International Paper Teams up with Ilim Pulp in Russia

Implications: Russia has vast untapped natural resources - woodlands plus fresh water. Ilim Pulp has four older soviet era mills in need of a large cash infusion.  Outside investors were understandably reluctant to risk up to a half billion dollars.  Ilim produces 60% of Russia's market pulp which goes to China, Eastern Europe and the growing domestic market.  Their mills are in western Siberia.  While profitable, Ilim was not able to generate the large amount of capital needed to update their mills and significantly increase production capacity.

International Paper not only had the money but the experience in that they have successfully owned and operated a pulp and paper mill at Svetogorsk (near St.Petersburg).  They are the only large US pulp and paper producer who knew the risks and how to handle them.

Analysis:

International Paper has recently completed joint venture deals in China and Brazil while significantly divesting themselves of a number of older North American mills. They are now the US's #1 producer of Uncoated Freesheet. They will soon have that title in Brazil. Their Kwidzen, Poland mill has become one of their leading mills as far as productivity, cost-containment and quality. The Svetogorsk mill near St. Petersburg is in the same league while concentrating more on UCF and packaging papers. IP saw in Russia an opportunity to join with an established producer of market pulp who needed cash to increase badly needed production capacity. IP put up US$400 million to acquire a 50% ownership of Ilim Holdings - now the largest foreign-domestic alliance in the Russian forest sector. Russia's domestic market is now projected to grow by more than 5%/year through 2010. In addition China's demand is also expected to grow at more than 3%/year. Purchase quantities are so great that entire trainloads can be shipped, overland, directly to China's world class, state-of-the-art paper mills. Russia has presented itself an ideal supplier - having limitless forests, abundant fresh water, low labor costs but well trained, highly motivated employees living in remote areas. IP would appear to be the ideal partner.