Tissue Thin

Achieving net profits is among the foremost goals for any incorporated business, and a comfortable net profit margin can indicate that this goal is being met.

As of mid-2006, much of the North American paper industry is struggling to achieve this basic goal, according to earnings reports figures compiled and presented at the Yahoo! Finance Web site.

Averaging out reported figures from 37 papermaking companies that sell their stock on North American markets, the paper industry checks in with an average net profit margin of 0.60 percent.

That figure compares to a 9.22 percent average for utilities; 6 percent for personal computer makers; 10.70 percent for makers of communications equipment; 17.10 percent for regional banks in the U.S. Southeast; and 12.10 percent for publicly traded steelmakers.

Clearly, profit margins in the paper industry right now are as thin as the tissue produced at some of its mills.

IT TAKES A SPECTRUM. As discouraging as the 0.60 percent net profit margin average is, it should be noted that an average is created by accumulating a range of figures.

In the case of paper industry margins, the good news is that there are several companies operating on healthier margins, but the flip side is also true: As of their most recent financial reports, some 15 publicly traded paper companies are operating at a loss.

Among the prominent paper and board producers operating at a loss in their most recently completed quarters are Smurfit-Stone Container Corp., Bowater Inc., Domtar Inc., MeadWestvaco Corp. and Caraustar Industries Inc.

Of those, Caraustar and Smurfit-Stone are the farthest from profitability, with Smurfit-Stone operating at a -2.32 percent margin and Caraustar at -3.51 percent.

Black ink is being enjoyed by several noteworthy companies as well. With more modest (yet still existent) profits are Stora Enso (1.07 percent margin), International Paper Co. (1.83 percent), Rock-Tenn Co. (2.01 percent), Sonoco Products Co. (5.38 percent), Abitibi-Consolidated Inc. (12.53 percent), Temple-Inland Inc. (13.40 percent) and Neenah Paper Inc. (51.33 percent).

Such widely divergent results often result from one-time occurrences (such as the sale of timberland by Neenah Paper) and have also yielded differing comments from industry executives as to how their particular companies have found themselves producing either red or black ink.

Among the comments from recent earnings announcements.

CHANGING LANDSCAPE. For paper makers to enjoy a higher overall industry average for net profit margins, several widespread changes may need to take place.

In basic-materials sectors, most analysts point to overcapacity as a culprit when margins are squeezed. For beleaguered paper industry employees, it may be hard to believe that further capacity cuts are necessary, yet mill closures and cutbacks continue to be commonplace in North America.

In the first 10 months of 2006, though, companies including Bowater, Caraustar, Catalyst Paper, the former Groveton Paperboard and Norampac have announced extended downtime at mills, shut down production lines or closed entire mills.

While the volume of capacity being idled may finally be less compared to earlier in the decade, North America is also commonly cited as lagging in reinvestment in newer, cost-effective technology compared to papermaking facilities in Asia and Europe.

The American Forest & Paper Association (AF&PA), Washington, recently commissioned Price WaterhouseCoopers to conduct a study to determine to what extent American tax policy is discouraging reinvestment.

The firm’s findings included a comparison of "total effective tax rates" for paper manufacturing companies as of 2005 that revealed that Canada and the United States imposed higher taxes on papermakers than other companies examined.

While Canada was taxing the profits of papermakers at a 63 percent rate and the United States at a 51 percent rate, nation’s such as Finland at 43 percent, Indonesia at 34 percent, China at 30 percent and Brazil at 28 percent offered a climate for better profit margins to their paper mills.

"The U.S. tax system raises very high hurdles compared to other countries," the report’s authors concluded.

Finally, for reinvestment in many grades of paper manufacturing to take place, companies and their investors will have to be convinced that future demand for things like newspapers, copier paper and cardboard boxes will be sufficient.

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The spread of electronic communication in the home and workplace (Internet news instead of newspapers and magazines; e-mails and PDFs instead of office correspondence and memorandum; electronic data storage instead of paper filing systems) is playing havoc with attempts to project the future demand for many types of paper.

In a presentation to attendees of Recycling Today’s European Paper Recycling Conference, which took place in Barcelona in September, Graham Moore of research and consulting firm Pira International, Surrey, U.K., offered a summary of a study that considered long-term trends in the paper industry.

De-inkers and recyclers of the old newspapers (ONP) grade may need to contemplate a future with far fewer newspapers, according to the Pira study. Newspaper publishers are facing declining circulations and at the same time are using smaller sheet measurements for the papers that they are producing. Beyond 2016, "printed paper products may be in serious decline," Moore remarked.

In the office grades, a trend to watch will be to what extent office workers continue to print out e-mails and other documents they receive digitally, according to the same Pira study cited by Moore.

The answers to such questions affect recyclers on both the supply and the demand side. If such segments as the health care industry genuinely move away from the paper-on-clipboard chart system to an electronic tracking and recordkeeping system, the consequences could be dramatic.

A September article in The News Journal of Wilmington, Del., conveys the notion that long-held visions of the "paperless office" remain elusive. However, some regional businesses contacted for the story could be early adopters of a more paper-free future.

The Alfred I. DuPont Hospital for Children in Rockland, Del., is cited in the article as being "in the vanguard" of the paperless medical records movement. The hospital has already converted its outpatient medical records system to a fully electronic online one and will also be doing so for its inpatient records next year.

The hospital’s director of information management estimates that it has cut its paper consumption by 75 percent and has similarly reduced the number of boxes it sends to its records management vendor.

Contemplating such scenarios continues to create challenges for paper companies as they consider how to invest in their future production capacity.