Summary
Domtar has made a positive strategic move to reduce its UCF (uncoated freesheet) capacity at a time when this paper grade is shrinking. At the same time it is increasing its position as a Fluff Pulp producer - a market that many estimate is growing 6-7%/year.
The Plymouth mill will, by the 4Q of 2010 be producing 444,000mt/year of Fluff Pulp
They will reduce UCF production by 210,000. This follows IP announced shut down of their Franklin, VA mill which produces 600,000st/year.
Analysis
The North American UCF market has been steadily shrinking...from 12 million st/year just a few years ago down to the current 10 million/year. With the exception of Thermal Imaging which is growing by 6%/year, all UCF grades are in decline - copybond, envelope, offset commercial printing papers, trade and text book, tablet, CPO and carbonless. This reduction is being blamed on (a) the internet and (b) the poor economy (c) reduced export opportunities. IP has a 25% share of the N.A. market, Domtar a 35% share. Working in concert they will be reducing overcapacity by slightly over 800,000st/year. This will undoubtedly help to maintain the current pricing structure. $40/st increases were announced for the 4Q but it may prove difficult to get all customers to agree to accept this increase at the full amount.
Fluff Pulp on the other hand is growing globally by about 6%/year - especially in emerging countries, the middle east and Latin America. Now only is this pulp grade growing but pricing has been on a par with the bellweather NBSK grade. The US is the major producer of Fluff Pulp in the world - having as much as an 80% market share. The major producers, Weyerhaeuser, GP and IP all produce over 1 million mt/year. The other producers are Buckeye, Rayonier, AbitibiBowaters, and Smurfit-Stone at their Panama City, FL mill. Last month Alabama River announced their intention to begin making Fluff Pulp at their Claiborne, AL mill but production is not expected to begin until 2011. Domtar's intention is to export most of their production since their mill at Plymounth mill is in NE North Carolina and fairly close to deep water ports. It is expected to cost the company $73.5 million to convert the mill to Fluff. The paper machine will be shut down but all the employees will be retained.
All in all this is a very positive move for Domtar.
