Here is a summary of a recent article by J.D. McNutt [1] which I think is timely and interesting.

We all know that the pulp and paper manufacturing is an industry in difficulty. A new integrated, virgin fibre-based mill has not been built in North America (NA) in more than 17 years. Value creation and stocks have gone nowhere over the past decade, making new investments unlikely. However, in the past, some really bad industries have turned around with strong asset management discipline and consolidation; an example is the steel industry. The possibility exists for the pulp and paper industry to turn around, judging by investments made by some private equity firms. Private equity is paying about 30-40% of invested capital costs for assets. With a new focus on capital asset management, older assets (capacity) are being permanently retired, resulting in both lower capacities and improved asset quality. This constrained new capacity investment and focused asset management climate should help paper companies to reach healthier returns on invested capital.

One of the factors affecting the NA industry is the decline in the value of the US dollar in the past few years. Asia’s huge consumption of commodities and increasing shipping costs have generated a new situation: it is now more expensive to import paper from Europe and Asia than to manufacture it in the US. Moreover, unlike the US automotive industry, the paper industry does not have major legacy issues such as healthcare and pensions.

Creating and capturing value is not a single event such as a single consolidation, or periodic events such as retiring older, high cost assets, or better managing retained assets. This is, indeed, a much longer and more involved process. The current industry steps to create value via M&A, asset consolidation, or product line focus are not sufficient to capture value in the future. To capture real value over time, at least two other areas must be considered:

? External influences, over which we have little control, but must respond to favorably. These include: rising energy costs, evolution of new economies such as China, changes in exchange rate, introduction of new competitive products and technologies outside the pulp and paper industry, and new legislation and regulations.

? Operations management transformation and enhancement, across the entire production platform. This area we do have control over and must leverage it for true, long term, and sustainable differentiation. This major issue requires a very rigorous organization-wide integrated effort that goes far beyond individual uncoordinated initiatives, such as narrowly focused operations improvements and cost cutting plans. In effect, we must change the way we work from the mill floor up.

An example given of capturing value is the case of the restarted Flambeau River Papers operation [2]. The new owners told the mill floor workers that it was up to them to improve or shut it down again, and that the way they worked at the mill floor level took precedence over all else. There was no one-time, major, synergy or asset management step taken. There was record tonnage produced at the mill; and record xylos concentration in the red liquor- a key economic factor. The mill also achieved record quality levels and lowest production cost. In July 2008, the company was one of two small scale biorefinery projects granted federal funding of up to US$40 million over five years [1].

1. McNutt, J.D., Value destruction, creation and capture, Paper 360o, p.15, Aug. 2008.

2. Retsina, T. and Pylkkanen, V., Back to the biorefinery, Paper 360o, p. 18, Feb. 2007