August 4, 2017

Domtar's Marlboro mill is analyst's No.1 pick for PM conversion...

Source: PPI Pulp&Paper Week
By: 

Domtar's Marlboro mill is analyst's No. 1 pick for PM conversion joint venture with big containerboard firm

The next US containerboard capacity addition should ideally be from converting a white­ paper machine with top softwood fiber access, and preferably, to reduce capital cost per company, be done in a joint venture, a veteran industry analyst said this week on a special call with investors.

Vertical Research Partners analyst Chip Dillon identified five white-paper mills that are best candidates for conversion to kraft linerboard. They are Domtar machines in Bennettsville, SC, Hawesville, KY, and Kingsport, TN, a Resolute Forest Products unit in Catawba, SC, and a Verso PM in Luke, M D.

Dillon, a longtime pulp and paper and forest product analyst, pinpointed Domtar's Marlboro mill in Bennettsville as the No. 1 choice. The one-machine 273,000 tons/yr mill is surrounded by prime US South softwood fiber.

"Only the Marlboro mill (of the three from Domtar) is in the pine basket," said an industry wood fiber expert. "The other two (Catawba and Luke) are far removed, so higher cost. Catawba is semi surrounded and in a good growing area. Luke gets most of its current pine long-distance from Virginia."

The contact pinpointed Marlboro and Catawba as the best of the five in terms of softwood  fiber access.

Dillon's 20-minute call with investors and others was unique. Analysts question CEOs, but in a public setting do not often overtly make recommendations of how to best run their businesses. Dillon said late this week that "we had a large response to the live portion with a number of company officials on the line in addition to our clients.... We expect many more have listened to (or will listen to) the replay. As you expect, the companies have been 'all ears' but have relatively little to say."

Another veteran industry analyst, Bank of Montreal's Mark Wilde, said on Aug. 2 that "one or two of Domtar's white paper mills will become containerboard conversion projects" and the company would announce a project within six months. Wilde added that with "the lowest risk option is some type of conversion effort with Pack­ aging Corp of America (PCA)."

High linerboard interest. The interest in the US containerboard and corrugated box market, which is growing at about 3% this year vs last year, and the ongoing and yet deeper-than-expected demand drop in uncoated freesheet (UFS) paper, opened the door for Dillon's discussion. What's more, Domtar CEO John Williams on July 28 told analyst that he was thinking about converting one or two Domtar mills to linerboard over the next three to five years. He suggested projects that would cost $200 million each. Prior to that, International Paper's (IP) Mark Sutton in April and PCA's Mark Kowlzan last week also spoke about the same topic. In addition, discussion within UFS paper circles about reducing capacity first intensified around mid-fourth quarter last year, based on PPI Pulp & Paper Week research.

On the July 31 call. Dillon said new linerboard capacity should be furnished with kraft pulp rather than old corrugated containers (OCC), as the road "was running out on OCC" because of lower generation. Four different newsprint machines were converted to recycled-content linerboard in the last five years in the US and Canada, and two large I00% recycled-content linerboard machines started up as well in the USA.

Dillon said Williams' comments on the earnings call made "total sense to us...We think it's a win-win."

Domtar already converted three UFS machines out of the commodity business, first with a move to fluff pulp in Plymouth, NC, then the conversion at Marlboro to specialty paper, and finally with the conversion last year of a newer commodity machine at Ashdown, AR, to fluff production. IP converted an UFS machine at Franklin, VA, specialty pulp. Domtar paid $30 million in 2013 to convert the 320,000 tons/yr Marlboro PM to production of lightweight base paper for thermal and packaging paper. Domtar at the same time signed a long-term supply agreement with Appvion, North America’s largest thermal paper supplier. The paper to Appvion from Marlboro is estimated at about 170,000 tons/yr. The Marlboro PM has a 329-in trim.

Dillon said a Domtar conversion would be best if done in a joint venture with one or more of the containerboard big boys that are IP, which operates with about a 30% share of North American containerboard capacity. PCA, and Georgia-Pacific (GP).  Dillon envisaged competition among IP, PCA, and GP for the "privilege" of linking with Domtar on what he called a conversion that would be an "elegant solution."

Domtar conversion benefits? Dillon said such a move by Domtar benefits Domtar, a large containerboard play r, and the producers in the US UFS market. Dillon added that IP, PCA, and GP combined have about half the capacity in both the nine million ton UFS market and the 36 million-ton containerboard market. Domtar in UFS is the largest producer with a 30% share.

Dillon said the US containerboard market would gain "more supply at a lower capital cost" and it would be done without "cannibalizing" the white paper business. He said more "virgin board" would feed the OCC supply chain, where prices have reached 25-yr highs and is on its most sustained run ever.

The Marlboro mill was the last one that was permitted to make kraft linerboard in the USA, by Williamette Industries in 1990. Dillon said he could not "fathom" Marlboro being shut "because of its wood basket."

"You need to be in the softwood (fiber) belt" and that is where Marlboro is located, he said.

He said Domtar Hawesville and Verso Luke would be higher cost mills than Marlboro, Kingsport, and Catawba. Marlboro, Kingsport, and  Catawba  are located close to softwood fiber. Hawesville  would  have to buy fiber from Mississippi, Alabama, and Tennessee. Luke would be about 250 miles from softwood fiber, he said.

Verso's CEO Christoper DiSantis has said that  the company  is  looking  closely at its assets to determine if reductions are necessary, with coated printing and writing demand down about 5 %/yr.

Two machines with 550,000 tons /yr of combined capacity make coated mechanical and supercalendered paper (SC) at Catawba, according to RISI Mill Intelligence. Two UFS machines with about 595,000 tons/yr of capacity run at Hawesville. One UFS machine with 423,000 tons/yr of capacity runs at Kingsport. Two coated freesheet machines with about 510,000 tons /yr of capacity arc at the Luke operation.

Glatfelter reported this week that for the first time in more than 10 years, the company's specialty paper performance was weaker than the industry average, with its shipments down 5.4%. The paper unit generated $I9I million in sales in the quarter, down 9% vs second-quarter 2016 sales, due to lower prices, and its EBlT was a $13.8 million loss. Glatfelter by the end of September expects to shut an 80,000 tons/year machine at its Chillicothe, OH, mill. "As you can imagine these are difficult decisions given the impact to many of our employees , but we are committed  to taking steps necessary to address the difficult market conditions we are facing," Glatfelter CO Dante Parrini said on Aug. 1. "I think (with the shut), we right­sized the (specialty paper unit's) footprint (and) we get closer to pulp neutrality, ... and I think all these things strengthen the competitive positioning of specialty papers in Chillicothe." Parrini added that "some of our markets are declining faster than industry rates. For example, carbonless and business forms. And with pricing at an 11-year low, we're experiencing higher levels of competition. And in some cases, it just doesn't make economic sense for us to purchase certain grades of pulp."