A Profile of the US. Pulp, Paper, and Paperboard Industry Richard E. Storat Vice President, Economic and Financial Services American Paper lnstiture New York, New York T he primary raw material for the myriad of products that we produce and you use in your daily lives is largely fiber or cellulose derived from trees - a renewable resource. The industry formerly obtained its fiber from another recyclable and renewable resource, namely cotton, in the form of rags. When demand outstripped that source of cellulose, we discovered how to obtain cellulose from trees. The renewability of this resource is underscored by the fact that nearly 3 billion seedlings are planted each year, with forest growth exceeding harvests and losses to natural causes; in fact, the United States has 20 percent more trees today than we had just 20 years ago. Pulping and bleaching processes separate the cellulose 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 a range of commercial and consumer products: printing and writing papers, newspapers, packaging, sanitary and personal care products, and corrugated containers. Pulp and Paper in Perspective With only 5 percent of the world s population, the United States has 12 percent of the world s paper and paperboard mills and 16 percent of the world s pulp mills. The United States manufactures 30 percent of the world s paper and paperboard and 35 percent of the world s pulp. 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 industries employed nearly 700,000 people with a payroll topping $28 billion and generated sales of $122 billion. U.S. mill production amounts to 5 percent of the total value of U.S. manufacturing output, placing pulp, paper, and paperboard among the nation s top 10 manufacturing industries. As the world s top producer, U.S. paper and paperboard mill output is greater than the combined total output of the next four countries - Japan, Canada, Germany, and China. Of the world paper and paperboard market, the United States has 30 percent, Japan, about 12 percent; Canada, 8 percent; Germany, 6 percent; and China, 5 percent. In world market shares of wood pulp, the United States has 35 percent; Canada, 16 percent; japan, 9 percent; the former Soviet Union, 7 percent; and Sweden, 7 percent, according to a United Nations Capacity Survey (U.N. Food Agric. Ass.. 1992). Continuing a long-term trend, total U.S. paper industry exports rose in 1991 to record heights, up 11 percent to 21.4 million tons, valued at $9.7 billion, in spite of slower world economic growth and global 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; fl greater global market focus by U.S. producers; and a very competitive U.S. cost structure. Perhaps the most significant of these factors is the competive cost structure. 7
Labor, Capital, and Capacity Costs Comparative unit labor costs are a key measure of competitiveness because they summarize the combined influences of productivity, compensation, and exchange rates. Partly as a result of favorable exchange rates but mainly as a benefit from productivity advances, U.S. paper industry unit labor costs have held flat since 1982, outperforming other major paper-producing industries around the globe (see Fig. 1). A fortune cover story, called "How American Industry Stacks Up," analyzed the competitiveness of 13 key U.S. industries relative to Japan and Europe. On its "report card," the US. paper industry 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 1930s." Fortune also noted that "the United States leads not just because it has a lot of trees. American companies also have relative lower labor and energy costs, and they have invested more than $100 billion since 1980 to raise productivity and underwrite expansion into new products and markets." The pulp and paper industry requires enormous amounts of capital - $16.7 billion in 1990. Even Index 1982=100 200 after the sharpest spending cutback in recent history, investments in 1991 neared $12 billion and will top $1 0 billion again this year. From 1980 until the end of 1991, a new capacity of almost 21 million tons was added to U.S. mills. As the rate of capacity expansion slows, 2 million additional tons of capacity are still expected to come on-line in 1992. During the 1980~~ the portion of industry capacity in paper mills larger than 500,000 tons per year almost doubled - from 18 percent to more than 32 percent. Pulp mills followed a similar trend. Almost 60 percent of the industry's capacity exists in machines that were either newly installed or extensively rebuilt during the past 10 years. This newest segment of the U.S. paper industry is larger than any other nation's entire industry - more than 1.5 times the size of the entire Japanese paper industry. Industry capital spending also translates into exceptional productivity gains. During the 1980% productivity rose 37 percent, providing the basis for paper industry unit labor costs that are among the lowest in the world, measured in dollars. Changing to meet new customer demands has required significant capital resources. The growing 200 180 160 140 120 180 160 140 120 100 80 100 80 I I I I 601 ' I I I I I I 1980 81 82 83 84 85 86 87 88 89 90 91 Source: Bureau of Labor Statistics 60 Figure l.-ljnit labor costs trendsin the paper industry. Source: Bur. Labor Stat. (1991); Am. Paper hst. (1991). 8
demand for paper -products containing recycled fiber is one example. As a result of a multibillion dollar investment program, fiber consumption from recovered paper is growing more than twice as fast as overall fiber consumption, and this trend is projected to continue to 1995 and beyond. The rate at which the U.S. industry uses recovered fiber jumped to 29 percent in 1991 from less than 24 percent only six years ago. Last year, 31 million tons of paper and paperboard were recovered in the United States - including half the newspapers and close to 60 percent of corrugated boxes. With last year's recovery rate at over 35 percent, the industry is on track to achieve its voluntary 1995 goal to recover 40 percent of all paper Americans use for domestic recycling and export. By 1995, more paper will be recovered for recycling than will be discarded to landfills. Primarily by using its own waste by-products, the U.S. paper industry generates more than 56 percent of its energy needs. Over the past two decades, oil consumption has been reduced by nearly 66 -percent; natural gas consumption by 10 percent; and fossil fuel and energy consumption per ton of paper by 46 percent - while production grew by 60 percent. In addition, over 50 percent of the industry's energy is more efficiently cogenerated, saving the energy content of nearly 24 million barrels of oil annually. Capital Intensity 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 00,000 of plant and equipment. This level is more than twice'the average of domestic manufacturing industries and, excluding petroleum, is matched only by the chemical industry. 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 US. manufacturing in general, which has traced a much slower growth path. The paper industry is the most capital intensive industry in the United States. 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 (see Fig. 2). The industry's capital intensity is extremely high. During the 198Os, on average, 10.7 cents of 9 R.E. STORAT every sales dollar went for capital spending. Until recently, most of the industry's capital spending was provided for by cash flow, allowing for some shortfalls during the early 1980s. From 1989 to 1992, however, cash flow fell far short of capital spending requirements. By doing so, the industry positioned itself well for world-class competitiveness during the 1990s. But it also shouldered a huge debt along the way. The industry has peaked in its cyclical pattern and must now get "end of cycle" returns on these large investments to retain the long-term financial strength that will enable it to remain globally competitive. Being capital intensive also means having to sustain a larger asset base relative to sales and having higher operating rates - in the case of the paper and pulp industry, the highest of any in U.S. industry, averaging 92 percent over the long-term, compared to an 82 percent manufacturing mean and,a 75 percent rate in some industries like transportation. To maintain and improve existing mills and to increase capacity to keep pace with anticipated demand in domestic markets alone, the U.S. paper industry will need to spend some $1 00 billion and add about 19 million tons of new capacity in the 1990s. Pollution Abatement Spending During the 1970s, environmental control expenditures comprised 23.5 percent of capital spending. While remaining in the $400 million per year range during the 1980s, such costs averaged only 8.1 percent of industry investment (see Fig. 3). Capital outlays for environmental compliance, having risen dramatically over the past few years, now exceed $1 billion per year. As a result, the paper manufacturing process today uses 60 percent less water per ton of product produced than it did 23 years ago. Biological oxygen demand of industry wastewaters has been reduced by 70 percent since the first phase of implementation of the Clean Water Act, even though paper production has increased by 50 percent since then. While this recently stepped-up spending does include the industry's response to dioxin-related concerns, none of the multibillion dollar investments in recycling facilities, none of the billion dollar-plus investments that 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. Extrapolating from recent trends and using the pollution spending projections developed by Data Resources, Inc., we estimate that environmental
I 14-14 12-12 10-10 8-0 6-6 4 All Manufacturing - 4 I I I I I I I I I I I I I 1 I I I I "2 74 76 78 80 82 84 86 88 90 92 Source: Iffi, Bureau of Census, API Figure 24omparative capital intensity (capital expenditures as a percent of sales). Source: Intern. Rev. Sew (1991); Am. Paper. lnst. (1991). spending may claim about 20 percent of industry capital during the 1990s. That's the capacity equivalent of 18 world-class paper machines each capable of producing 500 tons per day. The costs of future environmental regulations are especially high for a business as capital inten- sive as paper. Large capital investments relative to sales are required for the industry to remain globally competitive. In turn, the industry's global competitiveness enables it to run 'at the 90-plus percent operating rates that translate into low unit costs. Low-cost operations relative to other global competitors generate the cash flow that provides the in-. vestment capital to sustain the industry's position, closing the loop. If any one link is broken, the sys- tem fails. Since committed capital is neither easily nor inexpensively redirected, one needs to consider carefully the impact of policy prescriptions for the paper industry that may be proved wrong in the long-term - References Data Resources, Inc 1991. Review of U.S. Economy, 10-year Projections. McCraw-Hill. Lexington, MA. Forfune Magazine. 992. How Ameilcan industry stacks March 9: 30-38. United Nations Food and Agriculture of the Nations, 1992. U.N. Capacity Survey: Pulp and Paper Capacities 1991-1996. United Nations Press. New Yak, N Y. 19
I R. E. STORAT 6illion Dollars a. J 3 2.5 21.4% 2.5 2 1.5 17.9% 2 1.5 1 Percent of Total,Capital Spending 1 0.5 1-23.5% 8.1% 0.5 0 1970 's 1980 ' s 1990 * s Trend OR1 Proj. Figure 3.-Pollution abatement expenditures for US. paper, paperboard, and wood pulp mills. Source: Natl. Counc. Paper Indus. Alr Stream Improve. (1990); Am. Paper Inst. (1991); DRI/McGraw Hill (1991). 0