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PAPER INDUSTRY M&A -- The Consolidation Craze

April 2002

However, Dan O'Brien, senior vice president of paper operations for Quebecor World North America, believes that it is still too early to tell.

"Right now, it's so difficult to see what is going on because the market conditions are so weak and the paper companies' business is so bad."

Still, he does see some long-term benefits to consolidation once the market does rebound. "You have a smaller group of suppliers who will have much broader product lines. As consolidation continues to take place, the manufacturers will fill the remaining gaps in their product offerings and you will have larger relationships with fewer paper companies. In the end, they will rationalize both their product lines and their facilities. But, the plans that they are putting in place have not been fully developed or executed yet," O'Brien adds.

Even so, paper industry consolidation activity has had its critics. There are some that claim that quality, availability and service levels have slipped with the loss of the smaller paper companies. Both Collins and Maine attribute this criticism to the growing pains that come when two companies are merged.

"Any time there is a major reorganization and sales offices are combined and we see positions merged or eliminated, there are going to be some short-term problems," cautions Maine.

O'Brien also believes that critics' fears over availability and service levels are unfounded. "Initially, people get nervous when mills state they are going to reduce the number of grades made in a mill. They believe it will result in fewer products, but I think the contrary is going to take place. Paper companies are still going to produce a wide variety of products, but they are going to make specific grades in specific facilities.

"These grades are going to be produced more efficiently than they have been in the past. They will make them in facilities and on machines where they are best capable of making them at the lowest possible cost. When you narrow what the manufacturing equipment makes and produce fewer stocks on it, the quality of paper is going to improve," he states.

O'Brien also feels that consolidation will provide the long-term stability that paper mills need. "It will significantly impact their long-term ability to survive. They'll be better able to deal with the swings in the marketplace."


Capacity to Grow Moderately Through 2004

Paper and paperboard capacity will expand slightly in the years 2002 through 2004—at an average annual rate of 0.4 percent—according to the "42nd Annual Capacity Survey" of the American Forest & Paper Association (AF&PA).

The expansion will reverse a 1.3 percent drop in 2001, the first decline ever recorded in aggregate domestic capacity.

Historically, domestic paper and paperboard capacity rose at a 2.5 percent average annual rate in the 1980-1997 period, and 0.9 percent from 1998 through 2000.

Year 2000 paper and paperboard capacity (103.9 million tons) remains virtually unchanged from the level estimated by last year's survey. However, the 2001 level of capacity has been revised downward by 2 million tons (1.9 percent), to 102.6 million tons, primarily because large amounts of mills and machines that have been closed for at least one year or are in the process of being dismantled were removed.

Printing/writing paper capacity in 2001 has been revised downward by 4 percent, or almost 1.2 million tons, compared with the projection in last year's survey. This decline was not surprising because much of this capacity was already shut down in 2000, but was retained in last year's survey because the one-year shutdown rule had not been satisfied. The rule requires that mills and machines must be dismantled or closed for at least one year before their capacities are removed from AF&PA's survey base.

Uncoated groundwood capacity in 2001 is now estimated to be almost 20 percent—or 443,000 tons—below that projected in last year's survey. The capacity growth of 10 percent that had been projected for 2001 never materialized. Instead, capacity declined by almost 8 percent. Uncoated groundwood capacity is projected to rise by 14 percent in 2002, to 2.1 million tons.

Coated groundwood capacity in 2001 is estimated to be more than 2 percent larger than anticipated in last year's survey. Beyond 2001, total capacity is projected to grow by more than 12 percent during the 2002-2004 period, or by 4 percent per annum on average.

Coated free sheet capacity declined fractionally in 2001 from 2000. Anticipated growth in the 2002-2004 period is 0.4 percent per year. This compares with a 5 percent annual average capacity gain that prevailed during the 10-year period ending in 1997, the last high-growth year for coated free sheet capacity.

Uncoated free sheet capacity fell by 4.7 percent—or 700,000 tons—in 2001 from its 2000 level. At least another 650,000 tons of closed capacity shut down this year is being retained in the survey total because of the one-year rule.
 

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