Summary
IP has said there is excess capacity in both containerboard and uncoated freesheet (UFS). Now they've made a significant move to correct this situation by shutting down 3 papermills. plus one large machine in Oklahoma.
Containerboard capacity was reduced by 2.1 million mt. Uncoated Freesheet by 600,000tpy. Coated paperboard (SBS) by 140,000 typy.
The mills are located in Franklin, VA, Albany,Oregon, Pineville, LA and the one paper machine in Valliant, OK
Analysis
IP recently purchased the entire containerboard division from Weyerhaeuser which included 6 paper mills and 83 box plants. It was inevitable that shutdowns would occur since there undoubtedly were redundancies with IP's existing mills and box plants. Many thought the shut downs would mostly involve former Weyerhaeuser properties but IP evidently did a very thorough analysis of mill efficiencies, productivity and potential profitability. It would seem that Albany,OR, Pineville, LA and the one machine at Vallient did not pass the test. Containerboard's four major grades are (1)linerboard (2) test liner (3) corrugating medium and (4) carrier board (CUK) for beverages.
This overcapacity of containerboard stems from the fact that North American demand has continued to decline as manufacturing moves off shore or customers reduce capacity because of the soft economy. IP will still have 10 million tons of N.A. containerboard capacity remaining which assures present customers will not be impacted. This reduction in capacity is certain to be greeted enthusiastically by the other producers - GP, Smurfit-Stone, Temple Inland, PCA and Norampac. As an example of contraction in N.A. there is now only one linerboard mill in Canada - Canfor's mill at Kitimat, BC. Seven mills have shut down since 2002. In the future the US and Canada will have to be treated as one market.
The other major paper grades effected are uncoated freesheet (UFS) produced at the Franklin, VA mill where 1100 employees produced 600,000 tpy of paper that went into Copybond, Offset printing papers, text and trade books, envelope and tablet grades. The UFS market is also experiencing a decline in demand. In just a few years demand has shrunk from 1 million st/month to the current 850,000 tpmonth.
If the price increases announced last month are to hold it will be important for excess capacity to be reduced. IP has definitely made a major step forward in this regard.
The other grade produced at Franklin is coated paperboard also known as SBS (solid bleached sulphate) which is used in food packaging, cosmetics, pharmaceuticals, cigarette cartons etc. IP will be moving these orders to their other mills producing SBS. IP will still have 1.7 million/st of SBS capacity so again customers will not be impacted, and, will still have 2.6 million tons of UFS capacity.
IP has definitely led by example in reducing America's overcapcity. It's likely that this will encourage other producers to consider similar moves.
