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North Central U.S. faces challenges, takes action.

"Times changed, people came and went, and layoffs did not happen," the grandfather and old-time papermaker told his grandchildren. Economists and businesses are beginning to doubt the veracity of those words as the Midwest U.S. paper industry struggles in today's depressed pulp and paper business.

These times are not the best for the pulp and paper industry in the Midwest (North Central) region of the United States. The industry must deal with a depressed market that produces low prices for its products and high prices for its energy and labor. It also faces stiff global competition. Despite these daunting challenges, the industry possesses a tough, determined attitude. It believes it has a future and that actions speak louder than words for the Midwest industry. The industry's leaders say that now is the time for greater cooperation among stakeholders, stronger support from state governments, and courage to make the tough decisions about fixed costs designed to insure the future.

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The Midwestern states include Minnesota, Iowa, Illinois, Michigan, Indiana, Ohio and the nation's largest paper producing state-Wisconsin. As with the entire industry, the paper industry in this region has changed dramatically over the last five years. Mergers, consolidations, and new owners are customary. Machine and mill shutdowns are a common occurrence. Significant layoffs occur almost every quarter. The pipeline of students graduating from pulp and paper schools and joining the industry is decreasing significantly.

A large influx of foreign ownership of Midwestern pulp and paper mills separates this area from other regions of the country. For example, Finland's Stora-Enso purchased Consolidated Papers in Wisconsin. UPM-Kymmene, also of Finland, now owns Blandin Paper in Minnesota. South Africa's Sappi purchased the printing paper division of Potlatch, choosing to close the Brainerd, Minnesota, mill and operate the Cloquet mill. SCA (Sweden) now owns Wisconsin Tissue after acquiring it from Georgia-Pacific.

What is behind this foreign mill invasion? The obvious answer is that the United States is the single biggest market for pulp and paper products in the world. Although the marketplace in the United States is mature, per capita consumption of paper and board in the United States is approximately 740 lbs/capita compared with 420 lbs/capita for the second largest country. European and African companies want to be part of this market.

Another factor is close proximity of these mills to their customers. Although mills exist in other sections of the country, none have a central location like those in the Midwest. In addition, Chicago, Milwaukee, and some locales in Minnesota are major printing areas. This makes the printing and writing mills attractive to foreign owners.

FOCUS ON WISCONSIN

Any discussion of the Midwest pulp and paper industry must concentrate on Wisconsin because it is the largest paper producing state. It has held this position for more than 50 years. Two recent reports prepared by the Wisconsin Paper Council (WPC) provide a clear picture of the industry, its current economic impact on the state, and priority issues for the industry.

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Wisconsin produced 5.3 million tons of paper in 2002, plus 1.1 million tons of paperboard. In recent years, the paper industry has faced many economic challenges. Although paper production in the United States dropped in 1997-2000, production in Wisconsin continued to increase. In the years since then, paper companies facing a significant supply and demand imbalance have shut down mills and machines to reduce overcapacity. During these trying times, Wisconsin fared better than other parts of the United States. One area where Wisconsin did not fare as well as other states was capital spending on new equipment.

What about the economic contribution of the industry? The value of shipments from Wisconsin's paper companies is more than US$ 12.4 billion annually. Approximately 28 companies operate 45 mills in Wisconsin--variations exist because of SIC codes--with half of all production at these mills related to printing and writing grades.

Pulp, paper, and allied firms employ nearly 50,000 people, representing one in every 11 manufacturing jobs. Labor statistics show that papermakers are the highest paid manufacturing workers in the state, with an average annual salary of US$ 49,000 compared with an average state wage of US$ 30,000.

The industry's workforce earns more than $2.5 billion annually. This turns into a US$ 4.38 billion benefit that surges through Wisconsin's economy as the workforce spends earnings on goods and services such as food, clothing, medical care, and recreation.

COOPERATIVE EFFORT

When the paper industry in the United States experienced a down-turn in late 2000, Wisconsin's industry followed. Because the paper industry is a cornerstone in Wisconsin's economy, the industry looked to government and allied industries for help in solving its challenging problems of low prices and poor financial results.

In October 2002, representatives from the State Department of Commerce, the industry, and Representative Mark Green met in Green Bay to identify general areas of importance to maintain and enhance the economic health of the paper industry in Wisconsin. This meeting identified seven general areas: government, public relations, partnerships, infrastructure, research and development, economics, and education. The committee recommended that WPC adopt specific recommendations encompassing these areas.

WPC prepared a report on the industry that identified key factors influencing industry health. The overriding theme of the report was the need to control costs. The report stated, "United States and Wisconsin papermakers are, for the most part, high-cost producers in a global marketplace."

Paper industry officials reviewed the report that identified specific cost drivers and made specific recommendations that would enhance the ability of the industry to compete and attract new investment if implemented. The group also developed three high priority issues:

* Adoption of a sales tax exemption for fuel and electricity used in manufacturing

* Rapid adoption of regulatory reform initiatives, including permit streamlining and New Source Review air-quality regulatory changes

* Approving initiatives related to the costs, availability, and reliability of energy.

Patrick Schillinger, president of WPC, said the industry is doing well in moving these priorities forward. "The state legislature has passed a law giving manufacturing companies an exemption from the state fuel sales tax," says Schillinger. The State Department of Natural Resources has implemented the New Source Review changes advocated by the U.S. Environmental Protection Agency. The industry and other interested stakeholders are developing an energy efficiency initiative that will provide "reliable, low-cost electrical transmission and expansion of the natural gas pipeline to the state."

CONCENTRATING EFFORTS

Even as WPC pursues its priority issues, the industry in the state and the region are making efforts in other areas. Industry can make no "silver bullet" that will give the changes necessary to produce a growing, thriving, financially healthy paper industry.

In recent years, Midwest paper companies and industry in the United States have identified control of production costs as a key to profitability and long-term success in the paper industry.

Wisconsin's industry has responded by aggressively cutting costs and reducing capacity, consolidating operations, and developing new products and markets. A significant effort also exists on the part of WPC to have the state of Wisconsin make changes that will help the paper industry be more competitive. Previous efforts in this regard have been somewhat successful. Recently, the state of Wisconsin has failed to fully recognize the economic contribution the industry makes to the state, according to some observers.

In the area of labor costs, staff reductions are normal. Paper companies in the region are making the hard decisions now to reduce their work forces because they are in this business for the long-haul not just the short-term. (See article on Stora-Enso North America on page 26.)

In the Midwest, owners are shutting down older, inefficient paper machines. UPM-Kymmene shut down two old paper machines at the former Blandin Paper Co. Sappi purchased only the Cloquet mill from Potlatch, which closed the nearby Brainerd facility. (The mill has since reopened as Missota Papers). Appleton Papers shut down two paper machines at its Locks mill, and Stora-Enso is closing two paper machines and one pulp mill in Wisconsin. Curtis Papers is closing its two Michigan mills. With the closures comes a commensurate reduction in staff.

Even as the industry shuts down machines, it needs to be more efficient and more productive by making major capital investments in technology. Art Rankin, a 40-year veteran of the Wisconsin paper industry, believes that "technology makes a big difference in making paper companies competitive in the global marketplace cost-wise and quality-wise." He adds that industry in the region has not invested in technology because it has not had the money or seen the value in these investments. "We (the paper industry) have focused on the 'what' instead of the 'how', and we are now paying the price," Rankin says.

Jim Szaroletta, currently mill production manager at KTGUSA, a tissue manufacturer in Memphis, Tennessee, and a papermaker who worked at struggling mills in Michigan and Ohio, believes that the industry's lack of investment in technology stems from too high an ROI in too short a time frame. "We don't make the technological investments because we are too concerned about a quick return on our investment," Szaroletta says.

Doug Dugal, retired CEO of Integrated Paper Service, a researcher, a papermaker, a former leader of Lake States TAPPI, and now a writer of a monthly column on the paper industry for the Appleton Post-Crescent, says that stock analysts have set ROI targets that are "far too high for paper companies." As a result, CEOs only have short-term thinking. This then forces the companies to view investments in technology and research and development as business overhead and not business development factors. A "long-term investment" does not exist.

As industry reduces labor costs through shutdowns, attrition, and lay-offs, other mill managers note that it may also be shooting itself in the foot. One mill manager who asked not to be identified said, "We are so thin right now that we can barely keep ourselves operating." Another manager notes that mills are not even doing the normal maintenance functions needed to keep their mills operating. Rankin and Dugal add that young people are not going to paper science schools because "the industry is not a good source of jobs and future prospects."

FUTURE HOPES

As the Midwest pulp and paper industry struggles to survive the current economic downturn, it does so with a strong resolve. The industry may appear to be floundering, but it is taking actions now to make the industry successful in the long-term. Its motto is that "actions speak louder than words!"

The Midwest paper industry seems to agree on three things it needs to be successful. First, the industry must increase its productivity, or it will not be able to compete in a global marketplace. One simply needs to compare the daily wage costs between employees at Asian mills with those in the United States to see a large discrepancy. The same holds true for environmental costs.

To become more productive, Midwest mills are shutting down old machines, streamlining their existing operations, and looking to invest in new technologies. "Efficient and productive are the adjectives papermakers want to use to describe their mill operations," one mill manager said.

Second, the industry must be more visible and must do a better job of public relations to receive the support of their communities, states, and national legislators. Rankin says society takes the paper industry and basic manufacturing in general for granted. The industry must now state its position and move forward. "We need to state that we are a viable industry with a strong future. We are creating products needed by society. We are technologically sound and a world leader in the production of high-quality pulp, paper, and paperboard. Do you want to help us succeed or cause us to fail?" Rankin says.

Schillinger would agree with Rankin and adds that the industry--at least in Wisconsin--is delivering its message to state legislators: the paper industry is a foundation block for growing the state's economy. The state has an obligation to promote the industry. "We are seeing legislators who empathize with us because they are facing the same problems we do in terms of high costs and reduced revenues. They are more concerned about our plight," Schillinger says.

Thirdly, the industry must make more investments in technology. One need only look at the Scandinavian countries and ask how they can send their products over here and still make money. One possible answer is their reduced costs resulting from investments in large, high-speed paper machines that only require three or four people to operate.

IMPORTANT PREMISES

If the Midwest paper industry is to survive today's depressed prices and global competition, the industry needs strong support and cooperation. To obtain this, it must have a plan based on the following premises:

* "We (the paper industry) are not gross polluters of woods and rivers, but stewards of our natural resources."

* "We are an industry that uses renewable resources."

* "We are high technology industry looking for highly educated employees."

* "Without paper and without board, our society would be hurting in very discernible ways. Take paper and board from automobiles. They will fall apart. Take paper from electrical wiring. We would have no electricity. Take board from boxes. Trading then becomes terribly expensive."

Perhaps the biggest challenge facing the Midwest paper industry is that the actions being taken now will result in fewer, not more, people being employed in the industry.

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RELATED ARTICLE: IN THIS ARTICLE, YOU WILL LEARN:

* The Midwest paper industry has a significant economic impact on the region.

* Challenges facing the pulp and paper industry, such as high cost production.

* What the industry must do to ensure its future.

ADDITIONAL RESOURCES:

* Wisconsin Paper Council web site: www.wipapercouncil.org.

* Stora Enso North America web site: www.storaenso.com.

RELATED ARTICLE: STORA ENSO NORTH AMERICA SHUTS DOWN MACHINES AND MAKES CAPITAL INVESTMENTS

If Midwest mills are looking for an example of how to control costs in the face of global competition while simultaneously attracting new investments to upgrade their assets and improve efficiencies, they need only look at Stora Enso North America (SENA).

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SENA purchased Consolidated Papers in 2000. In August 2002, the company announced a "Profit Enhancement Program" to streamline operations, increase operating efficiencies, and improve profits. In short, this program called for major capital investment in technology; closure of older, inefficient operations; and reductions in its work force.

If actions speak louder than words, SENA is a good company to follow. As part of its 2002 program, the company shut down its PM 12 and its groundwood pulp mill in Kimberly, Wisconsin, USA. It recently announced the shutdown of PM 24 at Biron and the PM 32 at Stevens Point as of September 1, 2003. Its Port Hawkesbury mill in Nova Scotia, Canada, is in the process of shutting down its groundwood and high-yield pulp mill as progress is made in ramping up its TMP plant.

When SENA was taking these actions, it announced a US$ 250 million capital investment program spread across the company's facilities. This includes a conversion of the Wisconsin Rapids pulp mill No.2 fiber line to hardwood pulp production from softwood, expansion of the TMP plant at Port Hawkesbury, and rebuilding the PM 16 at Wisconsin Rapids, PMs 96 and 97 at Kimberly, and PM 26 at Biron. The company will also make modifications to paper machines at Niagara and Whiting to improve production.

As these shutdowns occur and projects finish, the company will eventually reduce its workforce by 1050 people by the middle of 2005. This process began on October 7, 2003, when SENA announced 105 layoffs of managerial personnel.

Tim Laatsch, SENA's senior vice president of communications, said these layoffs have not been easy. "We've had to make some tough decisions about employment. On the other hand, we're in this for the long haul. If we are to have a long-term future, we have to make changes now."

The shutdowns, layoffs, and capital investments are all part of SENA's efforts to make its operations more effective and more efficient Laatsch notes. "We (SENA) have to put action behind our rhetoric," he says. "When you lose US$ 98 million like we did in the first six months of the year, you have to do something about it. We can't wait for other people to make changes."

BY JEROME A. KONCEL, CONTRIBUTING EDITOR

ABOUT THE AUTHOR

Jerome A. Koncel is Contributing Editor for Solutions! magazine. A freelance writer, he has more than 15 years of experience covering the pulp and paper industry and was the editor of American Papermaker. Contact him at +1 847 524-6210 or by email at jkgolf67@aol.com.
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Title Annotation:Regional Focus
Author:Koncel, Jerome A.
Publication:Solutions - for People, Processes and Paper
Date:Dec 1, 2003
Words:2783
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