Pulp & Paper Industry in North America - consolidation and contraction

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!