Sobered up?

The news front the recent Paper Summit in Atlanta was, not surprisingly, sobering. In fact, we heard so much of this news that we should all be as sober as judges. Still, much of the Paper Summit focused on ways out of our current dilemma. One session, "Beyond Today's Paper Machine," offered good insight into where the industry is today and where it could--or should--be going.

Mark Wilde of Deutsche Bank (or at least his disembodied voice via a remote telephone hookup) was the first to address the live audience and others "attending" by way of a webcast. Wilde noted that the severe 2000-2001 downturn in the North American paper industry was the first two-year decline in 25 years. He ticked oft a now familiar checklist of "challenges:"

* Strong dollar is hurting the U.S. industry

* Demand growth is slowing in Europe and Asia

* U.S. paper and board demand growth is lagging GDP growth

* Plastics and other materials are tougher competitors

* Growing domination by Europe in coated paper and by Brazil and Chile in market pulp

Despite the bad news, Wilde said the U.S. industry will see a cyclical recovery and that the initial rebound may be powerful due to low inventories, still the "follow through" will be weaker; he said, and the industry can only expect long-term trend growth of 1 to 2%. Plus, the continued strong dollar has changed the U.S. paper industry trade position--perhaps permanently. More consolidation and rationalization is inevitable, particularly since industry leaders Stora Enso and International Paper have small market shares compared to their counterparts in other process industries. If there is no export rebound, further asset closures ill North America are inevitable.

What are the solutions? Wilde said that the paper industry must take a different approach to capital management, suggesting that "we are too fixated on the paper machine itself." He noted that independent paper and converters, with modest capital investment, enjoy the best margins in the industry, both in up and down cycles. They do that by providing customers with solutions, an idea that is foreign to many paper manufacturers who "are weak in their knowledge of customers and what they need," said Wilde. "I'm struck by the amount of paper moved through brokers who earn good profits with little or no capital in the business."

Wilde said that paper is no longer an essential good since there are so many alternatives. "We don't need paper anymore. Instead, we must look at it as an intermediate good that allows people to solve problems cost effectively."

Other speakers echoed this theme. They noted that "commoditization" of many paper grades has not and will not deliver value, and that paper companies must understand customer wants and needs. In short, companies must move from delivering a reel of paper to delivering what customers want--even before they know they want it.

Gary Helik, director of Tradition Financial Services, noted that running a paper mill requires predictable inputs and outputs, but that standard 30 day price windows create "bad price signals that lead to bad business decisions." Price has an enormous--and largely unpredictable effect on returns. Other major factors, such as capital investment, fiber, chemicals, energy, and labor costs, can be predicted over much longer terms.

Helik suggested that wider use of contractual disciplines (hedging) can help paper companies better manage price movements. By using 1- to 3-year supply contracts for paper and board, manufacturers can improve predictability--and profitability. In the future, the industry must move from "forecasting" to "futures" using transaction-based markets, said Helik, helping buyers and sellers make better business decisions.

These ideas are a good starting point. However, the industry also must revolutionize one of its primary assets--the paper machine. In next month's column, I'll look at what speakers said about the paper machine's future--and if it has one.

ALAN ROOKS Editorial Director; [e-mail]