This year, I once again was an intern for The Reporter, Pulp and Paper Canada's daily publication during PaperWeek International and EXFOR 2008.
It took place in early February, so while I'm a bit slow on the posting, I figured today was a symbolic day for looking back at past success and forward at new horizons.
Here are a couple of texts I wrote during that week.
Irving impresses with SC-A upgrade
In 2006, Irving Paper Ltd. decided to convert its PM1 to an SC-A grade machine, with plans to upgrade to SC-A+. The PM1, which was built in 1964, was in need of an upgrade, especially in the press and calendering areas.
“This was a strategic decision by the company to move away from newsprint and go to value add grades, so that was probably the biggest asset,” said PM1 Superintendant Terry Tomney.
One of the most interesting aspects of this presentation, which was part of Metso’s annual conference, was the time lapse photography of the whole process. The upgrade took 65 days to complete, and the bird’s-eye view of the calendering and dryer hood deconstruction and reconstruction was captured every 20 minutes, providing a remarkable amount of material for an impressive slideshow.
Most inspiringly, the process was ongoing as workers were on the floor 24 hours a day and the project was completed with no downtime.
At first, Irving experienced some quality issues such as dry end breaks, VIB Digital Block Corrosion, and wrinkling due to air entrapment, but Metso and Irving cooperated in finding the solutions to these problems, often by using new technologies such as the OptiReel Plus.
However, several of Irving’s concerns turned out to be non-issues.
“One thing we were really concerned about,” said Tomney, “is that it’s approximately 80 meters that the sheet runs, so there’s a lot of opportunities for issues. But to our great surprise, thanks to the advance work we had done with Metso, we had no issues with threading.”
Since Irving has only two paper machines, it was important for the company to minimize downtime. One of the keys to accomplishing this was quicker troubleshooting of E&I issues, as software made it possible to resolve issues in ten to fifteen minutes rather than four to five hours.
“We are taking a quantum step in development for ourselves and we’re entering an area that we didn’t know so much about,” Tomney said. “[Metso] was very valuable to us, so much so that we extended our co-operation agreement.”
Still, while early 2007 results showed a great increase in the quality of the paper produced by Irving’s reconstructed SC-A/SC-A+ machine, there is still a lot of room for improvement.
Industry analyst forecasts transition year
By Naila Jinnah
Tuesday’s plenary session provided much food for thought as TD Newcrest’s Paper and Forest Products Equity Analyst Sean Steuart, CFA, presented his forecast for the year to come.
His presentation, appropriately entitled “Outlook: An Industry in Transition”, was a perfect partner to PaperWeek International’s theme for 2008, “A Bridge to the Future”.
Steuart explained that the pulp and paper industry in the United States and in Canada has a poor reputation in the investment community, partially because of its failure to meet performance expectations in the past few years but also because of the way brokers emphasize the pros but neglect to stress the cons of investing in the sector.
Since 1999, capital has been down 6%, with a more pronounced trend since the Canadian dollar started rising. Therefore, the industry is losing relevance in the investment community, as Canadian, US and European investments in the sector account for less than 1% of the equity market.
“I think there’s a credibility issue both on the analyst side and the industry side,” said Steuart. “We definitely get the sense that investors want to see how this unfolds in the next couple of years.”
In 2008, only five Canadian P&FP companies were listed in the S&P/TSX Composite Index, accounting for $6.0 million Canadian in market capital. That’s a huge drop from 1995, when 23 companies combined for $14.8 million in market capital. One major factor is the mergers and buyouts of the past few years, as traditionally Canadian companies like Abitibi and Domtar became listed as US companies.
Steuart looked back at the downturn of the past year and provided short, mid and long term trends, focusing primarily on the Canadian market.
“We estimate that the weighted average cost of capital for Canadian companies is 13%,” said Steuart of the current situation. “I wouldn’t say that USA and Europe companies have been better, but they’re certainly better than Canada. Companies have been withholding investments and share prices have gone down as a result.”
Steuart also addressed the recession fears in the US, claiming that although a broad recession might not take place, but that various commodities in this sector are already in recession.
Wood products were hit especially hard in 2007 and over the past five years, mitigated by actual demand improvement but also because of factors like the US housing crisis. New technologies will also play a role in the long term.
“A couple of products are in structural demand decline for North America,” said Steuart, “especially newsprint and uncoated freesheet. This reflects the trend in the way people are accessing information, especially with new technologies.”
Most wood product companies have a negative cashflow, especially in Canada, and further consolidation is inevitable, according to Steuart.
“Prices have fallen so much because companies with good balance sheets have decided to push their assets too hard and burn cash instead of sitting back and balancing,” said Steuart.
As for market pulp, prices are still rising across most grades and regions. The market remains tight, especially for hardwood, but momentum is decreasing due to the short term fibre scarcity caused by issues like weather, closures, and union disputes. In the long term, there will be a steady demand growth with closings of high demand price mills as new greenfield pulp mills open in the Southern Hemisphere. China remains a big driver, as shipments to that country account for 20% of the 19 major companies’ exports.
Prices for newsprint, primarily a Canadian commodity, have started increasing.
“A number of the smaller companies were waiting for Abitibi to finish their merger and proceed with expected closures. And they sort of sat at on the sidelines and waited, and prices went down,” explained Steuart.
For Steuart, it’s hard to believe prices went down so much, since the effect of inflation in the last 8 years in Canada coupled with the Canadian dollar appreciation made it double the US values.
“It’s been a very tough few years, but I think we’ve turned the corner,” said Steuart. “Part of the reasons we’re positive is that the big publishers in the States appear to be aboard and understanding our struggles.”
All Canadian lumber producers except for Interfor are losing operating cash before taxes and adjustments.
“We’re going to see the worst data in Q4 that we’ve ever seen. It’s going to be a tough quarter,” Steuart warned.
I also have an article going into the March issue of Pulp and Paper Canada, which is always interesting, and I should be writing an article on one of my pet subjects as of late, so...