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Management Side
More kraft capacity to compete with North American mills
Despite the continuing reduction in demand for communications grades of paper, world demand for bleached kraft pulp seems to keep growing, but we are still seeing contraction rather than expansion in North American mills.

Most of the real expansion seems to be elsewhere, while news of paper machine and pulp mill closures is more common in Canada. We do not even have the prospect of a major Chinese investment in new capacity like the one being discussed in Arkansas.

Fortress' widely publicised plans to produce dissolving pulp by converting shuttered paper-grade kraft mills have succumbed to excessive capital costs, trade barriers in China and a decline in the market for dissolving pulp.

Looking more widely, virtually all attempts in Canada and the US at resurrecting shuttered mills and paper machines have failed, many after absorbing significant amounts of investor's and taxpayer's money. It was recently announced that the Prince Albert mill (closed by Weyerhaeuser in 2006, and sold with the caveat that a buyer could not use the mill to produce anything competitive with Weyerhaeuser) cannot restart until at least 2020, since attempts to develop products that would not break the non-competition agreement have failed.

Overseas, we see very large projects in progress and planned. I have worked on environmental approvals for a few, and have been impressed by the mill sizes, and the imagination of the design teams. Most new projects are in South America, where wood and labor costs tend to be relatively low. However, these mills face various costs of doing business that are unknown in North America, and also substantially more stringent environmental regulations, plus sometimes difficult trade union issues.

The Finnpulp project mentioned in PaperMoney a few months ago is comparable to the several new and recent South American ones, in that it is a very large investment in a single, high efficiency fiber line. In Finland, it faces high labor costs, higher taxation and more stringent environmental regulations than a new North American mill would. Although publicised as a "bio-production facility" the Finnpulp mill is essentially a bleached kraft mill with some supplementary production of energy from wood waste. It will produce 1.2 million tons/year of bleached kraft, all the power required to run the plant and will also sell a TeraWatt hour of electrical energy/year, equivalent to rather over 800 MWh/ton pulp. If this energy is sold at rates competitive with energy from gas, coal or oil, the revenue will represent a considerable supplement to the profits from pulp sales, and will not be affected by the vagaries of the pulp market. Being generated entirely from wood, the electricity will be considered "green" so it may well fetch a premium.

Incidentally, the kraft mill that Shandong is proposing to build in Arkansas, is now being billed as a "bio-production plant" too. Perhaps that will help avoid some of the public's opposition to pulp mills, all too common, and based on the poor environmental performance that was common many years ago.

I have heard people with much more knowledge of pulp mill economics than I have saying that the best way to make profits is to run a mill into the ground, the replace it with a brand new megaproject, using the best technology, including selling electrical energy. They feel that the incremental upgrades and marginal capacity expansions so common in North America are less effective.

When I started in the industry, North American mills were generally the largest in the world, but today are small, relative to mills overseas. Mills in the US often have several fiber lines and recovery systems. These require large labor forces and it is more difficult to achieve optimum efficiency when staff time is divided between several production lines.

One obvious development would be for a mega-mill to replace a few old mills, benefiting from existing services such as the wood basket. A brownfield site would have a water supply and suitable effluent discharge location. So far, the studies I have heard rumoured have never gone far, due to lack of confidence in management and concerns about uncontrollable construction costs. This is particularly so in British Columbia, where a considerable amount of wood is exported for processing overseas, and construction costs are notoriously difficult to control.

I have enjoyed working in the pulp and paper industry for over fifty years, and am disappointed to see the North American part of it being bypassed by overseas companies. I do notice that management teams in the overseas companies are generally younger than here. Perhaps the inherent optimisation of youth is the key. On that note, I recently retired from engineering work, and will also make this my last contribution to PaperMoney. I hope younger ideas will follow.

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