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New England: a paper industry microcosm? New England's paper industry faces more than its share of challenges, but renewed investment may help the region become more competitive.

With aging assets and an uncertain future, the New England paper industry faces major challenges in the coming years. However, the prospects are not all bleak. Renewed investment and a better business climate could help regenerate growth in this historic papermaking region of the Northern United States.

Nothing better illustrates what is happening in the New England pulp and paper industry than examining what is occurring in Maine a microcosm of the entire industry.

The pulp and paper industry in Maine is the largest in the region and the third largest in the United States. Although the industry in Maine has a long history, it was only 20-25 years ago that the industry became sensitive to its old capital assets and the need to become more competitive. Unfortunately, the industry could not give up on its existing machines. It therefore has looked to produce more specialty papers.

This strategy worked for a time in a regional economy. It may have even succeeded in a national economy. But the pulp and paper industry is now a global economy where old machines have a hard time competing. For example, Asian copy paper is now sold by North American paper merchants across the United States.

Jeff Toorish, former president of the Maine Pulp and Paper Association and currently president of MSG Communications, believes that the industry's current problems have their roots in decisions made by large corporations 20-25 years ago. In the 1970s, these corporations looked at Maine and New England as "tough places to do business." Why?

* Because Maine's winter weather is so harsh.

* Because Maine ranks among the bottom lot states friendly to business.

* Because Maine passed environmental legislation that exceeded the standards of the Federal Environmental Protection Agency.

As a result, companies shifted their internal capital to other mills and to other states where the weather was warmer, the business climate friendlier, and the legislatures more helpful. The mergers, consolidations, and even bankruptcies of the past 5-7 years have their roots in decisions made decades ago.

In the present, mergers, consolidations, closures, and bankruptcies have become an almost daily occurrence. Venerable institutions such as Great Northern Paper (GNP), with two mills in Millinocket and East Millinocket, Maine, passed through several corporate hands and only recently landed in bankruptcy court. GNP is now The Katahdin Paper Co., a sister division to Nexfor Fraser, whose owner, Brascan, bought GNP's assets for approximately US$ 100 million.

CONSTANT CHALLENGE

A listing of the pulp and paper industry problems in Maine and New England reveals persistent issues that are a microcosm of the industry as a whole: lack of capital, overcapacity, worker inflexibility, strict environmental regulation, and lack of flexibility in responding to a global economy.

Over the last 3-5 years, New England has seen mergers, consolidations, bankruptcies, and shutdowns. Mills have decreased in size, changed capacity and ownership, and some have become largely bereft of the capital investment needed to keep them up and running--let alone competitive--in a global economy.

One persistent issue is lack of capital. When the industry discovered it was part of a global economy, it was so entrenched in its old ways of doing things that it could not make the changes necessary to be successful, according a leading business analyst. Nobody wanted to make the large capital investment needed to compete.

No matter who is to blame, the pulp and paper industry in New England and in Maine is struggling. Competition is coming from Asia and South America and the Scandinavian countries whose production of pulp and paper goes to export. In fact, striking similarities exist in Maine and Finland that are so consistent as to be eerie.

Peter Duncan, executive director, University of Maine Pulp & Paper Foundation, noted that Maine and Finland both have vast forest resources, plentiful water; abundant energy supplies, and skilled workers. Although the taxes paid by the pulp and paper industry in Maine are high, they pale in comparison to the almost 70% tax rate for both individuals and businesses in Finland.

Industry in Maine claims that Finland receives state support for its workers and its operations. For major capital investments, the Finnish government plays a major role in securing needed capital. Industry and government support in Finland are in direct contrast to that of Maine where the problems are not only capital investment but also rising health care costs, soaring workmen's compensation costs, and stringent environmental regulations. All these add nothing to productivity, the consultant said.

What makes the Finnish pulp and paper industry a success while that of Maine is challenged? Is it stringent environmental regulations? Maybe, but Duncan says the only difference between Finland's environmental expenses and those of Maine is that the Finnish companies did not spend as much at one time on the environment as did their counterparts in the United States.

Is it because Maine's forests are inferior to Finland's? Hardly, but one must wonder why the Maine industry does not do a better job of managing and using its forest resources, noted one observer. Why does the industry complain about the high costs of wood chips when it sells forestlands to raise capital to meet the bottom line in the next quarter?

Some observers question key management decisions made in recent years. For example, Great Northern Paper spent nearly US$ 160 million to rebuild PM 11 a couple years ago to produce supercalendered paper. The timing of this rebuild was inopportune at best and disastrous at worst, the consultant noted. The machine mostly ran at half capacity, and it hurt another Maine mill--Madison Paper--that produced SCA + paper.

This business decision helped lead the company to bankruptcy. The former GNP recently started operations again when Brascan purchased its total assets. The mill has a new name and now employs about 450 instead of 1100 workers. Instead of having eight machines running, it is running two--PM 4 and 5--producing directory paper. The new owners say that they will start PM 11, but they will not produce SCA paper on it.

A LIST OF PARTICULARS

When the industry looks at itself in New England, it finds a microcosm of problems facing the industry over the United States. Two of the biggest mills in the state, International Paper Co. mills in Jay and Bucksport, both need a "capital infusion" to stay competitive, according to industry, observers. The Bucksport mill was among the first in the world to produce lightweight and ultra-lightweight coated papers; though how long it can continue to operate without an influx of capital investment is questionable, observers said.

On a positive note, International Paper Co. said that it will spend about US$ 109 million to upgrade the PM 3 coated paper machine at its Androscoggin mill in Jay, Maine, provided the company receives "tax increment financing" on the investment. Jay residents voted to ok this financing on June 23, 2003.

SAPPI-North America, which purchased the S. D. Warren assets from Scott Paper Co., has been closing down machines at its Maine mills. The Westbrook mill has reportedly been on the sales block for several years. The Somerset mill is among the biggest in the United States and ranks as a global high-tech mill, but it has not started up a new machine since 1987.

Some smaller mills in Maine and other New England states am not doing well. Eastern Fine Paper, a privately owned company with mills in Lincoln and Brewster, was in court in June trying to convince creditors and a judge that its reorganization business plan was viable. In Massachusetts, Merrimac Paper Co. filed for Chapter 11 bankruptcy protection in March. American Paper Mills in Vermont filed for similar protection.

The news is not all bad. While the number of people working in the pulp and paper industry is down, the output per worker is up very significantly compared with production output of only 10 years ago. In addition, a comparison of the pulp and paper industry to other struggling manufacturing industries in the region, such as textiles and shoes, reveals significant differences.

THE FUTURE

Predicting the future for the pulp and paper industry in this region of the country is not an enviable task. The industry faces some formidable obstacles, not the least of which is past business decision mistakes in its bid to be competitive in a changing global marketplace. The industry does have some positive resources, such as wood, water, and environmental permits.

The Maine Pulp and Paper Association also notes that Maine's paper industry still accounts for 24% of all manufacturing jobs in the state, pays the highest wages (an average of US$ 1000/week), and accounts for direct and indirect wages of US$ 1.7 billion.

Also, investment is continuing. Brascan, the new owner of Katahdin Paper Co., is making significant investments at the aging Millinocket and East Millinocket mills. Brascan has also implemented a significant cost cutting program to make its Fraser Papers Edmundston/Madawaska operations, which straddle the border between Maine and Canada, more competitive.

Those interviewed for this article say that the New England paper industry is facing difficult challenges, but is far from dead. It is an industry that deserves special attention from various stakeholders including management, labor, government, and environmental interests, they say.

Two things need to happen in the immediate future if the Maine pulp and paper industry is to remain competitive. First, the industry must have some tax breaks on the needed capital expenditures it must make on its existing equipment and resources. For this to happen, the governor and the state legislature must work more closely with the pulp and paper industry to pass a "pro-business" agenda that will make doing business in the state easier.

Second, the major stakeholders in the industry cannot follow separate agendas regarding the industry. A symbiotic relationship must exist between management, labor, government, and environmental activists that provides more effective results from working together than from pursuing separate actions.

Although many small specialty paper producers will not have the capital to survive the current downturn in the industry, the larger mills may still operate 5, 10, or 20 years down the road. "Maine's paper mills will survive. The question is in what shape and form," concluded a former paper industry executive and current consultant. S!

IN THIS REPORT. YOU WILL LEARN:

* Strengths of the Northeast U.S. pulp and paper industry.

* Weaknesses of the industry.

* Future prospects for growth of the industry in that region.

ADDITIONAL RESOURCES

* Additional articles about Maine's pulp and paper industry are available on Solutions! magazine's "Online Exclusives" section. To access the articles below, go to www.tappi.org, click on "Solutions!" and click on "Online Exclusives" for August 2003.

* University of Maine supplies the industry

* Old Town mill gets a second chance at life

* A local business owner's perspective on a mill town

MAINE'S PULP AND PAPER INDUSTRY: AN OVERALL PERSPECTIVE

A review of the industry in this region reveals some positive attributes, a few persistent problems, and a need for some changes.

New England in general, and Maine in particular have abundant natural resources--wood, water, and in some cases power. Although the public and the government have castigated the industry's environmental record, the industry has made a great investment of time and money to cleaning the environment. In addition, the industry offers a highly-skilled, well-trained workforce.

Simultaneously, the industry's "old, non-competitive" papermaking equipment makes the industry seem like an albatross on the local and state economies, some observers say. Indeed, many people living in states such as Maine believe the pulp and paper industry is going the way of textiles and shoes.

The Maine Pulp and Paper Association has another view of the industry, The association notes that Maine's paper industry accounts for 24% of all manufacturing jobs in the state, pays the highest wages (an average of US$ 1000/week), and accounts for direct and indirect wages of US$ 1.7 billion. This industry may be facing some problems, but it is far from dead. It is an industry that deserves special attention from the various stakeholders, including management, labor, government, and environmental interests.

Over the years, management and labor in Maine have tended to view each other as antagonists rather than as two different parts of the manufacturing puzzle. State government and environmental activists have been the only things that actually brought paper industry management and labor together and then only to fight a common foe that appeared bent on destroying rather than regulating the industry.

On the positive side, Maine's current governor, John Baldacci, has taken a proactive approach toward the industry. On his first day in the job, he faced the bankruptcy problem at GNP and within four months he found a new owner. He worked closely with the CEO of Georgia-Pacific Corp., A.D. "Pete" Correll, to reverse the closing of the Old Town mill. At the University of Maine's Pulp and Paper Foundation meeting this past April, he met individually and collectively with the industry's senior leaders to listen to their problems and concerns. He then promised solutions.

JEROME A. KONCEL, Contributing Editor
COPYRIGHT 2003 Paper Industry Management Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2003, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Regional Report
Author:Koncel, Jerome A.
Publication:Solutions - for People, Processes and Paper
Date:Aug 1, 2003
Words:2178
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