17te U.S. Pulp, Paper and Paperboard Industry: A Profile Good morning! My job today is simple and straightforward: to profile the U.S. pulp, paper and paperboard industry for you. My objective is to offer a factual context into which you can fit the vaned topics to be discussed during the remainder of this symposium. Time is short, so let s get started! To begin with a thumbnail sketch of the industry and its products, the prime raw material for the myriad of products we produce and which you use throughout your daily lives is largely fiber derived from trees -- a renewable resource. The industry first obtained its fiber from another recyclable and renewable resource -- cotton, in the form of rags. When demand outstripped that source of cellulose, the means were discovered for obtaining cellulose from trees. The renewability of our resource is underscored by the fact that nearly 3 billion seedlings are planted eacb year, with forest growth exceeding harvests and losses to natural causes; in fact, our country has 2 percent more trees today than we had just 2 years ago. Many of the processes to be discussed at this conference -- pulping and bleaching -- involve the effort to separate the ceiiulose in trees from other constituents such as lignin with as little damage to the natural cellulose fibers as possible. The kind and extent of pulping depends on the end-use characteristics needed for particular products; the greater the cellulose content, for example, the greater the strength, brightness, longevity, softness and absorptive capacity. Finally, paper and paperboard mills in turn use the pulp to make an extraordinary range of commercial and consumer products, such as printing and writing papers, newspapers, packaging, sanitary and personal care products, and corrugated containers, for example -- some of which will be addressed on Day 3 of this symposium. Now for a profile of the industry. In a nutshell, it is large, globally competitive and capital intensive. PULP & PAPER IN PERSPECTIVE It s large. Operating within a country with only 5 percent of the world s population, the U.S. has 12 percent of the world s paper and paperboard mills and 16 percent of the world s pulp mills. More importantly, the U.S. manufactures 3 percent of the world s paper and paperboard production and 35 percent of the world s pulp production. Last year, 544 mills located in 42 states produced 79.4 million tons of paper and paperboard products and 9 million tons of market pulp. In 1991, the paper and allied products industry s nearly 7, employees, representing a payroll topping $28 billion, generated sales of $122 billion. All told, U.S. mill production amounts to 5 percent of the total value of U.S.
manufacturing output, placing pulp, paper and paperboard among our nation's top ten manufacturing industries. PAPER & PAPERBOARD CAPACITY As the world's #1 producer, U.S. mill output is greater than the combined total output of the next four countries. For paper and paperboard, those next four are Japan, Canada, Germany and China. PULP CAPACITY For pulp, it's Canada, Japan, the former USSR and Sweden. EXPORT GROWTH Not only is the industry large, it is globally competitive. Continuing long term trends, total U.S. paper industry exports in 1991 rose to record heights, up 11 percent to 21.4 million tons, valued at $9.7 billion, in spite of slower world economic growth and glolal overcapacity in several paper industry products. This strong export performance can be attributed to several factors: relatively better demand in foreign markets, fundamentally sound exchange rates, greater global market focus by U.S. producers and, perhaps most of all, a very competitive U.S. cost structure. PAPER INDUSTRY UNIT LABOR COSTS Comparative unit labor costs are a key measure of competitiveness, because they summarize the combined influences of productivity, compensation and exchange rates. Partly due to favorable exchange rates but mainly benefitting from productivity advances, U.S. paper industry unit labor costs have held flat since 1982, outperforming other major paper producing industries around the globe. That it stands virtually alone as a globally competitive American basic manufacturing industry is not the paper industry's view alone. Earlier this year, in a cover story, "How American Industry Stacks Up", Fortune magazine analyzed the competitiveness of 13 key U.S. industries relative to Japan and Europe. On their report card, our's was one of only two industries awarded an "A", which implied "... a dominant position in the world, one not likely to erode significantly in the 199's." In its report, Fortune noted that "... the U.S. leads not just because it has a lot of trees. American companies also have relative lower labor and energy costs, and they invested more than $io billion since 198 to raise productivity and undelwrite expansion into new products and markets." It is that aspect: capital investment that I'd like to zero in on, for a profile of the 2
industry's capital structure will bring some of the industry's most unique aspects into focus. CAPITAL EXPENDITURES Our industry requires enormous amounts of capital. Never less than $5 billion per year, spending reached $16.7 billion in 199. And, even after the sharpest spending pullback in recent history, 1991 investment neared $12 billion, and will top $1 billion again this year. While these commitments are substantial, knowing what the industry has gotten for its investment is also central to profiling the industry's capital structure. CAPAClTY INCREASES From 198 until the end of 1991, almost 21 million tons of new capacity have been added. And, even as the rate of capacity expansion slows, we still expect 2 million additional tons of capacity to come on line in 1992. hlill SIZE The industry built large, modem mills -- world class. This chart shows the distribution of paper and board capacity by mill size in 198 and in 199. During the 198's, the portion of industry capacity in paper mills larger than 5, tonsbear almost doubled -- jumping from 18 to more than 32 percent. And pulp mills followed a similar trend. NEW CAPACITY AND REBUILDS In fact, almost 6 percent of the industry's capacity exists in machines that were either newly installed or extensively rebuilt during the past ten years. Said another way, there is embedded within the U.S. paper industry a "less than ten-year-old" segment that, itself, is much larger than any other nation's entire paper industry - more than 1% times the size of the entire Japanese paper industry. INDUSTRY PRODUCTMTY Industry capital spending also translated into exceptional productivity gains. During the eighties, productivity rose 37 percent, providing the basis for paper industry unit labor costs which are among the lowest in the world, measured in dollars. RECOVERED PAPER UTILIZATION RATE Additionally, meeting changing customer demands have required significant 3
capital resources. A vivid example is the growing demand for paper products containing recycled fiber. As a result of a multi-billion dollar investment program, consumption of fiber from recovered paper is growing more than twice as fast as overall fiber consumption, and is projected to continue this trend to 1995 and beyond. Already the rate at which the industry s mills utilize recovered fiber has jumped to 29 percent in 1991 from less than 24 percent only six years ago. RECOVERYRATE Last year, 31 million tons of paper and paperboard were recovered in the U.S. - including half the newspapers and close to 6 percent of corrugated boxes. With last year s recovery rate at over 35 percent, the industry is right on track to achieving its voluntary 1995 goal to recover -- for domestic recycling and export - 4 percent of all paper Americans use. Significantly, by 1995, more paper will be recovered for recycling than will be discarded to landfills. ENERGY Primarily by using its own waste byproducts, America s paper industry meets Over 56 percent of its energy needs. Over the past two decades, oil consumption has been reduced by nearly 66 percent, natural gas consumption by 1 percent and fossil fuel and energy consumption per ton of paper by 46 percent - all while production grew by 6 percent. In addition, over 5 percent of the industry s energy is more efficiently cogenerated, saving the energy content of nearly 24 million barrels of oil annually - enough to power New York City. CAPITAL EXPENDITURES FOR POLLUTION ABATEMENT Last, but not least, is spending for environmental compliance. These capital outlays, having risen dramatically over the past few years, now exceed $1 billion per year. Among the results: the paper manufacturing process today uses 6 percent less water per ton of product produced than it did 23 years ago. And biochemical oxygen demand of industry wastewaters has been reduced by 7 percent since the first phase of implementation of the Clean Water Act, even though paper production has increased by 5 percent since then. While this recently stepped-up spending dots include the industry s response to dioxin-related concems, none of the multi-billion dollar investments in recycling facilities, none of the billio dollar-plus investments which will be required to comply with the recently enacted Clean Air Act, and none of the associated operating and maintenance costs are reflected in these data. 4 ^.
NET PLANT AND EQUIPMENT PER EMPLOYEE In part, how much an industry has invested per employee defines its capital structure. Currently, on average, each employee in our industry is backed up by more than $1, of plant and equipment. This level is more than twice the average of domestic manufacturing industries and, excluding petroleum, is matched today only by the chemical industry. CAPITAL EXPENDITURES AS PERCENT OF SALES Indeed, when capital investment is measured as a percent of paper industry sales, its intensity has been growing at an average rate of 2.7 percent per year for over two decades. Contrast that to U.S. manufacturing, in general, which has traced a much slower growth path. Not only bas the industry's capital intensity been growing, it is extremely high. In fact, during the 198's, on average, 1.7 cents of every sales dollar went for capital spending. That trend is best judged in comparison to other industries, for it is here that the'industry truly stands alone. COhlPARATNE CAPITAL AS PERCENTAGE OF SALES The paper industry is the most capital intensive industry in the U.S. In the last decade, it was twice as capital intensive as the all-manufacturing average, twice as capital intensive as the chemical industry, and significantly above the primary metals industry. This feature, more than any other, distinguishes the paper industry's capital structure from that of other basic manufacturing industries. CASH FLOW AND CAPITAL EXPENDITURES Until recently, most of the industry's capital spending was provided for by cash flow, allowing for some shortfalls during the first half of the eighties. During the most recent three years, however, cash flow feu far short of capital spending requirements. While the industry has positioned itself exceedingly well for world class competitiveness during the nineties through this unprecedented commitment, it also shouldered a huge level of debt along the way. Now though, the industry has reached the peak in its cycecal pattern where it must get the "back-end-of-cvcle" returns on these large investments in order to retain the long-term financial strength that will enable it to remain globally competitive. OPERATING RATES Being capital intensive also means having to sustain a larger asset base relative to 5
sales, and translates into higher operating rates -- in our case, the highest in U.S. industry, averaging 92 percent over the long-term, compared to an 82 percent manufacturing mean and 75 percent in some industries like transportation. FUTURE CAPITAL SPENDING Some profile of future needs is also important. Just to maintain and improve existing mills and to add the capacity that will be needed to keep pace with anticipated demand in domestic markets alone, America s paper industry will need to spend some $1 billion and add about 19 million tons of new capacity during this decade. How about future environmental requirements? A difficult question, to be sure... But an important one! PROJECTED POLLUTION ABATEMENT EXPENDITURES During the 197 s, environmental control expenditures were a significant 23.5 percent of capital spending. While remaining in the $4 million per year range during the 198 s, they averaged only 8.1 percent of industry investment, even including the end of decade upward spike mentioned earlier. On the right half of the chart are two views of the claim pollution abatement spending, excluding compliance with the new Clean Air Act, may have on total capital requirements during the nineties. Both the extrapolation of our industry s own recent trends and the projection of pollution spending developed by Data Resources, Inc., suggest that environmental spending could claim about 2 percent of industry capital during the 199 s. Translated into capacity terms, one could say that environmental spending will lay claim to the capacity equivalent of maybe 18 world-class 5 ton/day paper machines. Even while it is clear that we cannot calculate these future environmental impacts with precision, it is just as clear that the costs are especially high for a business as capital intensive as paper. INVESTMENT AND COMPETITIVENESS LINKAGE To put this profile of the paper industry into summary perspective for you, let s take a look at this chart. What it depicts are the linked implications of the paper industry s capital intensive structure. To remain globally competitive requires large capital investments relative to sales. In turn, it is the industry s global competitiveness that enables it to run at the 9-plus percent operating rates that translate into low unit costs. And finally, low cost operations relative to other global competitors generate the &b flow that provides the investment capital to sustain the industry s position, closing the loop. 6
If any one link is broken, the system fails. That s why understanding the industry s capital profile is so crucial to your productive consideration of pollution prevention opportunities for the paper industry. Since committed capital is neither easily nor inexpensively redirected, one needs to consider especially carefully for the paper industry the impact of policy prescriptions which might later be proved wrong. And it underscores why companies are best positioned to assess the viability and utility of opportunities for pollution prevention in the context of the myriad factors which enter into the marketplace. So, armed with this profile of the U.S. paper industry, I wish you well as you consider the complex technical and economic issues -- the opportunities and barriers -- associated with pollution prevention in the manufacture of pulp and paper. Thank you! 7
U.S. PULP & PAPER IN PERSPECTIVE 5% of the world's population 12% of the world's paper & paperboard mills 16% of the world's pulp mills 3% of the world's paper 6; paperboard production 35% of the world's pulp production
35 3 25 SHARE OF WORLD PAPER AND PAPERBOARD CAPACITY Top Five Producing Countries4991 35 3 25 2 2 15 15 1 5 U.S.A. Japan Canada Germany P.R. China Source: FA of the UN 1992 Capacity Survey 1 5
4 35 3 25 2 15 1 5 SHARE OF WORLD PAPER GRADE WOOD PULP CAPACITY Top Five Producing Countries-1991 U.S.A. Canada Japan Former U.S.S.R. Sweden Source: FA of the UN 1992 Capacity Survey 4 35 3 25 2 15 1 5
US. EXPORTS OF PAPER,.PAPERBOARD AND MARKET WOOD PULP Millions of short tons 7 EC89283 6 6 5 Wood 5 4 4 ard 2l 1 - I I 196 1965 197 1975 198 1985 199 1995 -
Index i9824 2 18 16 UNIT LABOR COST TRENDS Paper Industry' / Sweden \ 3EC37 2 18 16 14 14 12 1 12 1 8 - U.S. 8 6 198 81 82 83 84 85 86 87 88 89 9 91 Source: Bureau of Labor Statistics 6
Billion $ CAPITAL EXPENDITURES (Paper 6r Allied Products) 3EC228 2 198-91 Total: $11. Billion 2 15 15 Est 1 1 5 5 198 81 82 83 84 85 86 87 88 89 9 91 92 Source: Dept. of Commerce
ANNUAL CAPACITY INCREASES-PAPER & PAPERBOARD I Annual Capacity 3 2 1. 198 81 1991-86,96, 198-66,368, Net Additions- 2,592, 2.41 I *91 1.97 El I 11.48 1*2 1.4 83 85 86 82 84 Source: API Capacity Survey 87 2.35 88 1.63 89 2.24 9 2.57 91 2.1 92 Est.
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Index 1982-1 16 PULP, PAPER AND BOARD INDUSTRY ( All Employees-Output Per Employee Hour) 3EC229 16 14 12 1 8 6 4 2 14 12 1 8 6 4 2 I 1 1 1 1 1 1 1 l l 1 1 1 1 1 1 1 l l 1 1 1 1 1 l l 1 1 1 1 1 ~ ~ ~ ~ ~ ~ 195 55 6 65 7 75 8 85 9 Source: Bureau of Labor Statistics
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Percent 42 4 38 36 34 32 3 28 26 24 22 U.S. PAPER RECOVERY RATE I I I I I I I I I I I I I I I I 88 9 92 94 96 198 82 84 86.7 3EC384 42 4 38 36 34 32 3 28 26 24 22
US. PULP, PAPER AN? PAPERBOARD INDUSTRY Millions 'of BTU's 2 18 FOSSIL FUEL AND PURCHASED ENERGY,CONSUMPTION PER TON (Unadjusted) ENEROB4T 2 18 16 16 14 14 12-46.3%* 1972-'9 12 ry On an adjusted basis. Adjustments made for process changes between the base year 6 current year which affect energy efficiencies. 1 I I I I I I I I I I I I I I I I 1 I I 1972 74 76 78 8 82 84 86 88 9 Source: API Energy Monitoring System 1
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CAPITAL EXPENDITURES AS A PERCENT OF SALES Percent 16 3EC222 16 14 Paper Companies- 198-89 average: 1.7% 14 12 12 1 1 8 6 Manufacturing-la6%/Yr 8 6 4 I I I I I I I I I I I I I I I I I I I I I 1972 74 76 78 8 82 84 86 88 9 92 Source: Dept. of Commerce, API 4
3EC217 A U 12 1 Paper 6 Allied Products \ n 114 12 1 1 8 / Primary 6 4 Y All Manufacturing 2 I I I I I I I 74 76 78 8 82 Source: IRS, Bureau of Census, API I I I I I I I I I I I I I J 2 84 86 88 9 92
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FUTURE CAPITAL SPENDING Capital Spending of an estimated $9-$1 Billion from 199-2 includes adding 19 million tons of capacity, the equivalent of 14-5 ton/day mills.
PAPER, PAPERBOARD AND WOOD PULP MILLS Pollution Abatement Expenditures Billion Dollars 3 3EC218 3 2.5 21.4% 2.5 2 1.5 17.9% 2 1.5 1 Percent of Total Capital Spending 1.5.5 197 ' s 198 ' s Trend DRI Proj.