expand it?  Industry observers believe our position is very secure and that we are in the best position to expand.  What's behind this optimism? Fluff Pulp has the highest selling price and yet it is one of the most uncomplicated of the various market pulp grades.  There is even talk of reducing the already low ISO brightness another point or two.  Might not this give competitors in Sweden and Argentina an opening to take premium business away? International Paper has recognized the strategic importance of Fluff Pulp for enhancing their profit picture.  How much more could they expand if they really wanted to?

Analysis: International Paper has just announced the transformation of their 260,000 tons/year Bastrop, LA Uncoated FreeSheet mill over to all softwood - sheeted bales of papergrade SBSK and Fluff Pulp for the disposables market.  The mill will also continue to produce some heavy weight bristols on their paper machine. 
 Last year they began to changeover their much larger Pensacola, FL mill from partly Fluff Pulp and Uncoated Freesheet on the paper machine to 100% lightweight unbleached linerboard (for smaller corrugated cartons - the kind used by FedEx, UPS, Amazon.com etc.)   The UFS grades were moved to Riegelwood, NC along with the Fluff Pulp tonnage.  In this case the loser appears to be the SBS that was formerly made on the board machine.  
This represents a major reshuffling of grades with the apparent objective being to focus more on UFS (where they already enjoy a 25% market share), Fluff Pulp (where they are #3 to Weyerhaeuser and GP) and the lightweight linerboard market (where, when completed, will put Pensacola in a leadership position in making lightweight linerboard (below 23#) from virgin southern Pine.
IP has obviously recognized the benefits of increasing their Fluff Pulp sales.  First, the global market is increasing by 6-7%/year with the end uses being baby diapers, adult briefs, incontinent pads, feminine hygiene and air laid non-wovens.  In each case a growing middle class in developing countries can be counted on to begin using most of these products as their standard of living improves.  It has been reported that a new disposables producer starts up every week of the year in both the Middle East and Latin America.  In most cases these new producers are looking to the  US - not only the dominant Fluff Pulp producers but as having the highest global profile.  This high profile stems from the possible fact that our producers are also major players in  a variety of pulp grades - dissolving, mercerized, high Alpha for chemicals,  papergrade, softwood, hardwood etc.  These producers in order of tonnage are Weyerhaeuser, GP, IP, Rayonier, Buckeye and Bowaters.  In time Smurfit-Stone at Panama City, FL may also begin to produce Fluff Pulp.
GP has already expanded its Brunswick, GA mill, is actively changing over Leaf River, MS from papergrade softwood to Fluff Pulp and is now conducting trials at Palatka, FL to produce Fluff Pulp.
IP, when the Bastrop transformation is complete will have the capability of producing Fluff Pulp in Georgetown, SC (where they produce SuperSoft Fluff), Riegelwood, NC, Bastrop, LA and in Arkansas.
Why is Fluff Pulp so attractive to producers?   The answer is multi-faceted.  First, the market is global and expanding aggressively. Secondly, the $880/admt list price makes this the highest priced of the commodity market pulps ("commodity" = made 24/7 as a one-size-fits-all product with no particular customer or end use in mind).  And, third, it's one of more uncomplicated pulp grades.  Instead of papergrade's 89-90 ISO brightness Fluff Pulp has been "dumbed down" to 84 ISO brightness.  This significantly decreases the amount of Chlorine Dioxide needed for the bleaching process.   To many industry observers these three amount to a unbeatable combination.  As far as quality is concerned, only two things really matter - uniform moisture content (around 6%) and a level reel profile (minimal caliper variation).
Weyerhaeuser has apparently seen the same light as has GP and IP in that they have divested themselves of UFS (to Domtar) and are now talking about selling off their containerboard division and possibly even their lumber division.  They evidently are determined to be heavily focused on Fluff Pulp as the grade with the greatest chance for above-average profitability.
Lastly, if being in the FLuff Pulp business has so many benefits, do US producers have to fear competition from lower cost producers in Brazil, Chile, Indonesia or China?   While these other countries may have lower labor and wood costs, they do not have Slash Pine.   This is a highly unusual Pine species that favors the sandy soils and warmer climates of the Southeastern US (FL, GA, Alabama, Mississippi).  Slash Pine fibers have an unusually thick fiber wall which makes  it ideal for disposables.   These thick walled fibers produce exceptional bulk (void volume), pad integrity and especially TWA (Total Water Absorbency).    These attributes make Slash Pine the ideal fiber for all the various disposable products.  For a number of reasons we seriously doubt that these other lower cost countries will ever be able to develop even hybrids of Slash Pine that would challenge the US's leadership position.  Even if these other countries were successful in developing a fiber similar to our Slash Pine they would have to dedicate sufficient acreage to Slash Pine plantations and then would have to wait at least 20 years until the mature trees could be harvested.

Implications: The Uncoated FreeSheet market in North America is declining with the Internet and electronic devices being blamed for much of it. Is this really the case?  In spite of this decline selling prices have increased with few objections from  major buyers.  Is there any threat that lower cost overseas producers may try to enter the N.A. market?  Domtar and IP now control 60% of the market. Is this sufficient to maintain the proper supply/demand balance for prices to continue to increase? Several major moves have already been made in closing some mills, shutting down paper machines and transferring UFS grades to other mills. But what about those older, less efficient mills with their outdated pulp mills and lower production levels – are they candidates? Is this the next step if demand continues to decline?

Analysis:  

In 2000 the North American Uncoated FreeSheet market demand amounted to 15 million tons. In 2005 and 2006 it declined by an additional 856,000 tons and will likely decrease by another 500,000 tons in 2007 to a level of 11.5 million tons. With demand declining how much more capacity must be shut down to keep supply and demand in balance? Will capacity reductions be sufficient to raise prices on all the individual paper grades: Cut-size copybond, Offset (commercial printing plus books), envelope paper, tablet, carbonless, thermal imaging, and, Text & Cover?   Domtar inherited a number of  mills from Weyerhaeuser, which when added to their own mills brought the total to 16 facilities. With all this papermaking capacity at the various mills Domtar now is faced with the daunting task of improving efficiencies in order to realize their original projected cost savings.  How will this be done (besides closing older/smaller mills)?  Three strategic moves will undoubtedly be made over the next 12-18 months. (1) Combining paper grades on the most productive machines to achieve longer runs thus reducing the number of grade changes, (2)improving deckle utilization by moving those grades with fixed roll sizes to those machines where full utilization can be made of the machine width and (3) to reduce freight costs by moving grades to those mills closest to their markets (i.e. major printers or envelope producers).
Accomplishing these three strategic moves will certainly improve both productivity and profitability with the result that several more paper machines can be shut down.

International Paper has already discontinued UFS at Pensacola, FL and has announced plans to stop UFS production at their Bastrop, LA mill. Domtar has done their part by shutting down two small mills (Port Huron,MI and Port Edwards, WI) and shutting  the paper machine at Baileyville, ME.  Georgia Pacific has shut down three small machines in Oregon and, in addition, transferred the UFS grades at Wauna to another mill to free up that machine for tissue & towelling grades.   Boise Cascade has announced any closures but, in truth, they aren't a major factor in the general market since 85% of their UFS production goes to Office Max (675,000 tons/year).
 

What about the older, smaller mills with their outdated pulp mills that Domtar inherited from Weyerhaeuser- are they possible candidates for further contraction?  If the market continues to decline and the already mentioned strategic moves result in over capacity, who are the next likely candidates?  Two mills come to mind - the old small mill at Kingsport, TN and the mill at Rothschild, WI.  Both have pulp mills using outdated technology.....both mills do not have the production levels required for "economy of scale" and both mills, because of their age, carry a high maintenance liability.  But, of critical importance, is the fact that both mills must purchase outside pulp in order to supply their paper machines.  With NBSK at $870/admt it will be difficult to make money on UFS even with some of those grades selling for as much as $1000/st (i.e. copybond).

With rising prices on UFS does this now present an attractive market for lower cost countries like China, Indonesia and Brazil to begin shipping their own UFS grades to North America?   We believe this is unlikely for two reasons: (1) high sea and land transportation costs brought about by the fact that North American customers insist on delivered prices - where the seller must pay the inland trucking/rail costs.  In other countries pulp and paper must only be delivered to the Port where the customer then must pay to have the product transported to their mill. But, and this could be the overriding reason, these low cost countries all are experiencing rapidly increasing domestic demand.  The demand for copybond, textbook paper, envelope paper and all the others is growing at such a rate that little or no paper is left over for export.  China is an excellent example.  In 2002 their per capital consumption of paper was 22 kpp, in 2006 it had grown to 50 kpp and by 2010 the Government predicts it will be at 70 kpp.  The PRC has said that their country's total fiber demand by 2010 will be 81-84 million mt (all kinds of recovered paper plus market pulp).  With a pressing demand from their domestic market how could paper producers ever think about exporting?

The future looks bright for the major North American UFS producers in spite of the fact that demand is declining.  There are no low-cost rogue competitors likely to undercut the market and, even more importantly, Domtar and IP have enough options at their disposal to maximize profitability while maintaining the proper supply/demand balance.

Implications: Harvesting tropical hardwoods which have been submerged for 40 years may be environmentally beneficial but is this overshadowing the commercial considerations? Three Main Points: 1. Was nothing learned from the abandoned Camaroons pulp mill project that cost investors $250 million dollars? 2. To be commercially successful, logs must be processed - debarked and either sawn, chipped or made into veneer paneling. How will water logged wood respond? 3. Logistics & transportation pose a huge hurdle....how do you haul 100,000#, 6 foot wide logs? 3. Logistics & transportation pose a huge hurdle....how do you haul 100,000#, 6 foot wide logs? 3. Logistics & transportation pose a huge hurdle....how do you haul 100,000#, 6 foot wide logs?

Analysis: Western Africa's forests are filled with a broadly mixed variety of hardwood trees - estimates range from 65 to 80 different species of trees. The density of the wood varies from the "soft"hardwoods like poplar, aspen and cottonwood all the way to the very dense hardwoods like Sugar Maple and Locust. The number and proximity of each species varies considerably with the very real possibility that there may be far fewer desirable species like mahogany, teak and ebony than there are the lower density species (often known as "weed trees"). To be commercially viable,there must be enough of any of the desirable trees to accumulate and offer for sale. To think of offering thousands of trees of mixed species to a sawmill or chip mill (where these chips are bulk loaded and shipped to a pulp mill) would be similar to hosting a dinner party for 15-18 people where the menu consisted of a hundred small one-portion offerings. Sawmills and chip mills are always anxious to process trees of a single species since this allows them to specifically set up all the processing variables and then to offer a uniform product to their customers. So....the first question would be: how many of each species is there and how broadly scattered are they?

The second question would be ease of processing. Sawing waterlogged wood presents a variety of problems never encountered by conventional (drywood) mills. How easy a time will these existing saw/veneer/chip mills find it is to move into position 6 foot in diameter logs weighing as much as 100,000#? Or,will entirely new saw mills have to be built? And, how easy is it to saw through water logged wood? Will the saws wear prematurely or constantly bind unless higher horsepower motors are used?

If these logs go to a "chip mill" huge teeth reduce the whole log to small, beveled-edged chips 3/4" by 1/4" by 1/2". These chips are designed to be cooked in a modern pulp mill that must process as much as 12,000 mt/day of chips in order to produce the pulp mill's expected 3000mt/day production quota of pulp? Will waterlogged chips cook at the same rate as normal chips? Can the pulp mill mix regular chips with the waterlogged chips from these harvested trees, or,must they be kept separate? What a headache this will give any wood yard superintendent or pulp mill manager!

Let's suppose the company (Clark Sustainable Resources) decides to send all the logs to a saw mill for processing into dimension lumber (i.e. 2 x 4s, 2 x 10s) or for peeling into 4 x 8 foot panels? After the wood is cut it must be kiln dried to bring it to the proper residual moisture content. The biggest problem faced today in the kiln drying process is in producing warp-free lumber that will retain its dimensional stability over time. Warped lumber has little or no commercial value and the same goes for 4 x 8 panels. By the time sawmill cut lumber or panels get to kiln drying there is a considerable cost built into the material. Can you imagine the claims that could result when it was found that the cut pieces warped and had to be discarded? That is a risk no legitimate lumber company is willing to take.

Moving on, lets suppose CSR decides to sell the harvested, waterlogged trees to a chip mill that has been located near a deep water port. Of course, this chip mill would have to be designed and built to handle these huge, very heavy logs. Once the logs have been chipped they will be loaded on board dedicated vessels. How much heavier will these chips be than normal (dry) chips? Will the shipping company have to impose a surcharge? Once the chips have been cooked and delignified, what will the fibers be like? Will having been submerged for 40 years do anything to the fiber's strength properties? It has already been found that hardwood fibers with low viscosities (low degree of polymerization) tend to be very slippery and impossible to process across the wet end of a paper machine. Downtime on these huge, high-speed paper machines is figured at tens of thousands of dollars per hour. As with warped dimension lumber, the claims from a paper mill could be enormous.

Finally, there are the lessons learned from the failed Camaroon's project of 25-30 years ago when investors thought it would be hugely profitable to build a market pulp mill and utilize the extensive hardwood forests.

The overriding reason given for the abandonment of this project was logistics. To get from the deep water port to the forests meant building roads. Clearing all the land needed for the wood yard and pulp mill involved much more acreage than was first thought. But...putting in all the logging roads for the giant trucks to haul the felled logs back to the pulp mill proved to be an even greater problem. For one thing the forest kept trying to reclaim the land cleared by the pulp mill builders.

The final straw (the kind that breaks camels' backs) came when they analyzed the fibers in all the various trees. These fibers ranged from very short (0.5mm) to very long (2.5mm), very thin (10-12 microns) to very thick (40 microns), some with very thin walls (which easily collapse) to very thick walls (which make for coarse/grainy papers).

Paper makers greatly appreciate single species pulps like birch, eucalyptus, aspen and acacia. Having all these fibers with all different properties presents a myriad of problems.

To conclude this analysis, it should be reiterated that while the supposed safety and environmental benefits may seem considerable, in our opinion we believe there is little chance this project could ever be consistently profitable over a long period of time. That is, unless some exotic, very forgiving, nontraditional products or applications can be found for all the harvested logs.

Implications: Jouko Karvinen became CEO in 2006 and obviously has a different vision than his predecessor Jukka Harmala did 7 years ago when they purchased Consolidated Papers.  Last year the N.A. division generated 2 billion Euros and produced a profit of $295 million.   Does he see little growth in N.A. or is it that there are much more attractive options in Latin American market pulp mills and in Chinese paper mills?  Should other global players be considering these same opportunities? The sale of these 8 mills into which $250 million was poured in upgrading the operations now presents yet another opportunity for a private equity firm (Cereberus in this case) to acquire a renovated mill which it can operate in such a way as to maximize profits.  If these 7 mills had been part of NewPage (i.e.Cereberus) in 2006 they would have generated $4.1 billion in revenue and produced a profit of $583 million - this is according to AmericanCity Business Journals, Inc.

Analysis: This rather radical move for Stora Enso represents a backtracking on the global ambitions it expressed 7 years ago when it purchased these mills from Consolidated Papers.  What has changed to cause it to sell at such a loss?  It could be argued that they obviously see much better opportunities in Latin American market pulp mills and in papermills to supply UFS for the Chinese market.  Or, it may be that they see a shrinking market for higher quality coated papers in North America couped with more threats from lower costs countries like Korea, China and Indonesia.  Perhaps it a combination of all three.
Let's consider first their Latin American interests.  They already have a 900,000mt/year Bleached Eucalyptus pulp mill in Brazil as a joint venture with AraCruz (it's known as Veracel) and is considering a world class 1.1 million mt/year pulp mill in the southern state of Rio Grande do Sul - which will cost US$1.4 billion by the time it's finished.  Brazil, with its extensive eucalyptus plantations is recognized for its low wood costs and relatively low labor costs. The profit potential becomes most impressive if one assumes a cash cost for the pulp at, say, US$255 and a mill net on sales of $600+/mt. Their portion of the Veracel mill goes 100% to China to supply its four mills which produce UFS for the fast growing Chinese market.  The PRC has estimated that the per capita consumption will grow from its present 50 kg/person to 70 kg/person in 2010.  This will require the building of several dozen word class paper machines to meet the need.
Stora Enso obviously wants to be both a supplier (of BEKP for these machines) as well as a producer of A4Copybond, envelope paper, book paper, forms bond, tablet and offset paper for commercial printing.  These grades are all broad based commodities which will be consumed by China's fast growing middle class.  In other words, there's very little risk involved...their Brazilian Eucalyptus will constitute as much as 80% of the short fiber furnish for these paper grades and the paper produced will be sold into a huge expanding market.  The paper machines which have been installed since 1999 (from Metso and Voith) are state of the art in every way and capable of producing paper at costs/ton that other countries can only dream about.
While it may seem on the surface that Stora Enso has sold for a song a group of mills for which they perhaps paid too much, it is very possible that their decision to refocus on Latin America pulp and Chinese paper may turn out to be a very wise (and immensely profitable!) decision.

Implications: Domtar wants to be totally focused on (a) paper - Uncoated FreeSheet and (b) market pulp - hardwood, softwood and fluff.  They feel it's necessary to free themselves of 12 sawmills and 5 joint venture mills.  A newly formed company, Conifex, was prepared to take over all these mills and to pay Domtar $285 million. However, now the Nat'l Resources minister Claude Bechard has thrown a monkey wrench into the deal by saying the Province would withdraw the cutting rights to some 1.7 million cubic feet of timber.  Can they do this since there is no precedent for such an action? Better still, can Conifex unilaterally withdraw from the deal simply because the cutting rights to just two sawmills have been withdrawn? They still have the cutting rights to just over 3 million cubic feet of timber? What impact would this unprecedented move have on future investment in Quebec since all cutting rights could henseforth be in jeopardy?

Analysis: Is it possible this threat to deny the transfer of cutting rights to Conifex is really designed to get them to agree to start up the two shut mills at Malartic and Grand-Remous?  They've been shut since 2006 and 445 jobs have been lost in these two areas of high unemployment.  Perhaps Mr. Bechard believes he can trade a cutting agreement for a promise by Conifex to start up these two sawmills?
Another highly unlikely (but still plausible) motive could be that Conifex wants to renegotiate this $285 million deal in light of the stronger Canadian loonie ($1.02 to the greenback) and the continuing weakness in the dimension lumber business because of very slow home sales?  The deal was made back in June and perhaps prospects were more favorable then.
Mr Bechard has said other sawmills in the area are anxious to take over the cutting rights to the land in question and that he would like to see a re-distribution. 
Domtar had planned to retain a 20% stake in Conifex.   Is it possible Conifex wants to renegotiate this also and is the reason they were so quick to say the deal is now in jeopardy?  Domtar, on the other hand, says it plans to do everything it can be push this deal through.  There are no precedents for the Gov't to do anything like this.  Plus, the contract with Conifex clearly states that their can be no unilateral decisions (which this appears to be).

Implications: Market Pulp is a global commodity  produced in 19 countries totalling 58 million mt this year.  Will a new 1.1 million mt/mill upset the supply/demand balance and cause a downturn in pricing?   Eucalyptus (referred to as BEKP) has a new price of US$755/admt as of Sept.1st. which is $20/admt higher than the highest competitive hardwood (acacia, aspen, birch, high maple).  Some industry observers fear that this increased capacity will cause buyers to become hard nosed about paying the higher list prices recently announced.  This could start a downward spiral causing some producers to panic and immediately begin offering discounts. On the positive side is the robust health of the global paper business - especially Uncoated Free Sheet in China, India and other high population countries where new high-speed papermachines are consuming pulp (75-80% of this paper's makeup is hardwood) at very high levels and show no signs of slowing down.  And, new tissue machines will be consuming hardwood.

Analysis: When Metsa-Botnia announced plans to build this US$1.3 billion mill in Uruguay they actually were taking minimal risk since arrangements had already been made with fellow Scandanavian paper producers, Stora-Enso and UPM Kymmene to ship all their new BEKP to their mills in China.   Each company has a multi-mill operation in China with world class high speed paper machines employing the latest technology.  Just one of these new machines is capable of consuming over 125,000mt of hardwood pulp/year.  Therefore, just 4-5 papermachines can consume the total output of the new Uruguay mill.  With all the output going to China, buyers in all the other countries will never be offered any of this new capacity.  Therefore there will no impact on the supply/demand balance.
China's consumption of paper and paper products has grown from 22 kg/person in 2002 to the current 50-52 kg/person and is projected to grow to 70 kg/person by 2010.  It is for this reason that all the papermills in China already have laid plans to expand each of their mills by l and 2 machines each.  By 2010 the PRC estimates their country will require 81-84 million mt of paper making fiber.
Another growth area in China is in tissue and towelling.  APP in July announced the purchase of 40 high tech tissue and towelling machines. 24 to be installed on Hainan Island (which will effectively consume all the pulp from their 3300mt/day pulp mill) and 16 to be installed at APP's four major mainland paper mills.  
Not only is there tremendous growth in personal consumption of paper and tissue but there is a corresponding growth in papermaking capacity.  This bodes extremely well for every pulp producer around the world!
The government in Uruguay has announced its intentions to set aside 25 million hectares in the western part of their country for eucalyptus plantations.  This is quite sufficient to supply the needed chips for at lease several more pulp mills and would indicate the willingness of the government to make Uruguay a major pulp producer to the world.

Implications: Dissolving pulp has been in short supply for at least a year.  Prices is January for commodity rayon/viscose pulp were US$800 but now in September they top $1100/mt.  Producers are shipping every ton they can produce.  SAPPI-Saiccor in South Africa and RGM's BahiaPulp in Brazil are the two largest and two lowest cost producers but both use eucalyptus as their fiber source. will the reopened Cosmpolis, WN mill be able to compete if the market ever softens. Mills in BC have had to take downtime because of chip shortages and the Union has threatened to shut down 31 sawmills.  Has the Cosmopolis mill taken all this into consideration and where will they be sourcing their fiber?   This is a serious problem and the question has to be asked "where are their long term fiber supplies coming from" The predominate tree species in the mill's area is Douglas Fir and Hemlock.  Will these old trees provide the long/higher strength fibers to carve out a value-added niche in the dissolving market?

Analysis: When the mill closed Weyerhaeuser made it clear that it was an old mill with high maintenance libility, produced only 500mt/day (very small by world standards), and had some serious environmental and labor union problems.  In other words - it was no longer viable.  It now appears the State Dept. of Ecology is prepared to issue the needed permits for the mill to reopen.  The union has done its part by agreeing to a lower wage scale and more accomodating work rules.
Having been able to purchase the mill for much less than replacement costs (i.e. pennies on the dollar), Charlestown Investments will be able to upgrade the mill's infrastructure to reduce needed maintenance.
Mr. Basset of Charlestown Inv. has announced plans for a doubling of the mill's capacity within the first two years of operation.  This will greatly reduce the cost of overhead/ton produced and bring in other economies of scale.
The mill will start up on "commodity" (i.e. less demanding) pulp for the hungry Asian rayon textile market.  A year ago rayon-grade dissolving pulp sold for US$760/admt.  By January the selling price was up to $800 and now it has jumped to $1100+/admt with no signs of levelling off.   Few industry observers foresaw this growth in rayon textiles.  China, Indonesia and India are the three major rayon textile producers.
Mr. Basset has made it clear the mill will not remain in the rayon grade pulp business any longer than is necessary before it moves up to a value added pulp grade capable of producing cellulose di-acetate for the cigarette filter tow business in China.   For this the stronger, higher degree of Polymerization hemlock and douglas fir fiber should be quite beneficial.

Implications: Viet Nam has SE Asia's fastest growing economy, growing at (conservatively) 6%/year and by other estimates at up to 8% through 2010 when the government estimates it will require 2 milliion mt of fiber.  914,000mt of paper will have to be imported here in 2007 as well as importing 150,000mt of market pulp.  Their paper industry in many cases uses non-wood fibers such as bamboo, bagasse, kenaf and rice straw.  However, many high strength papers will require more stronger, more sophisticated pulps.  Domestic producers only meet 37% of current demand. The question remains: who will the investors be who finance the many pulp and paper mills needed if the country is to be self-sufficient? The Government has just been reorganized with a number of ministerial changes.  To many people this signals a chance in Hanoi's attitude toward outside investment and also the need to develop a domestic industrial base.

Analysis: Viet Nam has 84 million people and an old, out-of-date paper industry made up of salvaged paper machines 100 years old.  The government is planning to invest nearly US$6 billion into the development of a modern pulp & paper industry between now and 2020.  They have already planted 120,000 hectares of cajeput trees (an acceptable papermaking fiber plus leaves that produce medicinal oils and a spongy bark used as a packing material).  The climate is very conducive to planting fast growing eucalyptus and acacia trees.  China's Lee & Mann recently announced plans to build a containerboard mill that will produce 320,000mt/year of containerboard and 150,000mt of unbleached pulp.  They hope to have the mill up and running by the last quarter of 2008 or the fist quarter of 2009.  The company pointed out that Vietnam is a relatively low cost country with attractive shipping costs to nearby potential customers and with a climate that supports fast growing trees.  To meet the projected need of 2 million mt by 2010 a number of multinational companies will have to invest in as many as 12-15 major facilities in the very near future.  These would seem to be excellent investment opportunities.

Implications: Thailand is surrounded by countries needing to import fiber to meet their domestic paper & board requirements - Laos, Cambodia, Viet Nam, Malaysia, Myanmar Republic and of course China and India.  With low labor rates, fast growing plantations and favorable transportation costs, this country is poised to become even bigger in pulp and paper production. The Government is very supportive - having abolished control of pulp exportation, providing tax exemptions for imported machinery and production equipment, offering the producers income tax exemptions for 3-8 years and increasing import taxes from 1 to 10% to protect local production. The country has grown rapidly to where it has 6 pulp mills and 60 paper mills.   All are profitableor close to being profitable.  There is need for additional expansion since the Government foresees their domestic needs tripling between now and 2015.   Considerable investment will be needed.

Analysis: In 2007 Thailand's economic growth is projected to be in the range of 3.5-4.5%.   There is growing domestic demand driven by manufacturing growth and rising living standards.  But export growth is also expected to be robust.  In 2000 the country was heavily dependant on pulp imports with 150,000-170,000mt imported every year.  Not only did the pulp production expand (by 2009 it will reach 4 million mt) but the quality increased to the point where it is now fully competitive.  It is now exported to 30 different countries.  Profits have been very respectable from each of the major companies like Thai Cane Paper (TCP) a major kraft paper producer, Phoenix Pulp & Paper (PPPC)-a leader in the production of short fibered pulps such as eucalyptus, bagasse and bamboo and the largest - Siam Pulp & Paper who is a producer of both pulp as well as printing & writing papers.  The other major producer is Advance Agro (AA) who produces uncoated printing paper.   One of the country's major engineering companies, King Wan Corporation has announced plans to enter into a joint venture to build yet another pulp mill.
These mills all draw their wood supplies from plantations in the northeastern part of the country which are being judiciously expanded.  The Government estimates 20 million hectares of eucalyptus plantations will be needed to supply the needed 55 million cubic meters of wood needed by 2015 (currently their production is at 18 million cubic meters).
The Government has provided considerable incentives to promote expansion including tax exemptions on imported machinery, income tax exemptions for producers, taxing pulp, paper and board imports, eliminating controls on exports and eliminating taxes on all pulp exports.
Thailand's non-wood pulps are becoming increasingly popular among environmentally conscientious customers all around the world who want any fiber that does not come from trees.  This has made the country's bagasse (from sugar cane), kenaf and bamboo pulps in short supply and selling for premiums over other hardwood pulps.
The pulp, paper and printing industry is expected to continue to grow since the Government is determined to boost exports and promote the country as a printing hub before 2014.  The country's economic growth is anticipated to surge by 5.0-6.0% and it is hoped the pulp and paper industry will be a strong contributor.

Implications: Tasmania's location makes it a prime candidate to be a major supplier to emerging markets in India, SE Asia and the Pacific rim. With 5 million hectares of E.Nitens plantations already producing chips (currently only for export), it is only natural to construct a local pulp mill to produce a value added product - in this case Bleached Eucalyptus pulp. The world's appetite for eucalyptus pulp for papermaking (especially UFS papers) is expected to continue to grow and even accelerate as countries' middle class (the consumers) continues to grow.  India already has 250 million in its middle class and China is not far behind. A4 (copybond) papers alone can consume the output of many modern high-production paper machines which by their nature require high quality pulps rather than wheat straw or rice straw pulps.  These machines are already being built or are in the final planning stages.  Pulp production must keep up!

Analysis: Author Richard Flanagan is distressed over the loss of old natural growth forests and wishes to preserve them in their entirety.  And yet a natural growth forest is a sickly, dying collection of trees - shutting out sunlight to younger trees and preventing any undergrowth that is necessary to support wildlife.  Over the years lightning has succeeded in erasing these sickly forests so that a new beginning can commense. In the USA there are now more healthy (plantation grown) trees than when Columbus discovered it.   These old natural growth forests must be clearcut (he calls it clearfelling) in order to prepare the ground for highly advanced young eucalyptus trees to be planted.   They become a "crop" that can be harvested on 11-12 year cycles.  As these trees are thinned they keep the canopy open so that sunlight can filter through creating a verdant undercover of bushes and plants on which wildlife can feed.
Gunns already has 5 million hectares of eucalyptus plantations from which they are  exporting green chips (green=half water).  Their new mill will consume 4 million hectares leaving one million still for export. Author Flanagan claims Gunns will proceed to clearfell an additional 2 1/2 million hectares of old growth forests.   I question this figure as being impractical since it would seem to be greatly in excess of what is needed.
Gunns intends to build a state-of-the-art mill duplicating what is being built in Uruguay and Brazil.   These mills are in full compliance with the most rigid of environmental restrictions.  For example, no elemental Chlorine will be used in bleaching - only Chlorine dioxide which has been shown to have dioxin/furan levels below 1 part per billion (often called non-detectable).  Yet Flanagan erroneously says Gunns will revert to elemental Chlorine.  Absolutely not!    And, as far as water is concerned, today's pulp mills are required to only put potable water back into the rivers....no matter how filthy they were when brought in.
Tasmania is Australia's poorest State.  Are they to remain this way, foresaking industrial progress, in order to maintain 100% of the remaining natural forests?   Gunns only intends to use a fraction of these forests....not clearfell them all in their entirety.  Why can't environmentalists be content to have a "natural growth Federal forest" for people to visit?  Must the entire country be kept in a pristine state?   The Gunns pulp mill will produce over US$650 million/year in revenue plus employment for hundreds of people.   Eventually it's possible a papermachine may be added providing more employment, more export dollars and eliminating the need for Tasmania to import UFS.
This pulp mill will cover about 3 square kilometers (2 sq.miles) and yet author Flanagan writes as though it will cover half the Island.  The mill will produce 1.1 million mt/year of high quality, single species, eucalyptus pulp - the preferred papermaking fiber by most of the world's modern high speed machines.   These machines are being installed in China and many other countries.  The business world and society are counting on the market pulp industry to provide the fiber for these machines....however Flanagan says "NIMBY" - Not In My BackYard!.  As we began, Tasmania will be a relatively low cost producer, have an excellent quality pulp and have an attractive ocean freight rate to a number of emerging markets. With 5 million hectares already producing chips, isn't it logical that the next step is to build a market pulp mill?   We certainly think so!