Email Jim at jim.thompson@ipulpmedia.com

There have been many distinct phases to the pulp and paper industry since the dawn of the industrial revolution. In this column, I want to focus on the three that have taken place since 1994 (I can count at least five pre-1994 which we will ignore for the moment).

The first two of these modern phases have been sales or demand driven. The one we are in right now is technology (quality and efficiency) driven. It is Phase VIII.

The demand driven phase (Phase VI) started in 1994 when the Internet and sophisticated software and printers started displacing printing and writing paper. Demand for these grades started to drop and sophisticated software and printers allowed the use of less expensive grades to accomplish the tasks of high end, coated grades. In this phase tissue and container/packaging grade demands were not affected.

Phase VII started in the early 2000's and was driven by information transmission and storage becoming Internet driven, cloud driven, and ubiquitous. This Phase drastically lowered the demand for newsprint in particular. It doesn't seem to be over yet as evidenced by Domtar's recent announcement to indefinitely idle the mill at Grenada, Mississippi. However, this may be a false supposition (that this mill will restart on newsprint) as this mill has been rumored in the past to be a candidate for conversion to containerboard.

These phases (VI and VII) are consistent with my mantra--cellulose products (printing & writing; newsprint) used for communications purposes are fading away and cellulose products (tissue; packaging) used for their material properties are still thriving. The drivers for these trends are speed and cost.

Recapitalization can mean a couple of things. Recapitalization can mean restructuring one's debt and equity to achieve new financial goals. This is a balance sheet exercise. Or, in the case of Phase VIII here, it can mean restructuring one's physical assets to achieve new efficiencies and product qualities. Sort of like buying a new car, except in this case we are trading in one-hundred-year-old models, long beyond their useful lives.

The foresighted and strong European players in our industry have been in Phase VIII for many years. One thing I think that helped them along was that their tax systems have traditionally provided shorter depreciation schedules than have ours, hence they are able to write off their investments much quicker.

In the United States, Graphic Packaging has been in Phase VIII for a number of years, starting with the latest machine they built in Kalamazoo and their new mill in Waco, Texas which will start up in a few months. These two machines will replace a handful of century-old CRB machines with state-of-the-art monsters good for another hundred years.

Pundits in the containerboard sector are looking at the short-term reduction in demand and the subsequent shut of a number of containerboard machines as the end of containerboard. To add to their argument, they cite larger consumers of containerboard boxes, such as Amazon, converting to soft sided shipping tubes and other alternatives to make their case.

I disagree; these arguments are extremely short-sighted. The corrugated sandwich is a lower cost alternative to many other structural media. Additionally, all the big players operate modern design centers turning out new substitutes for other materials as well as uses never thought of before for the rugged corrugated sandwich.

We saw a hint of this this past week when International Paper not only announced the shut of some very old machines but the conversion to container grades of a fairly new machine at Selma, Alabama. They would not be recapitalizing the machine in Selma if they thought the death of the containerboard business was imminent.

Green Bay Packaging has been doing the same thing. They recently completed a new machine at their home location in Green Bay; now they are replacing their entire mill in Arkansas.

From a personnel standpoint, the Phase VIII machines will produce higher quality with much higher efficiency and greatly improved safety. Efficiency and safety will definitely mean fewer human hours per ton of production, but this has been the story in the advancement of the industrial world from day one.

Be safe and we will talk next week.

For a deeper dive, go here.

Study Guide

Quiz

• What were the primary drivers for Phases VI and VII of the modern pulp and paper industry, and how do they differ from Phase VIII? Phases VI and VII were primarily sales or demand driven. Phase VI saw demand drop for printing and writing paper due to the Internet and sophisticated software, while Phase VII was driven by the shift to Internet and cloud-based information transmission, drastically lowering newsprint demand. In contrast, Phase VIII is technology-driven, focusing on quality and efficiency.
• How did the Internet and sophisticated software impact the demand for printing and writing paper during Phase VI? During Phase VI, the Internet and sophisticated software and printers began displacing traditional printing and writing paper. This led to a drop in demand for these grades and allowed the use of less expensive paper types to achieve tasks previously requiring high-end, coated grades.
• What specific product grade was most significantly affected by Phase VII, and what technological advancements were responsible for this impact? Newsprint was most significantly affected by Phase VII. This was due to information transmission and storage becoming Internet-driven, cloud-driven, and ubiquitous, making traditional newsprint largely obsolete for communication purposes.
• According to the author's "mantra," which categories of cellulose products are "fading away" and which are "still thriving"? Provide examples for each. The author's mantra states that cellulose products used for communications purposes are fading away, such as printing and writing paper and newsprint. Conversely, cellulose products used for their material properties, like tissue and packaging, are still thriving.
• Explain the two distinct meanings of "recapitalization" as described in the text and clarify which meaning applies to Phase VIII. Recapitalization can refer to restructuring debt and equity for new financial goals (a balance sheet exercise). Alternatively, it can mean restructuring physical assets to achieve new efficiencies and product qualities, similar to buying new equipment. The latter definition, focusing on physical assets, applies to Phase VIII.
• What factor is suggested to have aided European players in adopting Phase VIII strategies earlier than their American counterparts? European players were likely helped by their traditional tax systems, which provided shorter depreciation schedules. This allowed them to write off their significant investments in new equipment much quicker, incentivizing earlier recapitalization.
• Provide examples of U.S. companies and their projects that exemplify Phase VIII recapitalization. Graphic Packaging is cited as a U.S. company in Phase VIII, evidenced by their latest machine in Kalamazoo and their new mill in Waco, Texas. International Paper also demonstrates this by converting a fairly new machine at Selma, Alabama, to container grades.
• What arguments are made by "pundits" who believe in the "end of containerboard," and why does the author disagree with them? Pundits cite short-term reductions in demand, the shutdown of containerboard machines, and large consumers like Amazon using soft-sided shipping alternatives as reasons for the end of containerboard. The author disagrees, calling these arguments short-sighted, believing corrugated is a low-cost alternative with new uses being developed.
• How do Phase VIII machines impact production quality, efficiency, and safety compared to older models? Phase VIII machines are designed to produce higher quality products with much higher efficiency. Additionally, they offer greatly improved safety for workers. These advancements ultimately mean fewer human hours are required per ton of production.
• What is the significance of International Paper's announcement regarding the Selma, Alabama mill in the context of the author's argument against the "death of containerboard"? International Paper's decision to recapitalize a relatively new machine at Selma, Alabama, by converting it to container grades, is presented as strong evidence against the imminent death of the containerboard business. The author argues they wouldn't invest if they believed the industry was failing.

Essay Questions

• Analyze the fundamental shift in the pulp and paper industry from demand-driven phases (VI & VII) to the technology-driven Phase VIII. Discuss the long-term implications of this transition for product development, market strategy, and global competitiveness.
• Evaluate the author's "mantra" regarding the fading of communication-based cellulose products and the thriving of material property-based cellulose products. Provide arguments for and against this assertion, considering potential future technological developments or shifts in consumer behavior.
• Discuss the concept of "recapitalization" in the context of the modern pulp and paper industry. Compare and contrast the European and American approaches to Phase VIII adoption, including the role of economic incentives and historical factors.
• Critically examine the author's dismissal of arguments suggesting the "end of containerboard." What evidence does the author provide to support their counter-argument, and what are the potential risks or opportunities that the "pundits" might be overlooking?
• Beyond the stated benefits of higher quality, efficiency, and safety, explore other potential impacts of Phase VIII recapitalization on the pulp and paper industry. Consider aspects such as environmental sustainability, supply chain dynamics, and workforce development.

Glossary of Key Terms

Phase VI: The first modern phase (starting 1994) of the pulp and paper industry, driven by sales/demand. Characterized by the Internet and software displacing printing and writing paper.

Phase VII: The second modern phase (starting early 2000s) of the pulp and paper industry, driven by sales/demand. Characterized by information transmission and storage becoming Internet/cloud-driven, drastically lowering newsprint demand.

Phase VIII: The current modern phase of the pulp and paper industry, driven by technology (quality and efficiency), focusing on recapitalization of physical assets.

Recapitalization (Balance Sheet): Restructuring a company's debt and equity to achieve new financial goals.

Recapitalization (Physical Assets): Restructuring a company's physical assets (e.g., machinery, mills) to achieve new efficiencies and product qualities. This is the meaning relevant to Phase VIII.

Cellulose Products (Communications): Paper products primarily used for transmitting or storing information, such as printing & writing paper and newsprint. These are described as "fading away."

Cellulose Products (Material Properties): Paper products primarily used for their physical attributes, such as tissue and packaging (e.g., containerboard). These are described as "still thriving."

Printing & Writing Paper: Paper grades traditionally used for documents, books, and other printed materials. Demand for these grades dropped during Phase VI.

Newsprint: Paper grade specifically designed for printing newspapers. Demand for newsprint drastically lowered during Phase VII.

Tissue: A category of cellulose products used for hygiene and sanitary purposes (e.g., toilet paper, paper towels).

Container/Packaging Grades (Containerboard): Cellulose products used for making corrugated boxes and other packaging materials.

CRB (Coated Recycled Board): A type of paperboard made from recycled fibers, often used for packaging.

Corrugated Sandwich: A common term for corrugated board, which consists of fluted (corrugated) sheets sandwiched between flat linerboards, known for its strength and low cost.

Depreciation Schedules: The timeframe over which a company can deduct the cost of an asset from its taxable income. Shorter schedules allow quicker write-offs.

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