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Pulp, paper industry faces tough decisions.

Pulp, paper industry faces tough decisions

The recession and changing markets are forcing the pulp and paper industry to re-evaluate the way it operates, its relationship with labor and even the way it invests funds.

With prices down by about $265 per ton for pulp and $80 per ton for newsprint, shareholders of companies in the industry are doing some deep soul-searching, forcing industry executives to be more selective in making capital investments.

"The bottom line is that shareholders want to get a reasonable return on their investment, and they don't want to see investments made in any non-competitive mills," says Brian Topp, a pulp and paper analyst with Scotia McLeod in Toronto.

However, forest industry officials are realizing that traditional markets are in jeopardy unless production costs are brought in line with those at new mills in the United States, South America and the Philippines. To make matters worse, the pulp and paper workers received an average pay increase of 16 per cent over three years last fall.

"The industry needs to become more competitive in the global sense," notes John Johnson, a vice-president and forestry analyst with Richardson Greenshields of Canada. "It needs to increase labor productivity, and that means either cutting out bodies and shutting down mills or bringing in new capital."

One industry official believes that most of the rationalization can be accomplished by shutting down older mills to balance demand and capacity.

"The facilities are already in place, so there isn't really a need for new machines," said the official, who declined to be identified.

The recession has caused problems for the industry by reducing the demand for newsprint and creating a glut on the market. As a result, buyers are being more selective about price and quality - another blow to companies operating older machines.

The recession has also caused investors to be cautious, reducing the supply of investment to forestry industries.

"The industry is capital-intensive, and capital is scarce right now, especially when you're talking about a new paper machine which costs hundreds of millions of dollars," says Michael Lynch, regional manager of communications for Abitibi-Price Inc.

The company, which lost $11.2 million during the first half of the year, has mothballed its Thunder Bay division's two paper machines for at least two years and laid off 450 people in the process. Lynch says problems related to product quality also played a role in the decision to mothball the facility.

The shutdown reduced Abitibi-Price's newsprint production capacity by 170,000 tons. Company officials are rumored to be discussing the reduction of an additional 100,000 tons.

If the two paper machines are brought back into operation at the end of the two-year time frame, it will signal a recovery for the industry.

An economist with the Canadian Pulp and Paper Association says a recovery is expected to occur by the middle of next year.

In the meantime, environmental controls forced on the industry by the provincial and federal governments are draining available capital funds.

According to Topp, it will likely cost the country's forestry companies between $3 billion and $5 billion each to comply with the many new provincial and federal regulations.

"It's going to absorb funds which could have been used to improve the quality of newsprint and pulp," adds Lynch.

For its part, the global move towards recycled newsprint has left shareholders questioning the merit of investing capital in mills in Northern Ontario.

"It is apparent that if you build new assets, you don't build them in the north," says Johnson. "Things have changed. You don't have to build the mills near the source of virgin fibre or near a power source like we did in the past.

"The major shareholders are asking |Why are we here (Northern Ontario)?'"

Lynch believes that the industry, government and labor must cooperate to ensure the industry's survival.

"But there seems to be a reluctance by some groups to take part in any effort," he adds.

Lynch charges that the labor-related legislation being proposed by the Ontario government is an indication that it is not committed to working with the business community.

Topp predicts that unions will be forced to make concessions. However, there is some doubt that union officials are aware of the severity of the crisis the industry faces.
COPYRIGHT 1991 Laurentian Business Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Report on Forestry; need to re-evaluate operating procedures, labor relations and investment activities
Author:Krejlgaard, Chris
Publication:Northern Ontario Business
Date:Sep 1, 1991
Previous Article:New president.
Next Article:Capital invested to meet environmental regulations.

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