The very bad news is that consumption of newsprint in North America will continue to decline. There is some good news also, but we don’t want to exaggerate; it’s just relatively good news – making the best of a difficult situation. Surviving in a declining industry is very difficult, but prospering in a declining industry is barely possible. Nevertheless, that is the goal.
The “good news” is summarized in the following bullet points:
- Newsprint supply and demand are pretty much in balance right now.
- More newsprint capacity will be eliminated before White Birch (Northern Branch) emerges from bankruptcy, and there are other newsprint machines that are likely to close or be converted to other grades during the next nine months.
- North American consumption is still falling, but the decline is moderating.
- The perpetual high cost of ONP will put limits on Chinese and Korean newsprint production. Therefore, the Asian market should remain a large and viable source of demand for North American newsprint producers.
- It has been a slow process, but the newsprint industry has reduced costs significantly in a number of ways: more favorable labor agreements, increased cooperation from taxing authorities, dramatically reduced debt, and the closure of the higher cost mills, etc. This puts the North American newsprint industry in a better competitive position globally – not a good competitive situation, but much better.
To have any real hope of success going forward, however, requires additional consolidation. As the market shrinks, it will be helpful for the sellers if there are fewer newsprint companies. If the largest one or two paper companies remaining have a huge newsprint market share, they might be able to close enough capacity (as the market shrinks) to keep supply and demand in balance for an extended period of time.
We have, therefore, two questions. How does AbitibiBowater get larger, and is there a second large paper company willing to help out? In the past neither Kruger nor White Birch were willing to assist Abitibi and Bowater in their effort to keep supply and demand in balance. Catalyst, on the other hand, has been willing to shut down capacity much more quickly.
Some of the former debt holders of AbitibiBowater and White Birch (Northern Branch) will be the new company owners as these bankruptcies come to a conclusion. How can the new owners best “prosper” in these difficult times? They could sell the assets, but there is little interest in newsprint capacity (or uncoated groundwood grades), especially in Canada. For the same reason, they can not take the companies public. Stated differently, these paper assets are not worth very much.
Specifically, White Birch Paper Company (Northern Branch) has few options, and none of them are promising. A good portion of its 1.2 million tonnes of capacity seems to be high cost and should be shut down – roughly 500,000 tonnes. So what will the new owners do with the rest?
The best White Birch option seems to be to sell out to Catalyst or AbitibiBowater. They won’t get any cash, not much anyway, but they could get shares in the new AbitibiBowater or Catalyst. The White Birch assets are worth more combined with another company than standing on their own. On their own, they are a part of the competitive challenge. Combined with one of the other major companies, they provide part of the fuel that will be consumed in the years ahead in order to keep the newsprint market in balance.
Perhaps the best outcome of all would be for Catalyst and White Birch (Northern Branch) to combine. Then, when the dust settles, Catalyst and AbitibiBowater could merge. It will take that kind of grand scale to keep order in the market in the coming years.
The Justice Department could be a problem, and probably would be if all three organizations came together. I tend to think, however, that the deal could still get done. I won’t offer an argument today, except to mention that a big factor would be that the vast percentage of White Birch and Catalyst capacity is in Canada.
Even if such a merger took place, the future success of the industry would not be assured, even for the medium-term. But I am running out of time and energy so we will stop here and maybe take up the subject at another time.