Built to Last

The challenges facing the North American paper and paperboard industry have been well documented. With a number of paper companies in bankruptcy protection or close to it, many industry watchers wonder how much scaling back yet remains for the paper industry is.

One of the companies that has survived and appears poised for success as the economy improves is Sonoco. From its humble beginnings 110 years ago as the Southern Novelty Co., which made cone-shaped paper yarn carriers, the company has grown to have a global presence with nearly 300 locations in North America, Europe, Australasia, and Central and South America.

Despite its growth as a global competitor, the company sticks close to its roots as it has kept its headquarters in the original location of Hartsville, S.C.

In a wide-ranging question-and-answer session, James C. Bowen, senior vice president, Sonoco Recycling and Internal Supply, discussed some of the changing dynamics in the paper industry with Recycling Today Media Group Senior Editor and Internet Editor Dan Sandoval.

James Bowen (JB): In the short term, I feel that demand has probably leveled out. However, segments of the industry still have significant supply overhang as evidenced by low operating rates, so there are more plant closures to come.

In the longer term, I think we will see further demand deterioration for certain grades such as newsprint and P&W (printing and writing) grades. I expect a rebound in packaging grades as consumer demand returns to more normal levels.

JB: I believe this trend will continue. In a mature, declining industry, further consolidation is fairly predictable. A fewer number of financially stronger companies is better for the industry. The industry must have reasonable returns to afford capital reinvestment to be able to compete in the global arena and against alternative packaging forms.

JB: Actually, the drop in the economy hasn’t negatively affected all packaging. A number of our consumer divisions are doing very well as customers stay home and consume more products, and packages, designed for in-home consumption. We have primarily been impacted in our industrial businesses. We have a long history as a company, so we have experience managing through recessions. Subsequently, we know how to quickly react to control costs and working capital and adjust our plant footprint to the realities with which we are faced.

I liken managing a company to one’s personal finances. If you personally overload on debt and credit cards for instance, you will suffer more as your paycheck gets impacted. It’s the same with any company. Entering a recession with a high debt load and a poorly structured balance sheet is problematic. Sonoco is a conservative, prudently managed company and subsequently, our healthy balance sheet and customer mix serves us well during difficult times.

JB: As our recycling plants are geographically close to our paper mills, one obvious advantage is a built-in customer base. We can enter into long-term agreements with a reasonable surety of material movement and without the concern of whether we will get paid. Plus, we can service customers with multiple locations very effectively. And being part of a larger company, we have access to capital and benefit of a strong balance sheet.

On the flip side, small independents probably operate with somewhat lower labor and benefit costs.

JB: Each time we get into strong markets for recyclables, as we have for the past few years up until late 2008, we see contracts and deals that aren’t sustainable. One lesson we have learned is that this is a very volatile business. The best move that can be taken is to protect the downside, i.e., be prepared to operate in low price zones for extended periods.

The steps we take to grow our recycling business are to build on sustainable customer value. Price paid is always an important variable but we rely more heavily on service and integrity.

JB: Absolutely. It is why we created our newest business, Sonoco Sustainability Solutions, or as we term it, S3.

Through S3, we offer customers the opportunity to avoid cost by reducing and diverting materials currently going to landfill. We convert those waste streams into revenue streams by finding alternative uses for the material. And in many cases, we offer a closed-loop solution, whereby the recovered material is sent to one of our mills, converted into paper and subsequently into a new package for the customer.

JB: With S3 in particular, we are now taking in a broader array of material beyond just paper.

We have a significant plastics business and we are looking for greater integration opportunities for recycled plastics and other materials.

JB: Sonoco has global paper operations, so we have a good view internally of the cost structure involved with operating in different regions of the world. The way for the North American industry and Sonoco to compete is to have first quartile costs. We extensively employ both lean and Six Sigma methodology along with prudent capital management. Our internal productivity processes are strong.

I also expect that we are in an energy cost lull, and that over the next few years we will see the cost of oil return to very high levels. Shipping goods long distances will be more cost prohibitive, and I expect regional paper manufacturers will have an edge, particularly if they are focusing now on reducing their reliance on fossil fuels.

Sonoco just recently announced a new biomass boiler for its largest paper mill in Hartsville, S.C.

JB: As a personal opinion, I prefer open trade. There is a role for government to play to ensure a level playing field for all where currencies, lax environmental or product standards or governmental tax rebates are being used to unfairly compete. I believe the best way for government to help the industry is through fair taxation relative to the rest of the world, support and reward for capital re-investment and a sound energy policy that supports greater self sufficiency longer term.

JB: Basically we have to continue to educate the public that just because a material is collected at curbside doesn’t mean it was recycled if it is later disposed of at the MRF or at the paper mill. Normal laws of supply and demand will dictate a lower price, or no market at all, during industry downturns for the more highly contaminated materials, I think.

JB: Paper is comprised of a number of grades so it’s a mixed bag. P&W grades and newsprint will be most negatively impacted, I think, as consumers continue their move to getting news and entertainment via the Web and other electronic means. I expect a rebound in tissue and certain packaging grades as population growth will generate some base level of demand growth.

Relative to the recycling industry, I expect continued growth. Paper demand in the developing world, especially China and India, will continue to grow. And I think the bulk of their installed capacity will be based on recovered fiber. They will continue to look to North America as a fiber basket, particularly as the export imbalance in the U.S. will offer attractive container back-haul rates.