For sale: 40-year-old paper mill. Five papermaking machines, capacity to produce 1,100 tons of paper a day. Specializes in efficient production of coated paper for magazines, catalogs and the like. Skilled work force of 1,000.
Bonus: Four other mills. Asking price: Negotiable.
If paper mills were bought and sold like used cars, this could be an ad for Jay’s Androscoggin Mill. The mill, along with four others in International Paper’s coated paper division, will likely be on the market following IP’s announcement Tuesday that it’s restructuring.
Clobbered by declining stock prices, heavy debt, flat consumer demand and increased global competition, the paper industry giant is shaking things up to increase its bottom line. The strategy is to focus on its best performers – the packaging and uncoated paper divisions – and get rid of the rest. That leaves the Androscoggin Mill facing an uncertain future. IP has said it will recast the coated division as a separate, spinoff company or, more likely, sell it outright.
No one knows how easy that will be.
In the highly competitive world of papermaking, efficiency is everything. Making the best paper at the cheapest cost is a formula that leaves U.S.-based paper companies scrambling. Foreign competitors in Eastern Europe, Asia and South America are opening technologically advanced mills and operating them with lower-paid workers than their American counterparts.
U.S. mills that are 30 or more years old face an uphill battle, say paper industry analysts.
“To be frank, some of the older mills in Maine will have bull’s-eyes on them,” said Mark Wilde, an equity analyst with Deutsche Bank who specializes in the paper industry.
But the Androscoggin Mill might not be one of them. IP invested heavily in the mill about seven years ago, putting in a lot of capital improvements.
Although IP officials won’t share specifics, the Androscoggin Mill spokeswoman said the mill is considered “profitable and competitive.” It’s gotten there by improving operations, containing costs and investing capital.
“That’s what ensures its future viability,” said spokeswoman Fiona McCaul.
Paper assets
Built in 1965, the mill has poured millions of dollars in upgrading its machines, with the exception of machine No. 1. An uncoated paper machine, it was shut down indefinitely in April as IP tried to maximize its profits by getting rid of older, less-efficient machines.
Three of the remaining machines – Nos. 2, 3 and 4 – have all been rebuilt, with No. 3 getting a $109 million upgrade in 2003. They produce coated paper.
The No. 5 machine is the newest, built in 1976 and last modified in 1992. It is an uncoated paper machine, whose capacity helped IP recently land a 12-year contract with Kohlberg & Co. to produce lightweight popcorn bags.
A comparison of the efficiency of mills making similar products was released by Paperloop Benchmarking Services, an association of trade analysts. It shows the Androscoggin Mill as a strong performer in coated paper, while more middle-of-the-pack in uncoated (see graphic).
But whether it can maintain its edge against international newcomers is questionable. Wilde said Brazil is coming on strong in the paper industry world. He was there in March, talking with an executive from Stora, a Finnish company that is the world leader in coated paper.
The executive told Wilde that they can harvest and produce the pulp in Brazil, then ship it to Helsinki for less money than just delivering the pulp to its mills from its conventional sources.
“It’s just phenomenal,” said Wilde.
Brazil is a rising star in making chemically processed paper, as well, said Pablo Conde, vice president of the Pulp and Paper Products Council, an international trade association. He said many of its unused cattle lands have been converted to tree farms, and can produce mill-ready trees in seven or eight years versus the 15 to 30 years it takes in North America.
“That’s a huge advantage,” said Conde.
IP’s push in Brazil
IP has assets in Brazil, including a paper mill in Parana that is part of the coated division. Wilde said that mill is the “deal sweetener” – likely to draw interest from other paper companies that might be blas about buying the U.S. mills, but very interested in the Brazil operation.
IP could be willing to let that mill go because it’s exploring a massive investment in a new uncoated paper mill in Tres Lagoas – a $1.2 billion project. The Brazil mill is expected to produce uncoated, chemically processed paper at about $220 per ton; the most efficient U.S. mills come in at $350 per ton. The average U.S. mill produces that grade of paper at $450 per ton. (IP declined to reveal what the cost per ton rate is at the Androscoggin Mill.)
The Brazil project is just one of the overseas projects IP is considering as it tries to boost profits. Stock for the Connecticut-based company has taken a nosedive in the past year, dropping from $43 to $31 per share. Its debt ratio is 1.64; the industry average is .90. Last year, it reported $26.2 billion in sales ($1.6 billion from the coated paper division), but recorded a -0.1 percent profit margin versus the 3.9 percent industry average.
The company said it expects to use a portion of the $8 to $10 billion it will realize from the restructuring to reinvest in its facilities at home and abroad.
A February article in Pulp & Paper magazine quoted IP CEO John Faraci saying that in the future, the company would have a bigger presence outside the U.S. More than three-quarters of IP’s production facilities and market are concentrated in the states.
Last December, IP President Robert Amen revealed plans for $300 million in investments in Eastern Europe and the Tres Lagoas project.
Additionally, he said IP would focus on bringing full product lines to China, where it expects revenues of $1 billion and where it has 3,000 employees.
“I think increasingly you have to be in parts of the world where it’s very cost competitive,” Faraci told Pulp & Paper. “There are many factors that go into the cost-competitive equation like fiber, energy, labor cost, capital cost, cost of doing business, regulatory costs, etc.”
So where does that leave Maine mills?
It depends. Conde said the most efficient mills that have a niche market are likely to stay competitive in a world market. Wilde agreed, and speculated that the four U.S. mills in IP’s coated division could find a new owner riding on the coattails of the Brazil mill.
Stora could be interested, as could SAPPI, another leader in coated papermaking, he said.
“Some businesses can probably be competitive in Maine in this industry,” especially if they use softwood fiber and concentrate on lightweight coated paper, said Wilde.
But overall, papermaking in the U.S. is a mature industry, hampered by rising production costs and lack of investment.
“It’s facing more and more global competition,” said Wilde. “And honestly, many of these mills are not great assets.”
Staff writer Donna Perry contributed to this report.
BREAKOUT
Compared to other mills
Comparison of cash manufacturing costs of the Androscoggin Mill compared to mills making similar paper products. The number indicates efficiency, with No. 1 mill being the most efficient.
Coated free-sheet*, 45-lb: No. 3 out of 10 mills
Coated free-sheet, 60-lb: No. 5 out of 14 mills
Coated groundwood**, 34-lb: No. 2 out of 11 mills
Coated groundwood, 40-lb: No. 3 out of 18 mills
Coated groundwood, 50-lb: No. 3 out of 12 mills
Uncoated free-sheet, printing: No. 14 out of 39 mills
Uncoated free-sheet, value added: No. 9 out of 53 mills
*free-sheet is chemically processed
**groundwood is mechanically processed
Source: Paperloop Benchmarking Services
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