Year of the dog: will it be the industry's best friend?

According to Chinese zodiac, the year 2006 is the Year of the Dog. People born during the Year of the Dog are characterized as born leaders, honest, noble, charismatic, loyal, and keepers of secrets. However, they can be emotionally cold, distant, stubborn, and care little for money. Health and business success will fall on the Dog during the year but he or she should avoid making any loans to friends or family. Some famous "Dog people" are: Bill Clinton, Harry Houdini, Shirley McLain, Judy Garland, Sylvester Stallone, Donald Sutherland and Michael Jackson. (Previous Dog years were 1994, 1982, 1970, 1958, 1946, 1934)

What will the Year of the Dog bring for the paper industry? In 2006, new and/or renovated pulp and paper companies will be born due to spin-offs and private equity activity--especially in North America. In terms of investments, privately owned companies are in the forefront, especially in Europe where, for example, Myllykoski is building a new paper machine in Eastern Europe and SAICA seeks to start its new liner and medium machine during the latter half of 2006.

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NORTH AMERICA: RESTRUCTURING

In North America, increased financial reporting requirements under the Sarbanes-Oxley Act are considered to be a burden, especially for smaller public companies. It will be interesting to see whether some of the smaller public companies seek to change their ownership structure as industry giant Georgia-Pacific did by agreeing to a buyout from privately-held Koch Industries.

During the Year of the Dog, some 5 million metric tons of new paper capacity will start up; of this total, 60% will be in China, 20% in Europe, and 20% in the rest of the world. For North America, the New Year will be a year of conversions away from declining or mature businesses and start ups of small tissue machines. In 2006, the market pulp industry more clearly than ever will be moving to the Southern Hemisphere, as a total of 1.8 million metric tons of new capacity is due for start-up in Argentina, Brazil, and Chile.

UNCOATED FREESHEET CHANGES

Uncoated freesheet industry restructuring will continue, driven by maturing markets and increased imports into the United States. U.S. imports in 2006 are estimated at 0.5 million metric tons (mainly from Asia and South America), which is 4 to 5 times higher than 10 years ago. Imports will be boosted by Riaupaper's new 415,000 metric tons/yr paper machine, which is slated for a 3rd quarter start up in Indonesia.

North American uncoated freesheet suppliers are adjusting to the changes. Weyerhaeuser is closing down its 270,000 metric tons/yr PM1 in Prince Albert, Saskatchewan, Canada; International Paper is converting its PM5 (320,000 metric tons/yr) in Pensacola, Florida, USA to manufacture linerboard; and Boise's Wallula, Washington mill has announced a conversion of PM3 (225,000 metric tons/yr) away from uncoated freesheet to release base.

NEWSPRINT EXODUS CONTINUES

Exodus from newsprint manufacturing continues, as paper machines will be converted into SC paper (Irving) or lightly coated mechanical papers (Bowater). U.S. newsprint purchases are estimated to be lower (by 0.4 million metric tons) and exports to be slightly below 2005 levels, but announced capacity withdrawals balance the situation and operating rates are expected to be 97-98%.

Some small tissue machines will be replaced by midsize machines and backward integration of converters into jumbo rolls will take place on a smaller scale in 2006. There will be ample supply of, for example, eucalyptus pulp for expanding tissue producers. Cenibra, Arauco, and CMPC have major investments materializing in 2006; moreover, the year 2006 means construction work and equipment installations for Aracruz and Veracel, and according to plan they would then be ready in 2007 to start delivering additional volumes of cost competitive BHKP to world markets.

Here's to a well-heeled 2006!

Note: This article is part of a series by Jaakko Poyry Consulting, Tarrytown, New York, USA, a provider of consulting services.

JAAKKO POYRY CONSULTING

Contact Ms. Soile Kilpi by email at [e-mail], or by phone at [phone].

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