Open Collections

UBC Theses and Dissertations

UBC Theses Logo

UBC Theses and Dissertations

The economic outlook for the woodpulp industry in British Columbia Wood, William Fordham Johnson 1966

Your browser doesn't seem to have a PDF viewer, please download the PDF to view this item.

Item Metadata

Download

Media
831-UBC_1966_A4_5 W6.pdf [ 5.4MB ]
Metadata
JSON: 831-1.0102395.json
JSON-LD: 831-1.0102395-ld.json
RDF/XML (Pretty): 831-1.0102395-rdf.xml
RDF/JSON: 831-1.0102395-rdf.json
Turtle: 831-1.0102395-turtle.txt
N-Triples: 831-1.0102395-rdf-ntriples.txt
Original Record: 831-1.0102395-source.json
Full Text
831-1.0102395-fulltext.txt
Citation
831-1.0102395.ris

Full Text

THE ECONOMIC OUTLOOK FOR THE WOODPULP INDUSTRY IN BRITISH COLUMBIA by •WILLIAM FORDHAM JOHNSON WOOD B. Comm., U n i v e r s i t y o f B r i t i s h Columbia, 1963 A THESIS IN COMMERCE SUBMITTED TO THE FACULTY OF GRADUATE STUDIES IN PARTIAL FULFILMENT OF THE REQUIREMENTS OF THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION We accept t h i s t h e s i s as conforming t o t h e r e q u i r e d s t a n d a r d THE UNIVERSITY OF BRITISH COLUMBIA A p r i l , 1966 In p r e s e n t i n g t h i s t h e s i s i n p a r t i a l f u l f i l m e n t o f t h e r e q u i r e m e n t s f o r a n a d v a n c e d d e g r e e a t t h e U n i v e r s i t y o f B r i t i s h C o l u m b i a , I a g r e e t h a t t h e L i b r a r y s h a l l m a k e i t f r e e l y a v a i l a b l e f o r r e f e r e n c e ' a n d s t u d y . I f u r t h e r a g r e e t h a t p e r -m i s s i o n f o r e x t e n s i v e c o p y i n g o f t h i s t h e s i s f o r s c h o l a r l y p u r p o s e s may b e g r a n t e d b y t h e H e a d o f my D e p a r t m e n t o r by h i s r e p r e s e n t a t i v e s . I t i s u n d e r s t o o d t h a t c o p y i n g o r p u b l i -c a t i o n o f t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l n o t b e a l l o w e d w i t h o u t my w r i t t e n p e r m i s s i o n . D e p a r t m e n t o f Commerce  T h e U n i v e r s i t y o f B r i t i s h C o l u m b i a V a n c o u v e r 8 , C a n a d a D a t e A p r i l 2 9 . 1 9 6 6 ABSTRACT The Honourable Mr. Ralph Loffmark, B r i t i s h Columbia's M i n i s t e r o f Trade and Commerce, has taken the p o s i t i o n t h a t demand f o r woodpulp w i l l g r e a t l y exceed the sup p l y d u r i n g t h e next f i v e y e a r s . On the o t h e r hand, l e a d e r s o f B r i t i s h Columbia's p u l p and paper i n d u s t r y f e a r t h a t a l a r g e s u r p l u s o f p u l p i s i n e v i t a b l e . In t h i s t h e s i s , the d i f f e r e n c e o f o p i n i o n was examined by f o r e -c a s t i n g demand f o r paper and paperboard f o r the p e r i o d o f 1965 t o 1975. From t h i s e s t i m a t e was d e r i v e d the expected requirements f o r c h e m i c a l p u l p and bl e a c h e d s u l p h a t e market p u l p f o r the same p e r i o d . The demand f o r b l e a c h e d s u l p h a t e was then compared w i t h the p o t e n t i a l supply, l e a d i n g t o the judgement t h a t a s u r p l u s c o n d i t i o n w i l l e x i s t . F i n a l l y , t he p r i n c i p a l f a c t o r s which would a f f e c t the f i n a n c i a l outcome f o r an independent b l e a c h e d s u l p h a t e p u l p m i l l were a n a l y z e d . T h e ' c o n c l u s i o n was reached t h a t an independent f i r m would be p r o f i t a b l e i n s p i t e o f the a n t i c i p a t e d s u r p l u s . i i TABLE OF CONTENTS Page ABSTRACT . . . . . i i LIST OF TABLES i v LIST OF FIGURES v i ACKNOWLEDGEMENT v i i Chapter I INTRODUCTION . . . . . . . . . 1 O b j e c t i v e o f the T h e s i s I I PRINCIPAL FACTORS OF THE WOODPULP INDUSTRY . . 6 The Product Breakdown o f the Market Market Pulp Summary I I I THE WOODPULP MARKET. 23 Growth o f Market P r e v i o u s F o r e c a s t s The AuthorIs F o r e c a s t Summary IV ANALYSIS OF SELLING PRICE AND PRODUCTION COST DATA 57 An Average M i l l Net Value M i l l P r o d u c t i o n Costs V FINANCIAL PROSPECTS FOR AN INDEPENDENT MILL. . 72 F e a s i b i l i t y Study D e f e n s i v e S t r a t e g i e s o f E s t a b l i s h e d Producers Courses o f A c t i o n Open t o an Independent M i l l Summary VI CONCLUSIONS 85 BIBLIOGRAPHY 88 APPENDIX 92 i i i LIST OF TABLES T a b l e Page 2.-1 Types o f Woodpulp 8 2-2 1963 World Pulp Consumption 8 2-3 World Shipments o f Woodpulp f o r the Years 1950, I960; and 1963 9 2-4 P r i c e s o f Bleached K r a f t Pulp, U.S. Market 1965 13 2-5 C u r r e n t B.C. Producers o f Bleached and Semi-Bleached K r a f t 19 2- 6 Bleached Market Pulp M i l l s Under C o n s t r u c t i o n i n B r i t i s h Columbia 20 3- 1 World Demand - Paper and Paperboard, T o t a l Pulp And Chemical Pulp 1955-1964, and FAO F o r e c a s t 1975 23 3-2 P a l e y Report 25 3-3 S t a n f o r d Research I n s t i t u t e F o r e c a s t 26 3-4 F o r e c a s t by I n t e r s t a t e & F o r e i g n Commerce Committee 27 3-5 C o r r e l a t i o n C o e f f i c i e n t 29 3-6 G.N.P. Growth Rates • 30 3-7 1965 FAO F o r e c a s t Compared w i t h 1964 A c t u a l Paper Consumption 31 3-8 F o r e c a s t V a r i a b l e s 33 3-9 F o r e c a s t o f Paper Demand; 1970 and 1975 33 3-10 World P r o d u c t i o n o f Chemical Pulp 35 3-11 E x p o r t s o f Bleached and Semi-Bleached K r a f t Pulp, 1955-1964 37 i v T a b l e Page . 3-12 Imports o f Bleached and Semi-Bleached K r a f t Pulp 1955-1964 39 3-13 P e r c e n t o f Bleached K r a f t Per Ton o f Paper and Paperboard; Western Europe, 1953-1960 40 3-14 Bleached K r a f t Market Pulp c f . Chemical P u l p 40 3-15 P r o j e c t e d Demand f o r B/K Market Pulp, 1970 and 1975 42 3-16 P r e d i c t e d D i s t r i b u t i o n o f B/K Market Pulp, 1970 and 1975 42 3-17 Per C a p i t a Paper Consumption Gain, 1950-1964 44 3-18 1970 Supply c f . Demand 50 3-19 New Supply Bleached K r a f t Market Pulp, Canada 1965-1969 51 3-20 Supply c f . Demand 53 3- 21 Comparison o f B.C. P r o d u c t i o n Tonnages, 1964 55 4- 1 December 1965 Bleached K r a f t P r i c e s 58 4-2 American P r i c e s , 1955-1965, F u l l y Bleached K r a f t (G.E. 89/90) 59 4-3 F o r e c a s t o f Bleached K r a f t P r i c e s 61 4-4 Expected Average Water F r e i g h t Rates, 1966-1970 62 4-5 C a l c u l a t i o n o f M i l l Net, 1960-1970 ' m 64 4-6 Weighted Average M i l l Net, 1966-1970 66 4-7 Comparison o f Swedish and Canadian B/K Costs 67 4-8 T y p i c a l P r o d u c t i o n Costs o f Bleached K r a f t Per S.A.D.T., 68 4- 9 B.C. Wood Costs 69 5- 1 Proposed B/K M i l l s 73 v LIST OF FIGURES F i g u r e Page 1. Bleached K r a f t Market P u l p as a P e r c e n t o f T o t a l Chemical Pulp 41 2. Supply c f . Demand - Bleached K r a f t Market Pulp 52 v i ACKNOWLEDGEMENT The author i s g r e a t l y i n d e b t e d t o P r o f e s s o r J . N. Bray o f the F a c u l t y o f Commerce and Busi n e s s A d m i n i s t r a t i o n , The U n i v e r s i t y o f B r i t i s h Columbia. Mr. Bray's guidance, h e l p f u l comments, and c r i t i c i s m of t h e p r e l i m i n a r y d r a f t o f t h i s t h e s i s c o n t r i b u t e d immeasurably t o t h e p r e p a r a t i o n o f the f i n a l d r a f t . v i i CHAPTER I • INTRODUCTION On November 29, 1965, i n a speech b e f o r e the A s s o c i a t e d Chambers o f Commerce o f the Lower Mainland, the Honourable Mr. Ralph Loffmark, B r i t i s h Columbia's M i n i s t e r o f Trade and Commerce^ s t a t e d t h a t the f e a r s o f o v e r p r o d u c t i o n o f p u l p and paper as a r e s u l t o f the c u r r e n t unprecedented expansion o f t h i s p r o v i n c e ' s wood p r o d u c t s i n d u s t r y are unfounded. He continued? I n c r e a s i n g w o r l d demand over the next f i v e y e a r s w i l l f a r exceed new c a p a c i t y f o r p r o d u c t i o n by B r i t i s h Columbia m i l l s . Demand f o r wood-derived p r o d u c t s c o u l d i n c r e a s e by f i f t y m i l l i o n t ons i n the next f i v e y e a r s , he a s s e r t e d , but B r i t i s h Columbia's p r o d u c t i v e c a p a c i t y was keyed t o o n l y s i x p e r c e n t annual market growth r a t e , or t h r e e m i l l i o n t o n s . Mr. Loffmark concluded h i s remarks w i t h t h i s statements "There a r e warnings o f o v e r p r o d u c t i o n - don't you b e l i e v e i t . " Leaders o f the B.C. p u l p and paper i n d u s t r y , n o t a b l y the Honourable J . V. Clyne and Mr. L. L. G. Be n t l e y , r e t o r t e d t h a t the M i n i s t e r ' s statements were "shocking", 1 "Loffmark Doubts Pulp G l u t " , The P r o v i n c e , Vancouver, November 30, 1965, p. 20. 2 2 " i r r e s p o n s i b l e " , and "not i n accordance w i t h the f a c t s " . A spokesman f o r the manufacturers p o i n t e d out two s a l i e n t f a c t s . F i r s t , t he i n d u s t r y ' s e x p e c t a t i o n o f p u l p s u r p l u s e s i s based upon a r e c e n t study by the Food and A g r i c u l t u r e O r g a n i z a t i o n (FAO) o f t h e U n i t e d Nations which p r e d i c t e d t h a t , i n s p i t e o f a f i v e p e r c e n t i n c r e a s e i n w o r l d demand f o r p u l p and paper f o r the next f i v e y e a r s , the f o l l o w i n g p u l p s u r p l u s e s would o c c u r t 1966 925,000 Tons 1967 1,585,000 1968 2,325,000 1969 2,425,000 1970 2,020,000 Secondly, t h e Scandinavian producers have d e c i d e d t h a t each p u l p m i l l w i l l cease p r o d u c t i o n f o r a t h i r t y - d a y p e r i o d between January and August 1966 i n o r d e r t o s t a b i l i z e the market. On December 2, 1965, Mr. Loffmark was i n t e r v i e w e d by Mr. A r t McKenzie o f The P r o v i n c e , a t which time he ex-p r e s s e d h i s annoyance a t the o u t b u r s t by the l e a d e r s o f the 4 i n d u s t r y and r e a f f i r m e d h i s p o s i t i o n . He then o f f e r e d t h e f o l l o w i n g f i g u r e s t o s u b s t a n t i a t e h i s c l a i m s . During 1964, B r i t i s h Columbia produced 3.5 m i l l i o n tons o f p u l p , c o n v e r t e d 2 "Firms H i t Loffmark Pulp Claim", The Sun, Vancouver, November 30, 1965, p. 1. 3 "I n d u s t r y Says Loffmark E r r s on Pulp", The P r o v i n c e , December 1, 1965, p. 21. 4 "Loffmark R e t o r t s With Data C l a i m i n g Strong P u l p Demand", The P r o v i n c e , December 2, 1965, p. 17. 3 1.7 m i l l i o n o f t h i s i n t o paper, and shipped 1.8 m i l l i o n tons o f p u l p t o w o r l d markets. By 1970, the new p r o d u c t i v e c a p a c i t y f o r B.C. s h o u l d be 6.5 m i l l i o n t o n s . However, world demand f o r p u l p i n 1964 was 92 m i l l i o n tons, and by 1974-5 - i t s h ould be 132 m i l l i o n . The M i n i s t e r argued t h a t the i n c r e a s e i n B.C. p u l p p r o d u c t i o n o f t h r e e m i l l i o n tons by 1970 was not s i g n i f i c a n t i n view o f w o r l d demand, and t h a t any amount o f p u l p c o u l d be s o l d a t a p r i c e . No f u r t h e r p u b l i c comment has i s s u e d from B.C. i n d u s t r y r e p r e s e n t a t i v e s . They have, however, r e c e i v e d support from Major Roy Johnsen, P r e s i d e n t o f the B r i t i s h Wood Pulp A s s o c i a t i o n , who p r e d i c t e d o v e r p r o d u c t i o n and e x c e s s i v e s t o c k s "because o f t h e expansion which i s t a k i n g 5 p l a c e i n B r i t i s h Columbia". A comparison o f 1964 w i t h 1965, he i n s i s t e d , j u s t i f i e d h i s statements "Pulp p r o d u c t i o n up 6%, s a l e s up 2%, but i n v e n t o r i e s up 70% over the same 6 p e r i o d as 1964". F u r t h e r support f o r the i n d u s t r y ' s c l a i m i s found i n t h e r e c e n t r e d u c t i o n o f woodpulp p r i c e s throughout Western Europe. In October 1965, i n o r d e r t o reduce i t s i n v e n t o r y , a Scandinavian m i l l lowered i t s p r i c e on Bleached Sulphate p u l p f o r a Y u g o s l a v i a n buyer. When t h i s news reached French buyers, they, demanded equal treatment and thereby t r i g g e r e d a c o l l a p s e o f the p r i c e s t r u c t u r e f o r a l l grades o f woodpulp from $10 t o $12 a ton, or 7.5%. 5 Pulp and Paper, v o l . 39, no. 50, December 13, 1965, pp. 7-8. 6 I b i d . , p. 8. 4 The s u b j e c t o f worl d demand f o r woodpulp i s c r u c i a l t o the f u t u r e p r o s p e r i t y o f the B r i t i s h Columbia i n d u s t r y and economy. Should c u r r e n t b u i l d i n g p l a n s c r e a t e a v a s t s u r p l u s o f p u l p , the B.C. i n d u s t r y w i l l be unable t o operate a t f u l l c a p a c i t y , w i t h the r e s u l t t h a t p r o f i t s w i l l be low o r perhaps n o n - e x i s t e n t . On the o t h e r hand, i f a shortage o f p u l p o c c u r s , the f o r e s t r e s o u r c e s o f the p r o v i n c e w i l l not be u t i l i z e d t o the maximum p o t e n t i a l . OBJECTIVE OF THE THESIS T h i s t h e s i s w i l l a n a l y z e t h e worl d consumption o f paper and paperboard f o r the p e r i o d 1955 t o 1964 and w i l l i s o l a t e the important v a r i a b l e s t o be used f o r a f o r e c a s t o f demand f o r these p r o d u c t s i n 1970 and 1975. From t h i s * e s t i m a t e o f p o t e n t i a l consumption we w i l l d e r i v e a f o r e c a s t o f demand f o r bl e a c h e d s u l p h a t e p u l p ( k r a f t ) . Bleached k r a f t was s e l e c t e d becauses 1. A l l b ut one o f the B.C. m i l l s under expansion o r c o n s t r u c t i o n are designed t o manufacture t h i s p r o d u c t . 2. The demand f o r bl e a c h e d k r a f t has r i s e n 500% s i n c e 1950, o r more than twice t h a t o f any o t h e r c a t e g o r y o f p u l p used i n paper-making. 3. Bleached k r a f t i s e s s e n t i a l i n the manufacture o f h i g h q u a l i t y , s t r o n g , l i g h t - w e i g h t paper and paper-board. S t a t i s t i c s i n d i c a t e a more r a p i d a c c e l e r a t i o n o f demand f o r thes e grades o f papers than f o r any o t h e r s . 5 Subsequently, we w i l l p r o j e c t the expected world supply of bleached k r a f t f o r the same years i n an attempt t o r e s o l v e the d i s p u t e of shortage versus s u r p l u s . F o l l o w i n g t h i s , we w i l l examine c u r r e n t bleached k r a f t s e l l i n g p r i c e s and c o s t s f o r a new independent B.C. m i l l w i t h a view t o p r e d i c t i n g the f i n a n c i a l outcome of such a venture. F i n a l l y , we w i l l d i s c u s s the s t r a t e g i e s o f e s t a b l i s h e d producers and suggest p o s s i b l e c o u n t e r - s t r a t e g i e s an independent m i l l might adopt. 6 CHAPTER I I PRINCIPAL FACTORS OF THE WOODPULP INDUSTRY Our a n a l y s i s of the woodpulp i n d u s t r y w i l l begin w i t h a d i s c u s s i o n of the product and a breakdown of i t s market. F o l l o w i n g t h i s , we w i l l look a t the'supply o f the raw m a t e r i a l , the s t a t e o f technology, labour c o s t s , s e l l i n g p r i c e s , and the producers. THE PRODUCT Woodpulp i s c e l l u l o s e f i b r e which i s converted i n t o paper, paperboard, t e x t i l e s , and chemicals. Most of the world's pulp i s obtained from t r e e s although, i n many p a r t s of the world, rags, hay, grass, reeds, bamboo, and sugar cane are u t i l i z e d . Paper can be manufactured from any f i b r o u s m a t e r i a l . Two major c l a s s i f i c a t i o n s are i n c l u d e d ' i n the ge n e r a l term, woodpulp - groundwood, and chemical pulp. The former; a l s o known as mechanical pulp, r e s u l t s from the process of g r i n d i n g logs u s i n g a high-speed g r i n d s t o n e . Newsprint i s 7 5 % groundwood, w h i l e coarse grade papers, such as are found i n cheap pulp magazines, t e l e p r i n t paper, and low-cost t i s s u e paper, are a l s o d e r i v e d from t h i s m a t e r i a l . 7 In 1963, world consumption o f groundwood amounted t o 20,327,000 t o n s . ^ In i t s f i r s t stage, the p r o c e s s which y i e l d s c h e m i c a l p u l p u s u a l l y c o n s i s t s of r e d u c i n g the l o g s to c h i p s measuring about 5/8 i n c h i n l e n g t h and 1/8 i n c h i n t h i c k n e s s . The c h i p s a r e subsequently combined w i t h e i t h e r an a c i d o r an a l k a l i n e s o l u t i o n and cooked under steam p r e s s u r e i n a d i g e s t e r t o break down the l i g n i n and o t h e r bonding agents which h o l d the c e l l u l o s e f i b r e s t o g e t h e r . A f t e r the cooking phase, the f i b r e o r p u l p i s washed, screened, b l e a c h e d (sometimes), and e i t h e r t u r n e d i n t o paper o r d r i e d as woodpulp. The a c i d treatment produces s u l p h i t e p u l p , the l e a d i n g chemical grade u n t i l the e a r l y 1900's. The a l k a l i n e p r o c e s s manufactures s u l p h a t e o r k r a f t p u l p which now forms, by f a r , the l a r g e s t p o r t i o n o f the chemical p u l p market. By a d d i t i o n a l treatment i n e i t h e r c h e m i c a l p r o c e s s a s p e c i a l l y •• designed m i l l can produce d i s s o l v i n g o r s p e c i a l a l p h a p u l p which i s manufactured i n t o t e x t i l e s and c h e m i c a l s . In the market these major grades a r e f u r t h e r s u b d i v i d e d a c c o r d i n g t o the e x t e n t o f the b l e a c h i n g p r o c e s s . The grades a r e u l t i m a t e l y s o l d under the f o l l o w i n g c a t e g o r i e s : 1 Reference T a b l e s , Canadian Pulp and Paper A s s o c i a t i o n , September 1965, p. 33. 8 TABLE 2-1 TYPES OF WOODPULP Grade G.E. B r i g h t n e s s * Groundwood 55/57 Bleached Groundwood 65/70 Unbleached S u l p h i t e 60/65 Bleached S u l p h i t e 90/94 Unbleached Sulphate 26/30 Semi-Bleached Sulphate 68/75 Bleached Sulphate 89/90 * The Standard employed i s a G e n e r a l E l e c t r i c Meter t h a t compares the whiteness o f t h e p u l p w i t h magnesium o x i d e (100 p t s . ) . In 1963 worl d consumption o f paper and paperboard t o t a l l e d 96.2 m i l l i o n t o n s . A g e n e r a l breakdown o f t h e p u l p used by grade o f f u r n i s h f o l l o w s s TABLE 2-2 1963 WORLD PULP CONSUMPTION Short Tons Grade (000's) Groundwood - Bleached & Unbleached - 20,327 S u l p h i t e - Unbleached 4,821 - Bleached 5,840 Sulphate - Unbleached 16,822 - Bleached & Semi-Bleached 13,137 Other Grades - Semi-Chemical 3,719 - Soda 592 Communist C o u n t r i e s (grades not shown) 6, 944 Waste Paper & M i s c e l l a n e o u s Grades 24,000 T o t a l 96,202 Sources Canadian Pulp and Paper A s s o c i a t i o n , Reference  T a b l e s , September 1965; p. 33. 9 BREAKDOWN OF THE MARKET World Shipments o f Woodpulp Approximately one hundred n a t i o n s p a r t i c i p a t e i n the w o r l d t r a d e o f woodpulp as s e l l e r s o r buyers. In 1 9 6 3 t h e r e were t w e n t y - f i v e n a t i o n s e x p o r t i n g woodpulp and o f t h e s e o n l y seven a r e s i g n i f i c a n t , as can be seen i n T a b l e 2 - 3 . TABLE 2 - 3 WORLD SHIPMENT OF WOODPULP FOR THE YEARS 1 9 5 0 , 1 9 6 0 AND 1 9 6 3 ( 0 0 0 , 0 0 0 " s SHORT TONS) E x p o r t i n g 1 9 5 0 1 9 6 0 1 9 6 3 Country Tons 0/ /o Tons % Tons % Sweden 2 . 3 3 7 3 . 3 3 1 3 . 5 2 8 Canada 1 . 8 2 9 2 . 6 2 5 3 . 3 2 7 F i n l a n d 1 . 1 1 7 1 . 7 1 6 2 . 1 1 7 U.S.A. 0 . 1 2 1 . 1 1 0 1 . 4 1 1 Norway 0 . 6 9 0 . 9 8 0 . 9 7 U . S o S . R . 0 . 1 2 0 . 3 3 0 . 3 2 S. A f r i c a - - 0 . 1 1 0 . 2 2 Balance 0 . 3 4 - 0 . 6 6 0 . 7 6 T o t a l 6 . 3 1 0 0 1 0 . 6 1 0 0 1 2 . 4 1 0 0 Sources E x t r a c t e d from CP.P.A. Reference T a b l e s , September 1 9 6 5 , p. 3 3 . MARKET PULP A l l p u l p s o l d a t arm's l e n g t h i s c a l l e d market p u l p as opposed t o c a p t i v e p u l p , which i s p u l p t r a n s f e r r e d by a company from one t o another o f i t s own m i l l s . In 1 9 6 3 the t o t a l market p u l p s o l d , a l l grades, was 1 2 , 4 1 7 , 0 0 0 tons 10 2 o f which Canada s u p p l i e d 3',338,000 tons, o r l e s s than 27%. Out o f t h i s Canadian p r o d u c t i o n , o n l y 1,527,000 tons was bleached and semi-bleached s u l p h a t e market p u l p . S i n c e a l l but one o f t h e new m i l l s planned, o r c u r r e n t l y under c o n s t r u c t i o n , i n B r i t i s h Columbia a r e t o be b l e a c h e d s u l p h a t e market p u l p p r o d u c e r s , and c o u l d add 3,000,000 tons t o t h e market by 1970, i t i s c l e a r t h a t a d e t a i l e d study o f the market and a f o r e c a s t o f f u t u r e demand a r e p r i m a r y problem areas.- These w i l l be expanded and examined f u l l y i n Chapter I I I . Raw M a t e r i a l Requirements C u r r e n t estimates o f c a p i t a l r e q u i r e d t o b u i l d a p u l p m i l l a r e $100,000 per ton day o f p r o d u c t i o n , i n c l u d i n g working c a p i t a l . T h e r e f o r e , s i n c e most o f t h e new m i l l s a r e planned t o have a c a p a c i t y o f 600 t o 750 tons p e r day, t h e minimum c a p i t a l r e q u i r e d w i l l be .$60,000,000. Be f o r e any group can r a i s e t h a t sum o f money, i t r e q u i r e s a guaranteed source o f raw m a t e r i a l . The f r a n t i c b i d d i n g f o r new f o r e s t l i c e n c e s o f the p a s t two y e a r s - i s evidence o f t h i s f a c t . The B.C. Government has opened up many new f o r e s t areas and a l l o t t e d t h e s e t o new m i l l s . Most o f t h e s e have been i n the i n t e r i o r o f the p r o v i n c e where g r e a t stands o f f i r , hemlock, spruce, and p i n e have grown t o m a t u r i t y . The two c h i e f methods u t i l i z e d i n a l l o c a t i n g t h e timber have been Tree Farm L i c e n c e s ( T . F . L . ) , and Pulp 2 Reference T a b l e s , CP.P.A., p. 33. 11 H a r v e s t i n g Areas (P.H.A.). A T.F.L. awarded t o a company w i l l p r o v i d e a guaranteed source o f wood i n p e r p e t u i t y , s u b j e c t t o s u s t a i n e d y i e l d c u t t i n g . In r e t u r n , the govern-ment r e c e i v e s stumpage tax e s w h i l e the c o s t s o f f i r e - f i g h t i n g , r o a d - b u i l d i n g , and r e f o r e s t a t i o n a r e borne by t h e company. The annual a l l o w a b l e c u t i s determined by a government f o r e s t o f f i c i a l who a l s o ensures t h a t the company does not v i o l a t e any r u l e s o r r e g u l a t i o n s . Under a P.H.A. a f i r m has a twenty-one y e a r r i g h t (renewable under c e r t a i n c o n d i t i o n s ) t o a l l t r e e s d e s i g n a t e d by diameter as pulpwood. Independent o p e r a t o r s a r e p e r m i t t e d t o remove the sawlogs. In a d d i t i o n , the company i s g i v e n r i g h t s t o a l l c h i p s and s l a b s and edgings produced by the sawmills from l o g s i n t h a t a r e a . However, the main roads, f i r e - f i g h t i n g , and r e f o r e s t a t i o n c o s t s a r e borne by the government i n r e t u r n f o r stumpage taxes which a r e h i g h e r than t h o s e o f a T.F.L. Recent awards o f T.F.L.'s and P.H.A.'s have c o n t a i n e d a r i d e r r e q u i r i n g t h e company concerned t o p o s t a performance bond s u b j e c t t o f o r f e i t u n l e s s i t commences c o n s t r u c t i o n o f a m i l l w i t h i n a s p e c i f i e d time l i m i t . T h i s c o n s t r a i n t was c r e a t e d t o p r e v e n t promoters from b i d d i n g f o r r e s o u r c e s and h o l d i n g them f o r s p e c u l a t i v e g a i n . When a company seeks timber r i g h t s i t must survey the f o r e s t t o determine t h e volume o f wood, the s p e c i e s , and t e r r a i n . The a l l o w a b l e c u t , s e t by the government, must be o f s u f f i c i e n t s i z e to s u p p l y a l a r g e percentage of the t o t a l 12 requirements. The company can and, i n most i n s t a n c e s j must purchase c h i p s o r l o g s from o t h e r s u p p l i e r s . For example,; M a c M i l l a n ^ B l o e d e l L i m i t e d , i n s p i t e o f owning o r c o n t r o l l i n g 2;500,000 a c r e s , bought 27% o f i t s l o g requirements from 165 3 independent c o n t r a c t o r s i n 1965. Although p u l p can be manufactured from almost any t r e e ; i t s q u a l i t y and hence p r i c e a r e determined by the s p e c i e s o f timber used. Each s p e c i e s has i n h e r e n t f i b r e c h a r a c t e r i s t i c s which e s t a b l i s h t h e q u a l i t y o f the f i n a l commodity. For i n s t a n c e , the long; wide and bushy f i b r e s o f Douglas F i r make a paper which i s h i g h l y t e a r - r e s i s t a n t but v e r y poor f o r top q u a l i t y p r i n t i n g . On t h e o t h e r hand, the f i b r e s o f hemlock, balsam and cedar are c o n s i d e r a b l y t h i n n e r , smoother, and a l i t t l e s h o r t e r than Douglas f i r . These s p e c i e s can make a l i g h t - w e i g h t paper, h i g h l y r e s i s t a n t to b u r s t w i t h o u t s t a n d i n g p r i n t i n g q u a l i t i e s . Spruce and lo d g e p o l e p i n e w i l l produce t h e b e s t q u a l i t y p u l p f o r f i n e papers, bond; and h i g h g l o s s paperboard. P r i c e s v a r y a c c o r d i n g t o s p e c i e s as i s shown i n T a b l e 2-4. Th e r e f o r e ; the p r i c e a f i r m w i l l pay f o r i t s raw m a t e r i a l w i l l v a r y a c c o r d i n g t o the s p e c i e s and the type o f paper market i t expects t o s e r v i c e . T e r r a i n determines a c c e s s i b i l i t y o f t h e timber and; t h e r e f o r e ; the c o s t o f l o g g i n g . West Coast l o g g i n g has advanced from the use o f oxen as h a u l e r s , through r a i l w a y s , 3 MacMillan; B l o e d e l and Powell R i v e r L i m i t e d , Annual  Report 1965, p. 8. 13 and d i e s e l t r u c k s t o the l a t e s t method o f b a l l o o n l o g g i n g . As the companies are f o r c e d t o move f u r t h e r i n l a n d and t o u t i l i z e every a c c e s s i b l e t r e e , c o s t s have r i s e n . However, these c o s t s are l a r g e l y o f f s e t by improved mechanization which p e r m i t s removal o f timber once c l a s s i f i e d as unat-t a i n a b l e . N e v e r t h e l e s s , the c o s t o f l o g g i n g remains one o f the major c o s t s i n p r o d u c i n g p u l p f o r i t r e q u i r e s 2.2 tons o f dry wood t o make one ton o f bleached k r a f t p u l p . An assessment o f wood c o s t s i s p r e s e n t e d i n Chapter IV. TABLE 2-4 PRICES OF BLEACHED KRAFT PULP U.S. MARKET - 1965 L i s t P r i c e Per S p e c i e s S.A.D.T.* F i r $145.00 Hemlock, Balsam 150.00 Cedar 155.00 Spruce/Pine 155.00 * Short A i r Dry Ton. Woodpulp i s s o l d i n t e r -n a t i o n a l l y a c c o r d i n g t o the standards s e t by t h e T e c h n i c a l A s s o c i a t i o n o f Pulp and.Paper I n d u s t r i e s . A Short A i r Dry Ton >is d e f i n e d as 2,000 pounds o f a i r - d r y f i b r e . A Bone-Dry Ton o f f i b r e equals 10/11 o f an a i r - d r y t o n . A f t e r wood supply, t h e next most important raw m a t e r i a l i s c l e a n pure water. A ton o f p u l p i n v o l v e s t h e use o f 100,000 g a l l o n s of water w i t h a low m i n e r a l content s i n c e a l a r g e percentage i s used as steam. In a d d i t i o n , i t i s necessary t o ensure t h a t the water used i n washing the p u l p c o n t a i n s no measurable l e v e l o f r a d i a t i o n . 14 P u l p c o n v e r t e d i n t o paperboard i s o f t e n s o l d t o box makers who, i n t u r n , may s e l l t h e i r p r o d u c t s t o f i l m manufacturers. Any d i s c e r n i b l e l e v e l o f r a d i a t i o n i n the c o n t a i n e r w i l l d e s t r o y the f i l m . Furthermore, the q u a l i t y , mix and thus p r i c e , o f a sheet o f bl e a c h e d p u l p i s r e l a t e d t o i t s " d i r t count". Glean; 1 f i l t e r e d water i s e s s e n t i a l t o m a i n t a i n a l e v e l c l o s e t o 0-1 p a r t s per m i l l i o n (p.p.m.). I n f e r i o r q u a l i t y (20 p.p.m.) p u l p earns $25.00 l e s s p e r t o n . F i n a l l y , the m i l l must ensure t h a t i t s water supply w i l l be s u f f i c i e n t t o cover i t s demand, t a k i n g i n t o c o n s i d e r a t i o n the worst p o s s i b l e c o n d i t i o n s o f drought. V a s t q u a n t i t i e s o f e l e c t r i c a l power a r e a l s o a p r e r e q u i s i t e o f a m i l l . An example o f purchased power c o s t i s p r o v i d e d by Great Lakes Paper Company who r e c o r d a pay-4 ment o f $6.81 p e r ton o f p r o d u c t i o n i n 1964. Together, Canadian p u l p and paper m i l l s purchased $5.10 o f power p e r 5 ton produced i n 1962. In B r i t i s h Columbia most m i l l s purchase a steady l o a d and manufacture t h e i r a d d i t i o n a l requirements f o r peak l o a d c o n d i t i o n s by e i t h e r hydro o r thermal methods. Using t h i s combination, m i l l s a r e a b l e t o ma i n t a i n power c o s t s a t a re a s o n a b l e l e v e l . Common to a l l m i l l s i s t h e use o f chem i c a l s i n the manufacture o f the cooking l i q u o r and b l e a c h i n g . In 1962 the Canadian Pulp and Paper I n d u s t r y spent $122,228,000 on 4 Great Lakes Paper Company L i m i t e d , Annual Report 1964. 5 Dominion Bureau o f S t a t i s t i c s , Pulp and Paper M i l l s 1962, #36-204, p. 18. chemicals and other supplies, or the equivalent of $10.10 per ton of a l l pulp produced. The cost of chemicals to an i n d i v i d u a l m i l l varies according to the distance from the source. In B r i t i s h Columbia the major sulphate chemicals are curren t l y produced at Vancouver, Squamish and Nanaimo and a new plant i s being constructed at Prince Rupert. A more de t a i l e d examination of chemical costs follows i n Chapter IV. Labour costs constitute a considerable portion of expenses of production. Although the industry i s c a p i t a l intensive^ i t required $21.10 of labour to produce and s e l l 7 a ton of pulp and paper i n Canada i n 1962. On a per employee basis, the cost came to $5;500 per year. The r a t i o of employees to ton of production i s s Newsprint 2 to 1 . Pulp (Old M i l l s ) 1 to 1 Pulp (New M i l l s ) 0.6 to 1 During the period 1957-1962 wages and s a l a r i e s rose an average of 4% per year. Labour s k i l l s have undergone a rapid change i n the past ten years. As new measuring devices and control mechanisms have been i n s t a l l e d , the s k i l l l e v e l of an operating employee has a l t e r e d . The average operator now needs only to monitor the equipment, whereas before he was 6 Dominion Bureau of S t a t i s t i c s ; #36-204, p. 18. 7 I b i d . j : p. 7. 16 constantly changing flows and adjusting cont r o l s . The required degree of s k i l l f o r maintenance personnel has increased sharply, and there i s at present a shortage of q u a l i f i e d instrument technicians. The e f f e c t of automation can be i l l u s t r a t e d most e f f e c t i v e l y by the f a c t that from 1957 to 1962 production of pulp and paper rose 20% but the number 3 of employees dropped 2%. A glance at the c l a s s i f i e d advertisement section of any Canadian newspaper i n the past year w i l l show the intense demand f o r pulp and paper production personnel. According to Mr. C. T. Farmer of H. A. Simons (International) Limited, 40% of a pulp m i l l ' s employees must be experienced operators and maintenance mechanics. The industry has enjoyed excellent r e l a t i o n s with the main union, the International Brotherhood of Pulp, Sulphite and Paper M i l l Workers. In the past twenty years, there has been only one s t r i k e (1958). The union leaders have acted responsibly and, through a strong bargaining p o s i t i o n , have established high rates of pay and excep-t i o n a l l y good working conditions. There i s a small union, United Pulp Workers, serving three m i l l s that has been more aggressive i n i t s at t i t u d e towards management, but as yet i t has f a i l e d to win any s i g n i f i c a n t advantages not already acquired by the Pulp and Sulphite Union. In newer-design pulp m i l l s (since 1957) labour costs are, generally speaking, 8 to 10% of the s e l l i n g p r i c e of bleached pulp. Therefore, 8 D.B.S., #36-204, Table 1, p. 7. 17 a 4% annual i n c r e a s e i n wages cou p l e d w i t h a drop i n t h e employee/ton p r o d u c t i o n r a t i o has a minor e f f e c t on the o v e r a l l p r o f i t a b i l i t y o f t h e m i l l . Management, t h e r e f o r e , o f f e r s l i t t l e o p p o s i t i o n t o a s e t t l e m e n t amounting t o a 4 to 5% annual wage increment. S t a t e o f Technology K r a f t p u l p i n g has undergone few changes s i n c e i t s i n v e n t i o n . The major a l t e r a t i o n i n the p r o c e s s o c c u r r e d i n t h e 195011 s when the Kamyr Company d e v i s e d t h e continuous d i g e s t e r t o r e p l a c e b a t c h d i g e s t e r s . T h i s c o o k i n g mechanism p e r m i t s u n i n t e r r u p t e d c h a r g i n g o r f i l l i n g a t the t o p w i t h c h i p s w h i l e cooked p u l p i s b e i n g d i s c h a r g e d from t h e bottom. The advantages ares 1. lower manpower requirementsy 2. c o n t r o l l e d c ooking procedures? 3. h i g h e r and a more c o n s i s t e n t q u a l i t y o f pulpy 4. lower c a p i t a l investment f o r t h e s i z e o f the m i l l . Another improvement has been h i g h e r through-put s c r e e n e r s . The s t o c k must be screened and o n l y t h e cooked s e p a r a t e d f i b r e s must be passed on t o the b l e a c h i n g p r o c e s s . Bunched f i b r e s must be re-cooked. R a d i c l o n e C l e a n e r s have c o n t r i b u t e d t o g r e a t e r e f f i c i e n c y and h i g h e r through-put than p r e v i o u s equipment p e r m i t t e d . The b l e a c h i n g p r o c e s s has undergone v a r i o u s minor changes which have lowered b l e a c h i n g c o s t s without damaging the f i b r e s t r e n g t h and have a t t a i n e d a "whiter" p u l p . As a r e s u l t , most bleached k r a f t was s o l d a t 85/87 G.E. t e n y e a r s ago, but now 91 p l u s i s a v a i l a b l e . 18 A f i n a l m o d i f i c a t i o n o f t h e p r o c e s s has been t h e i n v e n t i o n o f the a i r - b o r n e d r y e r . In t h e o l d e r s t y l e o f d r y e r the p u l p was c a r r i e d on r o l l e r s and d r i e d by hot a i r c u r r e n t s . The new a i r d r y e r e l i m i n a t e s t h e r o l l e r s , and the p u l p sheet i s supported and d r i e d by h o t a i r p r e s s u r e . The r e s u l t i s lower c a p i t a l c o s t and a s i g n i f i c a n t i n c r e a s e i n t h e p r o d u c t i o n r a t e . The I n i t i a l v i s i t t o a p u l p m i l l w i l l o f t e n l e a v e t h e n o v i c e wondering why a l l t h a t p i p i n g , c o n c r e t e , and equipment a r e r e q u i r e d t o cook, wash, scre e n , b l e a c h , and d r y p u l p . I t i s common to hear the v i s i t o r ask, " I s n ' t t h e r e an e a s i e r way t o make p u l p ? " The adherents t o t h e c u r r e n t s t a t e o f t h e a r t say no. C o l l e c t i v e l y , the Canadian i n d u s t r y supports t h e Pulp and Paper I n s t i t u t e i n Mo n t r e a l where r e s e a r c h i n t h i s area i s b e i n g conducted, w h i l e each company p r o u d l y p o i n t s , as w e l l , t o i t s own r e s e a r c h l a b o r a t o r y . A t t h e p r e s e n t time, no b e t t e r method ' i s i n commercial o p e r a t i o n , but one new p r o c e s s , " A l k i f i d e " , d i s c o v e r e d by Domtar Company L i m i t e d , which lowers cooking time from 2h hours t o 40 minutes, i s i n p i l o t p l a n t o p e r a t i o n i n Red Rock, O n t a r i o . While r e s e a r c h on a new method to produce s u p e r i o r p u l p i s commendable and i s supported by the i n d u s t r y , a r e v o l u t i o n a r y break-through c o u l d l e a v e new produ c e r s w i t h l a r g e ; f i x e d , p a r t i a l l y d e p r e c i a t e d p l a n t s ; and few funds a v a i l a b l e f o r a l t e r a t i o n s . 19 C u r r e n t Producers L i s t e d below a r e t h e e x i s t i n g B r i t i s h Columbia producers o f bleached and semi-bleached k r a f t p u l p and t h e i r r a t e d annual c a p a c i t i e s o f market p u l p , based upon 345 o p e r a t i n g days/year. TABLE 2-5 CURRENT B.C. PRODUCERS OF BLEACHED AND SEMI-BLEACHED KRAFT Name Tons B.C. F o r e s t Products 300,000 Canadian F o r e s t Products 105,000 Columbia C e l l u l o s e Company 185,000 Crown Z e l l e r b a c h 120,000 Kamloops Pulp and Paper 86,000 MacMillan; B l o e d e l L i m i t e d 350,000 Rayonier Canada L i m i t e d 180,000 T o t a l 1,326,000 With t h e e x c e p t i o n o f Kamloops, the s e f i r m s have been i n p r o d u c t i o n f o r t e n y e a r s o r more. Kamloops Pu l p and Paper, which began p r o d u c t i o n i n October 1965, i s c o n t r o l l e d by t h e Weyerhauser Company o f the U n i t e d S t a t e s . These producers possess s t r o n g managerial teams composed o f experien c e d p r o d u c t i o n p e r s o n n e l and a g g r e s s i v e w e l l -e s t a b l i s h e d marketing o r g a n i z a t i o n s . New a r r i v a l s i n t h e t r a d e a r e f a c e d w i t h i n t e n s e c o m p e t i t i o n from t h e s e companies, 20 M i l l s Under Construction Construction has commenced on the m i l l s l i s t e d below. Table 2-6 also contains the estimated production of bleached k r a f t market pulp of each of these m i l l s . TABLE 2-6 BLEACHED MARKET PULP MILLS UNDER CONSTRUCTION IN BRITISH COLUMBIA Name Tons Start-up Date Northwood Pulp 215;000 1966 Prince George Pulp & Paper 115,000 1966 Tahsis 135,000 1967 Intercontinental 100,000 1968 Skeena K r a f t 260,000 1968 T o t a l 825,000 A common c h a r a c t e r i s t i c of these new m i l l s i s the fac t that each i s associated with one or more established companies. Northwood i s financed by Noranda Mines and the Mead Corporation; one of the largest U.S. producers of pulp 9 and paper. Prince George Pulp and Paper i s j o i n t l y under-written by Canadian Forest Products and-the Reed.Group; the l a t t e r being the United Kingdom's biggest producer of paper 10 and paperboard. Intercontinental i s a t r i - p a r t y organization whose partners include Canadian Forest Products, Reed; and 9 "The 500 Biggest Industrials", Fortune, v o l . LXXII, no. l ; J u l y 1965; p. 154. 10 "The 200 Largest Corporations Outside the U.S.";' Fortunei' v o l . LXXIi; no. 2, August 1965; ?. 172. 21 Feldmuhle, the l a r g e s t paper manufacturer i n Germany."^ Skeena K r a f t i s 60% owned by Columbia C e l l u l o s e and 40% by Sweden's l a r g e s t i n t e g r a t e d f o r e s t p r o d u c t s producer and 12 d i s t r i b u t o r , Svenska C e l l u l o s a . To conclude the l i s t , T a h s i s i s f i n a n c e d by Canadian I n t e r n a t i o n a l Paper, a wholly-owned s u b s i d i a r y o f I n t e r n a t i o n a l Paper, the world's l a r g e s t p r oducer o f p u l p and paper. In 1964 I n t e r n a t i o n a l 13 Paper s o l d 5,700,000 tons o f p u l p and paper, which amounted t o 5.5% o f the t o t a l w o r l d consumption of the s e items. SUMMARY Th i s c hapter has o u t l i n e d t h e p r i n c i p a l f a c t o r s a f f e c t i n g t h e p u l p i n d u s t r y . A lthough a source o f timber i s v i t a l to the f i n a n c i a l success o f a new m i l l , no f u r t h e r treatment o f the s u b j e c t w i l l be attempted i n t h i s study. I t i s an e s t a b l i s h e d f a c t t h a t B r i t i s h Columbia possesses immense untouched r e s o u r c e s o f wood and c o u l d c u t s i x times 14 the c u r r e n t y i e l d w i t h o u t o v e r c u t t i n g . S i m i l a r l y , water and power sources are now, o r w i l l be by 1968,'in s u f f i c i e n t s u p p l y t o a l l o w a new m i l l t o l o c a t e near any a v a i l a b l e timber. 11 P h i l l i p s D i r e c t o r y o f World Pulp and Paper M i l l s f u l l y d e s c r i b e s each p u l p and paper m i l l i n c l u d i n g p r o d u c t s made, output p e r day, and major f a c i l i t i e s t p. 247. 12 Columbia C e l l u l o s e Co. L t d . , Annual Report 1964, p. 11. 13 I n t e r n a t i o n a l Paper Company,' Annual Report 1964, p. 2. 14 Dr. J . Harry Smith, "Wood Supply i n B r i t i s h Columbia -Pr e s e n t and P o t e n t i a l " , B r i t i s h Columbia 1s F u t u r e i n F o r e s t  P roducts Trade i n A s i a and t h e P a c i f i c Area. 1965, p. 14. 22 Therefore, the factors l i s t e d below are the most c r i t i c a l and w i l l be examined i n d e t a i l s (a) Markets (b) S e l l i n g Prices (c) Costs (d) E f f e c t s of Changing Flows of Income and Costs (e) Offensive and Defensive T a c t i c s of Producers. 23 CHAPTER I I I THE WOODPULP MARKET GROWTH OF MARKET The w o r l d demand f o r paper and paperboard has shown phenomenal growth s i n c e 1955. F o r e c a s t s by t h e FAO i n d i c a t e t h a t the growth r a t e w i l l c o n t i n u e as the s t a n d a r d o f l i v i n g i n c r e a s e s . The t a b l e below i l l u s t r a t e s t h e s e f a c t s . TABLE 3-1 WORLD DEMAND - PAPER AND PAPERBOARD, TOTAL PULP AND CHEMICAL PULP 1955-1964 AND FAO FORECAST 1975 (000,000's Tons) Paper & T o t a l Chemical Year Paperboard Pulp Pulp 1955 63.5 51.7 32.4 1956 68.5 54.2 34.3 1957 70.3 55.1 34.9 1958 72.1 55.1 - 35.3 1959 75.5 60.5 ' 38.8 1960 83.7 66.6 42.6 1961 88.4 69.7 45.3 1962 92.1 73.2 47.3 1963 96.1 76.4 49.8 1964 103.2 83.3 54.7 1975 147.5 120.0 80.0 Sources t Paper & Paperboard - World Reviews^ Pulp & Paper Years 1955 t o 1964 T o t a l Pulp & Chemical P u l p - Woodpulp S t a t i s t i c s ; USPPA, Years 1955-1964 1975 F o r e c a s t s - World Demand f o r Paper t o 1975; FAO, Rome 1960. 24 The p r e c e d i n g t a b l e i n d i c a t e s t h a t consumption o f paper and paperboard has i n c r e a s e d an average o f 4;000/000 tons p e r y e a r d u r i n g the t e n - y e a r p e r i o d . I f t h i s r a t e c o n t i n u e s t h e FAO f o r e c a s t would be met by 1975. On a p e r c a p i t a b a s i s , w o r l d consumption has i n c r e a s e d from 50.4 pounds i n 1956 t o 64.6 i n 1964.^" A p e r c a p i t a breakdown by c o u n t r i e s r e v e a l s t h a t ; i n 1964, t e n n a t i o n s consumed over 200 pounds p e r p e r s o n . Ten more n a t i o n s f e l l i n the 100-199 range, and 115 were below 100 pounds p e r p e r s o n . The average f i g u r e s a r e h e a v i l y b i a s e d by t h e U n i t e d S t a t e s where 6% o f the world's p o p u l a t i o n consumed 45% o f t h e world's produc-t i o n . A f o r e c a s t o f demand f o r b l e a c h e d k x a f t market p u l p s h o u l d s t a r t w i t h an e s t i m a t e o f t h e w o r l d demand f o r paper and then d e r i v e t h e growth r a t e of t h i s grade o f p u l p from t o t a l c h e m i c a l p u l p . PREVIOUS FORECASTS An examination o f p r e v i o u s f o r e c a s t s f o r paper consumption r e v e a l s t h e i r extremely c o n s e r v a t i v e n a t u r e , f o r a c t u a l consumption has o u t s t r i p p e d t h e f o r e c a s t s . . V a r i o u s methodologies have been used - some a p p a r e n t l y informed guesses, o t h e r s u t i l i z i n g h i g h l y s o p h i s t i c a t e d s t a t i s t i c a l t e c h n i q u e s . Those s t u d i e s s e l e c t e d f o r summary were chosen, not t o emphasize t h e i r i n a d e q u a c i e s , but r a t h e r t o p r e s e n t t h e b e s t a v a i l a b l e ; w i t h p a r t i c u l a r a t t e n t i o n t o t h e FAO work. 1 "How N a t i o n s Rank i n Per C a p i t a Paper Consumption, 1965 World Review Issue; P u l p and Paper; v o l . 39, no. 29, J u l y 19/ 1965/ p. 7. 25 The P a l e y R e p o r t 2 T h i s 1952 r e p o r t was l i m i t e d t o American demand and was based upon the h i s t o r i c a l r a t e o f p e r c a p i t a consumption and the growth r a t e o f the G.N.P. TABLE 3-2 PALEY REPORT (000,000 Tons) Grade F o r e c a s t 1975 1965* Newsprint 8.7 8.5 P r i n t i n g & W r i t i n g 7.5 8.4 I n d u s t r i a l 12.5 10.5 Paperboard 20.5 20.9 T o t a l 49.2 48.3 * P r e l i m i n a r y f i g u r e s from O f f i c i a l Board Markets; February 11; 1966. The 1975 est i m a t e has almost been reached t e n y e a r s ahead o f p l a n . The major e r r o r was i n t h e est i m a t e o f G.N.P. i n c r e a s e o f 1.5% p e r annum/ as a c t u a l G.N.P. growth has been w e l l i n excess o f t h a t f o r e c a s t . . 3 World Pulp and Paper Resources and P r o s p e c t s T h i s 1954 r e p o r t e s t i m a t e s the world's consumption t o r e a c h 66 m i l l i o n tons by 1961. That l e v e l was passed two 2 Resources f o r Freedom; v o l . V; A Report t o the P r e s i d e n t by t h e P r e s i d e n t ' s M a t e r i a l P o l i c y Commission,' U.S. Government P r i n t i n g O f f i c e , Washington; 1 June 1952. 3 World Pulp and Paper Resources and P r o s p e c t s , FAO, U n i t e d N a t i o n s ; New York; 1954. 26 y e a r s a f t e r p u b l i c a t i o n . The procedure used was a s t r a i g h t l i n e p r o j e c t i o n o f t h e 1945-1950 w o r l d consumption f i g u r e s . 4 America's Demand f o r Wood 1929-1975 S t a n f o r d Research I n s t i t u t e c a r r i e d o u t a d e t a i l e d r e g r e s s i o n a n a l y s i s u s i n g the v a r i a b l e s - p o p u l a t i o n growth/ r e a l d i s p o s a b l e income and growth o f G.N.P. TABLE 3-3 STANFORD RESEARCH INSTITUTE FORECAST Grade ^ F o r e c a s t 1975 1965* Newsprint 8.6 8.5 P r i n t i n g & W r i t i n g 8.5 8.4 I n d u s t r i a l 11.7 10.5 Paperboard 20 ?3 20.9 T o t a l 49.1 48.3 * P r e l i m i n a r y F i g u r e s from O f f i c i a l  Board Markets, p . 2. The l i k e l y reason f o r the low e s t i m a t e was a G.N.P. growth r a t e o f 1.2% p e r annum. Pulp]' Paper and Board/Supply and Demand 1957~* T h i s f o r e c a s t was based upon a s t r a i g h t l i n e l o g -l o g c o r r e l a t i o n o f demand and r e a l d i s p o s a b l e income. G.N.P. was e s t i m a t e d t o i n c r e a s e by 3% p e r annum. 4 S t a n f o r d Research I n s t i t u t e / A Study f o r the Weyerhauser  Timber Company; 1954. 5 Report o f t h e Committee on I n t e r s t a t e and F o r e i g n Commerce. Report no. 573, U.S. Government P r i n t i n g O f f i c e ; Washington, June 17/ 1957. 27 TABLE 3-4 FORECAST BY INTERSTATE & FOREIGN COMMERCE COMMITTEE Grade F o r e c a s t 1975 1965* Newsprint 8.3 8.5 P r i n t i n g & W r i t i n g 7.1 8.4 I n d u s t r i a l 10.5 10.5 Paperboard 20.5 20.9 T o t a l 46.4 48.3 * P r e l i m i n a r y F i g u r e s from O f f i c i a l  Board Markets. 6 World Demand f o r Paper t o 1975 T h i s study, undertaken by the FAO, i s the most thorough done on t h i s s u b j e c t . The FAO h e l d a c o n f e r e n c e w i t h a number o f worl d i n d u s t r i a l l e a d e r s , economists, and s t a t i s t i c i a n s i n September o f 1959 f o r the s o l e purpose o f r e v i e w i n g p a s t e f f o r t s i n f o r e c a s t i n g demand i n o r d e r t o a r r i v e a t an informed view of l i k e l y f u t u r e demand t r e n d s . T h i s c o n f e r e n c e examined t h e h i s t o r i c a l demand, methodology f o r f o r e c a s t i n g , and v a r i a b l e s t o be employed i n t h e f o r e -c a s t . The outcome was t h e most d e t a i l e d and s t a t i s t i c a l l y s o p h i s t i c a t e d f o r e c a s t completed and p u b l i s h e d i n t h e w o r l d . Methodology. In 1954 t h e FAO conducted a f o r e -c a s t o f paper demand, assuming a s t r a i g h t - l i n e l o g a r i t h m i c c o r r e l a t i o n between income and consumption from a number o f c o u n t r i e s ( c r o s s - s e c t i o n a l a n a l y s i s ) . 6 World Demand f o r Paper t o 1975. FAO, Rome, 1960. 28 This technique proved to have two p r i n c i p a l drawbacks s (a) each country c a r r i e d the same weight i n the co r r e l a t i o n regardless of population or income l e v e l ; (b) a s t r a i g h t - l i n e r e l a t i o n s h i p implied that paper consumption would increase a t the same rate f o r a given income growth rate f o r a l l countries regardless of t h e i r current s t a t e 1 o f economic development. The outcome of the 1954 forecast was discussed e a r l i e r ; the FAO sought a method to overcome these objec-tions i n order to improve the new study. The demand function selected f o r the c o r r e l a t i o n analysis was the log normal d i s t r i b u t i o n . The a p p l i c a t i o n of t h i s function rested on the assumption that paper demand per capita w i l l ; as incomes r i s e ; approach a saturation l e v e l . The function used was t where y = consumption i n kilograms per capi t a S = saturation value in.kgs per capita t = lnx - u P x = income per capita u & p = constants. The value of S was determined by consecutive adjustments from a guess f i g u r e . One important value of the log normal function; apart from gr e a t l y improved f i t ; was that the 29 e l a s t i c i t y c o e f f i c i e n t c o r r e s p o n d i n g t o such a c u r v e decreases as income i n c r e a s e s i n accordance w i t h r e s u l t s o b t a i n e d from h i s t o r i c a l d ata i n a number o f c o u n t r i e s . The l o g normal f u n c t i o n was a p p l i e d t o h i s t o r i c a l d a t a f o r a number o f c o u n t r i e s f o r the p e r i o d 1949-1956. The r e s u l t i n g c o e f f i c i e n t o f c o r r e l a t i o n by major grade i s l i s t e d below. TABLE 3-5 CORRELATION COEFFICIENT Grade r_ Newsprint 0.9917 P r i n t i n g & W r i t i n g 0.9917 I n d u s t r i a l 0.9876 Paperboard 0.9979 T o t a l Paper 0.9968 The FAO were s a t i s f i e d t h a t the l o g normal d i s t r i b u t i o n p r o v i d e d a b e t t e r f i t than s t r a i g h t - l i n e l o g c o r r e l a t i o n and proceeded t o the d e t a i l e d a n a l y s i s . The base p e r i o d was 1954-1956. P o p u l a t i o n f o r e c a s t s were s u p p l i e d by t h e U n i t e d Nations Economic Commission f o r each major a r e a w i t h t h e w o r l d average b e i n g 1.8% annual i n c r e a s e . The G.N.P. base y e a r was 1954, and the assumed growth r a t e i s shown i n T a b l e 3-6. TABLE 3-6 G.N.P. GROWTH RATES Area Assumed U n i t e d S t a t e s 1. 40 Canada 2. 18 L a t i n America 2. 50 Western Europe 2. 50 E a s t e r n Europe 4. 00 U.S.S.R. 4. 50 A f r i c a 2. 00 Near E a s t 2. 00 Japan 5. 65 I n d i a 2. 50 Far E a s t (Others) 2. 00 China 4. 75 Oceania 2. 50 Source* FAO; World Demand; T a b l e 2.28J p. 7. 31 L i s t e d below i s the FAO f o r e c a s t f o r 1965, compared w i t h a c t u a l 1964 f i g u r e s . TABLE 3-7 1965 FAO FORECAST COMPARED WITH 1964 ACTUAL PAPER CONSUMPTION (000,000 Tons) F o r e c a s t A c t u a l A r ea 1965 1964 D i f f e r e n c e D i f f e r e n c e N orth America 48.0 c 49.0 -1.0 -2.1 L a t i n America 3.8 3.4 +0.4 +10.5 Western Europe 27.5 26.6 +0.9 +3.3 E a s t e r n Europe 4.1 3.7 +0.4 +9.8 U.S.S.R. 6.7 4.6 +2.1 +31.3 A f r i c a 1.0 0.6 +0.4 +40.0 Near E a s t 0.3 0.4 -0.1 -33.3 Far E a s t 1.8 2.3 -0.5 -14.0 Japan 4.9 8.0 -3.1 -63.3 China 3.2 3.2 0 0 Oceania 1.4 1.4 0 0 T o t a l 102.7 103.2 -0.5 -0.5 Source: 1965 F o r e c a s t , FAO, World Demand, T a b l e 2.29, p. 51. A c t u a l 1964, 1965 World Review, Pulp & Paper, p. 7. The r e s u l t i s s i m i l a r t o a l l p r e v i o u s s t u d i e s ; t h a t i s , u n d e r e s t i m a t i o n o f the demand. The major f a c t o r which caused t h e d i f f e r e n c e s i s t h e assumed r a t e o f G.N.P. The boom o f t h e s i x t i e s has i n c r e a s e d t h e paper consumption i n No r t h America; Europe/ and e s p e c i a l l y ; 1 Japan.. By s u b s t i t u t i n g the a c t u a l North American G.N.P. annual i n c r e a s e 1960-1964 o f 3.2% (1954 U.S. d o l l a r b a s i s ) 7 f o r the assumed v a l u e s , 7 The Bank o f Nova S c o t i a ; Monthly Review, February 1966. 32 the FAO forecast would have been 49.1 m i l l i o n tons f o r 1964. Similar corrections f o r Western Europe and Japan would also adjust the forecast. In the case of U.S.S.R., the FAO over-estimated the rate of economic growth. Since G.N.P. i s not a v a i l a b l e f o r the U.S.S.R., the FAO substituted that rate of economic growth that corresponded to the Five-Year Plan f o r paper production. The remaining areas are well within an acceptable variance f o r the forecast. The methodo-logy employed i s capable of forecasting consumption with more accuracy than any other method u t i l i z e d to date. The values of the two variables - income growth rate per capita, and population, can be obtained each year and the forecast amended year by year. THE AUTHOR'S FORECAST In t h i s study, the techniques described above i n connection with the FAO work w i l l be employed to obtain a forecast f o r paper demand f o r 1970 and 1975. On the basis of that p r e d i c t i o n , the next step w i l l be the derivation of the demand f o r bleached market k r a f t pulp. Following t h i s , the study w i l l examine production by countries, future plans, and w i l l p r e d i c t the s i z e of the surplus or shortage f o r the next f i v e and ten years. Forecast of Paper Demand, 1970 and 1975 This forecast assumes the following variables (growth rates of G.N.P. and population) f o r market areas served by B r i t i s h Columbia pulp exporters* 33 TABLE 3-8 FORECAST VARIABLES G.N.P. Annual P o p u l a t i o n I n c r e a s e ( M i l l i o n s ) Area % 1970 1975 North America 2.5 232 255 L a t i n America 2.0 255 290 Western Europe 2.0 330 350 A f r i c a 1.5 275 300 Near E a s t 2.0 58 66 Japan 7.5 100 108 Far E a s t (Others) c 2.5 900 1/000 Oceania 3.0 15 16 A p p l i c a t i o n o f the above d a t a t o the l o g normal d i s t r i b u t i o n p r o v i d e s t h e f o r e c a s t o f paper demand shown i n T a b l e 3-9. TABLE 3-9 FORECAST OF PAPER DEMAND, 1970 and 1975 (000,OOO's S.A.D.T.) A c t u a l F o r e c a s t Area 1964 1970 1975 North America 49.0 60.0 70.5 L a t i n America 3.4 ' 5.6 • 6.5 Western Europe 26.6 34.3 42.5 A f r i c a 0.6 0.9 1.4 Near E a s t 0.4 0.6 0.9 Japan 8.0 11.3 14.9 Far E a s t (Others) 2.3 3.3 4.6 Oceania 1.4 1.8 2.1 T o t a l 91.7 117.8 143.4 Sourcej 1965 World Review, Pulp and Paper, p. 7. 34 F o r e c a s t o f Chemical Pulp Demand Chemical p u l p as a p e r c e n t o f paper consumption has s l o w l y i n c r e a s e d from 50% i n 1955 t o 53% i n 1964 (see T a b l e 3-1). T h i s t r e n d w i l l c o n t i n u e as the consumer demand f o r h i g h e r q u a l i t y i n c r e a s e s . The p a t t e r n i n Western Europe from 1950 t o 1960 has shown a h i g h l y c o r r e l a t e d r e l a t i o n s h i p o f i n c r e a s i n g percentage o f chemi c a l p u l p i n t h e f u r n i s h o f paper w i t h the p e r i o d 1940-1950 i n the U n i t e d S t a t e s . As t h e p r o p o r t i o n o f chemi c a l p u l p i n c r e a s e s , groundwood percentage decreases due t o two f o r c e s - q u a l i t y demand, and a d i m i -n i s h i n g amount o f a v a i l a b l e wood f o r g r i n d i n g . T h e r e f o r e , the p e r c e n t o f chemical p u l p i n paper i s expected t o i n c r e a s e t o j 64.6 m i l l i o n tons, o r 55% by 1970; and 83 m i l l i o n tons, o r 58% i n 1975. Demand f o r Bleached K r a f t (B/K) Pulp The demand f o r s t r o n g e r and, a t the same time, l i g h t e r - w e i g h t papers has e n l a r g e d the need f o r bleached k r a f t p u l p i n the f u r n i s h o f most white grades o f paper. Bleached s u l p h i t e , although n o r m a l l y w h i t e r than k r a f t , does not possess the s t r e n g t h c h a r a c t e r i s t i c s r e q u i r e d . In a d d i t i o n , t h e r e i s a d i s t i n c t economic advantage i n t h e use o f s u l p h a t e s over s u l p h i t e s because 25% l e s s o f the former w i l l produce a paper o f comparable o r s u p e r i o r q u a l i t y . Paper manufacturers have shown t h e i r p r e f e r e n c e f o r bleached k r a f t by a s t r o n g surge i n demand (see T a b l e 3-10). 35 TABLE 3-10 WORLD PRODUCTION OF CHEMICAL PULP (OOO^OO's Tons) Grade 1950 1960 1963 % Change 1950-1963 Bleached K r a f t 2.6 9.6 13.1 504 " S u l p h i t e 3.2 5.2 5.8 180 Unbleached K r a f t 8.1 13.9 16.8 209 " S u l p h i t e 4.5 5.1 4.8 107 Sub T o t a l 18.4 33.8 40.5 220 Other Grades 2.3 r 4.1 4.7 204 Communist Areas 2.3 4.7 4.7 204 T o t a l 23.0 42.6 49.9 217 Bleached K r a f t as % o f T o t a l 11.3 22.5 26.3 Sources Reference T a b l e s ; Canadian Pulp and Paper A s s o c i a t i o n , T a b l e 89/ p. 33. A n a l y s i s o f F u t u r e Demand The f i n a l s t e p i n f o r e c a s t i n g the demand f o r b l e a c h e d k r a f t market p u l p i n v o l v e s an a n a l y s i s o f p a s t h i s t o r y p l u s p r o j e c t i o n f o r the f u t u r e . The annual i s s u e o f Woodpulp S t a t i s t i c s , p u b l i s h e d by the U n i t e d S t a t e s Pulp and Paper A s s o c i a t i o n (USPPA), i s t h e r e c o g n i z e d w o r l d a u t h o r i t y o f p u l p s a l e s and w i l l be t h e s o l e source o f data f o r d e t e r m i n i n g B/K market p u l p s a l e s . The o n l y n a t i o n w i t h a s i g n i f i c a n t volume o f i n t e r n a l B/K market p u l p t r a d i n g i s t h e U n i t e d S t a t e s . The ten-year average has been f a i r l y c o n s t a n t a t 570,000 tons, b u t o n l y 10% or 57,000 tons can be c o n s i d e r e d as c o m p e t i t i v e B/K market p u l p because t h e b a l a n c e i s e i t h e r hardwoods o r 36 or southern pine. These two pulps s e l l at $15 to $25 below northern B/K and are used f o r f i l l e r pulps i n low grade papers and cheap boxboard. The only a v a i l a b l e s t a t i s t i c s showing i n t e r n a t i o n a l transfers of pulp are the import/export s e r i e s . I t i s ' possi b l e that by assuming the t o t a l s to be market pulp, a s l i g h t bias i s introduced. Certain companies t r a n s f e r captive pulp to su b s i d i a r i e s i n other countries, but these shipments appear as imports to those countries. Because the current quantity of i n t e r n a t i o n a l captive pulp shipments i s not s i g n i f i c a n t , f o r the purpose of t h i s study exports by producing countries w i l l represent the world market pulp sales. Most countries produce k r a f t pulp, but only four are s i g n i f i c a n t i n world trade for bleached k r a f t . These are Canada, Sweden, the United States, and Finland. Others, such as France, Russia, Chile, New Zealand, and Norway, ship le s s than 1% of the t o t a l of the four major sup p l i e r s . A ten-year h i s t o r y of exports by these countries to major areas i s displayed on the next page. It i s important to note that shipments have r i s e n by 2,557,000 tons i n the ten-year period and are three times the 1955 l e v e l . Canada has always been the largest exporter and her average annual increment, 103,000 tons, i s the highest of the four countries, followed i n order by Sweden (78,500 tons), Finland (39^600 tons), and the U.S. (25,000 tons). TABLE 3-11 EXPORTS OF BLEACHED AND SEMI-BLEACHED KRAFT PULP 1955-1964 (OOO's S.A.D.T.) From Sweden To U.S.A. Europe L. America As.,Afr.,Pac. Total From Finland To U.S.A. Europe L. America As.,Afr.,Pac Tot a l From Canada To U'.S.A. Europe L. America As.,Afr.,Pac Tot a l From U.S. To Canada Europe L. America As./Afr.,Pac. Tot a l Grand T o t a l .955 1956 1957 1958 1959 1960 1961 1962 1'963 1964 82 87 65 76 91 70 70 89 69 82 231 173 317 392 477 537 536 700 893 994 20 22 19 11 11 10 4 17 16 13 13 20 15 19 29 24 22 26 38 42 346 402 416 498 608 641 632 832 1,016 1,131 12 13 17 9 10 11 26 29 24 22 50 64 82 91 116 108 155 268 314 414 14 7 7 10 10 1 <- 7 6 5 4 3 1 3 3 3 3 7 15 19 35 79 84 109 113 139 123 195 318 362 475 601 611 667 777 890 897 986 1,093 1,173 1,259 61 62 62 95 120 173 156 153 211 267a 4 3 1 12 23 18 30 33 16 22 4 9 19 16 26 32 48 53 128 149 670 685 749 900 1,059 1,120 1,220 1,332 1,528 1,697 7 • 11 11 7 5 6 9 7 11 10 164 164 162 130 171 365 359 314 337 375 29 12 12 11 11 19 29 30 50 51 6 4 11 5 6 18 34 46 102 119 206 191 196 153 194 408 431 397 500 555 1,301 1,362 1,470 1^644 2,000 2,292 2,478 2,879 3^406 3^858 Source: Woodpulp S t a t i s t i c s , USPPA, 1955-1965. 38 Sweden and Finland s e l l approximately 90% of t h e i r outputs to Europe while Canada has concentrated on the American market. The United States has shipped from 70 to 80% of her exports to Europe. The other areas appear to he residuals although the e f f e c t of large shipments by a l l four countries to the Far East (Japan) i n recent years i s quite evident. To determine the major importing countries, an analysis of imports was undertaken. In L a t i n America, the Far East (excluding Japan), A f r i c a , and Near East imports are not broken down by grade. However, the s i g n i f i c a n t markets are shown i n Table 3-12 which follows on page 39. In absolute terms, the American market demonstrates the lar g e s t change with an average increment of 70,000 tons per year over the ten-year period. However, the greatest rate of growth appears i n Japan. To a new m i l l , the importance of Western Europe as a user of bleached k r a f t and a p o t e n t i a l market f o r the product i s v i t a l . Most of the nations have quadrupled t h e i r intakes, and I t a l y i s now importing ten times the quantity she purchased i n 1955. Table 3-10 c l e a r l y i l l u s t r a t e d the rapid increase of bleached k r a f t production i n the v/orld. This established trend w i l l continue, as was pointed out previously. Further evidence of t h i s trend can be seen i n the usage of B/K i n the furnish of paper i n Western Europe, tabulated i n Table 3-13 on page 40. TABLE 3-12 IMPORTS OF BLEACHED AND SEMI-BLEACHED KRAFT PULP 1955-1964 (000's S.A.D.T.) 1957 1958 1959 1960 1961 1962 1963 1964 740 842 988 952 1,068 1,237 1,279 1,378 18 19 25 17 ^ 13 11 13 11 236 258 296 389 393 432 501 580 77 85 106 148 155 188 249 294 158 167 212 285 309 397 459 547 29 40 53 64 55 54 90 126 31 46 47 50 57 69 87 82 41 40 63 92 95 135 228 253 26 23 31 38 44 39 40 41 39 62 88 131 106 131 108 134 637 721 896 1,197 1,214 1,445 1,762 2,057 39 37 28 56 26 33 44 53 45 5 2 3 14 43 180 210 Area 1955 1956 United States 697 714 Canada 13 i 3 Western Europe U.K. 184 174 France 67 65 Germany 137 151 < Holland 22 23 Belgium 21 22 It a l y 25 30 Switzerland 26 27 Balance _40 _ 8 l To t a l W. Europe 522 573 A u s t r a l i a 15 30 Japan 3 15 Lat i n America, Far East (Japan excluded), A f r i c a and Near Easti Detailed Grade S t a t i s t i c s not available. Source: Extracted from Woodpulp S t a t i s t i c s , U.S.P.P.A. for Years 1955-1964. to KD 40 TABLE 3-13 PERCENT OF BLEACHED KRAFT PER TON OF PAPER AND PAPERBOARD WESTERN EUROPE, 1953-1960 Year % 000's Tons Tons B/K Paper Prod. 1953 2.9 372 12,827 1954 3.1 453 14,613 1955 r - 3.6 575 15,972 1956 • 3.8 639 16,816 1957 4.3 768 17,860 1958 4.9 890 18,163 1959 5.6 1,100 19,642 1960 6.4 1,390 21,718 1965 (est.) 9.0 2,610 29,000 1970 II 12.0 4,116 34,300 1975 it 15.0 6,375 42,500 Sources Pulp and Paper Prospects i n Western  Europe, FAO, Rome 1963, p. 453. Below i s shown the trend of market bleached k r a f t to t o t a l chemical pulp. TABLE 3-14 BLEACHED KRAFT MARKET PULP c . f . CHEMICAL PULP (000,000 Tons) Year Chemical Pulp Market B/K % Market B/K 1955 32.4 1.30 4.0 1956 34.3 1.36 4.0 1957 34.9 1.47 4.2 1958 35.3 1.64 4.6 1959 38.8 2.00 5.2 1960 42.6 2.29 5.4 1961 45.3 2.48 5.5 1962 47.3 2.88 6.1 1963 49.8 3.41 6.8 1964 54.7 3.86 7.1 E r t i E E "farm" - L j - - - |_ ± H ? - H - H ~ | T J 7 J T J T J T | T 1 l l l i i l L 1.1 i 11 : ; 1 . ! | i.t- i ; ; i ; 1 \ j I 1 4 j j - "{-n • II j i f • 1 1 1 1 1 f f 11 i 1 1 i 1 1 1 i i j ! 4 - 1 i j 1 I • T - r 1 | ; j 1 j t I T 1 I I j r 11 i 1 1 i + F f f l i [ | | [ | - [ | | L | Itr 1 4 •f t i n P - 4i x n i i n i m i 4f 1 1 1 1 I N Mil Mill lill 1 1 1 i I I 1 ! 1 I I 1 1 1 1 1 1 1 I M 1 I M | M l 1 j j 1 i I 1 1 1 1 1 1 1 1 1 1 1 ! 1 1 1 M l 1 1 i I I 1 1 1 I I 1 1 1111 1 1 1 1 1 I I 1 1 1 1 I I 1 1 1 1 I M I I ' l l 1 L I 1 1 1 I'll l i 1111 i ill! i j 11 j 111 j j 11 i l l 1 11 I11 1 11 i 1111 1 11 ii | I I ill 1 I I I II l i l l i l i l l II I I I I I I I I III I I (0 M tt£* /UO /<?&$' /?7iT Figure 1. Bleached k r a f t market pulp as a percent of t o t a l chemical pulp. 42 Conclusion Projection of the trend of B/K market pulp as a percent of t o t a l chemical pulp leads to the conclusion that B/K market pulp w i l l be 11.0% of chemical i n 1970, and 15% by 1975. TABLE 3-15 PROJECTED DEMAND FOR B/K MARKET PULP 1970 and 1975 1970 1975 Chemical Pulp 64.4 M i l l i o n Tons 83 M i l l i o n Tons B/K as % of Chemical 11% 15% B/K Market Pulp 7.1 M i l l i o n Tons 12.4 M i l l i o n Tons Proposed A l l o c a t i o n of B/K Market Pulp by Area Table 3-16 contains a proposed ten t a t i v e breakdown of the p o t e n t i a l for B/K pulp f o r both 1970 and 1975, based upon the projected demand fo r paper, and the h i s t o r y of imports. TABLE 3-16 PREDICTED DISTRIBUTION OF B/K MARKET PULP, 1970 & 1975 . (000,OOO's Tons) .  Area 1970 1975 North America 2.0 3.5 Western Europe 3.7 6.0 Latin America .5 1.1 Oceania .1 .2 Japan .5 1.0 Far East & Others .3 .6 T o t a l 7.1 12.4 f 43 Analysis of Proposed D i s t r i b u t i o n The United States, i n s p i t e of possessing large uncut forests, has imported c e r t a i n grades of pulp to supple-ment her own production. Canadian B/K has always been i n demand by U.S. manufacturers of p r i n t i n g and w r i t i n g paper, high q u a l i t y paperboard, and f i n e paper since pulp made from southern pine or northern hardwoods cannot supply the charac-t e r i s t i c s required i n these grades. In the past f i v e years, p r i n t i n g grades have increased 18%, and t h i s trend should continue as school and college attendance grows. L i g h t -weight f i n e paper has exhibited a 21% growth during the past f i v e years due i n part to the increase i n postage rates, but mainly to the dramatic growth of business papers and computer prin t o u t s . Northern softwood pulp i s a necessity i n f i n e paper grades to impart strength and a smooth surface. Modern packaging techniques have created a demand for high q u a l i t y paperboard s u i t a b l e f o r h a l f and f u l l - t o n e colour reproduction. To date, the most acceptable pulp f o r top l i n e r on board has been northern B/K. Paperboard sales have r i s e n 23% i n the l a s t f i v e years and should continue t h e i r rapid growth. Therefore, an increase i n U.S. demand fo r B/K imports from Canada and Scandinavia i s evident. Western Europe's per capita production of paper i s running ten to f i f t e e n years behind North America's, but i s r a p i d l y catching up. This consumption gain i s i l l u s t r a t e d i n the following ta b l e . 44 TABLE 3-17 PER CAPITA PAPER CONSUMPTION GAIN, 1950-1964 (Pounds per Capita) Country Gain 1964 Level Sweden 198 320 United Kingdom 164 264 Denmark 151 246 West Germany 148 208 Netherlands 132 220 Switzerland 124 221 United States 97 479 France 83 157 Sources 1965 World Review, Pulp and  Paper, pp. 7 & 11. Consumption of paper i n Europe should make accelerated gains as income, l i t e r a c y ( I t a l y , Spain), and acceptance of the supermarket increase. As was shown previously i n Table 3-12, the FAO forecast a dramatic r i s e i n demand f o r bleached k r a f t . Europe's resources of wood are being taxed to the l i m i t . The FAO examined t h i s problem i n 1963 and conservatively predicted that,-by 1975, Western Europe w i l l have changed from a net exporter of pulp and paper of 1.4 m i l l i o n tons (1962), to a net importer of f i b r e of 6 m i l l i o n tons. The highest percentage of that f i b r e i s expected to be bleached k r a f t pulp. Japan ranks t h i r d i n the world i n production of paper. This country has large uncut forests, some of,which are on mountainous t e r r a i n , others large na t i o n a l parks or v i r t u a l shrines, and the balance being cut f o r timber, 45 fuelwood/ and pulp. Japan began importing pulp i n large quantities i n mid 1962. Since then, there has been a steady-increase i n demand for bleached k r a f t , and during the e a r l y 7 part of 1966 the demand doubled. The future demand i s l i k e l y to reach large tonnages. The l o c a l manager of one of the nation's leading Trading Houses estimates Japan w i l l import a m i l l i o n tons of bleached k r a f t i n 1970 and two Q m i l l i o n by 1975. However, the Japanese have been g u i l t y of exaggeration of demand i n the past. Therefore, t h i s study, perhaps conservatively, estimates demand to be 500,000 and one m i l l i o n tons i n 1970 and 1975, res p e c t i v e l y . L a t i n America has developed i t s pulp industry very slowly. Only C h i l e and B r a z i l have reached the point of exporting pulp and paper to other L a t i n American countries. Because the wood u t i l i z e d i s short f i b r e with inherent weak strength, the q u a l i t y of t h i s pulp i s considerably below western standards. In order to make high q u a l i t y p r i n t i n g , w r i t i n g and f i n e paper, these countries must import northern bleached k r a f t . Imports have grown s t e a d i l y and are expected to increase as the standard of l i v i n g improves. The Far East, Middle and Near East are an enigma for any forecaster. Demand has fluctuated s i g n i f i c a n t l y i n the past ten years. Taiwan f i r s t began importing of bleached k r a f t i n 1963 and i n the following year doubled the intake. I s r a e l r e l i e d on sulphites up to 1964 when k r a f t purchases 7 Personal interview with Mr. A. C. McGougan. 8 Personal interview with Mr. K. Kinoshita. 46 commenced. Pakistan's demand has gone from zero to 20,000 tons per year i n two years, but i s not expected to increase u n t i l more paper m i l l s are b u i l t . Equally d i f f i c u l t to pr e d i c t i s the p o t e n t i a l i n India, Malaysia or Indonesia, who currently purchase a few thousand tons each i n a year. The P h i l l i p i n e s industry, mainly s e l f - s u f f i c i e n t , does buy a small quantity of k r a f t pulp, c h i e f l y from U.S. sup p l i e r s . Demand i n these areas w i l l increase slowly, but, i n absolute tonnages, they w i l l not be a s i g n i f i c a n t force i n the market. A u s t r a l i a and New Zealand use high t a r i f f s to keep imported paper out of t h e i r markets. A u s t r a l i a must import pulp to meet the demand f o r ce r t a i n grades of paper and board even though her pine and eucalyptus forests are quite s u f f i c i e n t to meet other needs. New Zealand i s a net exporter of pulp and newsprint and i s attempting to form a free trade arrangement with A u s t r a l i a with a view to r e s t r i c t i n g imports from other nations. This trade agree-ment i s not a foregone conclusion f o r the pric e s the New Zealanders charge for t h e i r pulp are $10 to $15 a 'ton above that delivered from Canada. Therefore, i t i s anticipated that B/K pulp w i l l be imported by A u s t r a l i a i n increasing quantities f o r the foreseeable future. The demand i n the remaining area, A f r i c a , i s v i r t u a l l y impossible to pr e d i c t . South A f r i c a , Rhodesia, and Egypt are the major importers but together they only bought 22,400 tons of bleached k r a f t i n 1964. Should 47 standards of l i v i n g increase much more r a p i d l y than i n the past and the i l l i t e r a c y rate decreases at an accelerated pace, then A f r i c a may become a substantial buyer of bleached k r a f t . In summary, the demand for bleached k r a f t between now and 1975 w i l l increase sharply. The estimates, 7.1 and 12.4 m i l l i o n tons f o r 1970 and 1975 respectively, may indeed be highly conservative, but they are considered to be r e a l i s t i c , based upon current expectations. The Future Supply of Market Bleached Kraft The current major producing countries are Sweden, Finland, Canada, and the United States, with Russia a possible supplier. Each of these countries has large f o r e s t resources? with the exception of Russia, each possesses the tec h n i c a l knowledge to produce high q u a l i t y pulp. Russia i s attempting to acquire, from Sweden, the equipment and s k i l l s necessary to make market grade pulp.^ Russia's i n t e r n a l demand has not been s a t i s f i e d by her own production' and she has imported pulp from Finland to meet her require-ments. Al b e r t W. Wilson, editor of Pulp and Paper, who has ju s t returned from a tour of Scandinavia and Russia, suggests that Russia may become a major exporter i n the mid to l a t e seventies but not before. Besides supplying her own needs, Russia must f i r s t overcome c e r t a i n detrimental f a c t o r s . For example, the vast forests of Russia l i e i n Eastern S i b e r i a and are not r e a d i l y accessible. In addition, costs of 9 Albert W. Wilson, "USSR" Tour", Pulp and Paper, v o l . 40, no. 15, A p r i l 11, 1966, pp. 44-48. 48 r production and d e l i v e r y could postpone Russia's entry i n t o the world market u n t i l product prices r i s e . Finland's spectacular growth of production of market chemical pulp i n the past f i v e years'- (1.2 to 2.3 m i l l i o n tons) has come to a h a l t because of a shortage of raw material. In fact, i n 1964 Finland imported pulpwood from Russia to supplement her own c u t t i n g . This country, h i s t o r i c a l l y a world leader i n intensive forest management, i s approaching the point of depleting her f o r e s t s . The expected increase i n production of market bleached k r a f t i n the year 1965 ,is 40,000 tons* i n 1966, 100,000 tons? and 1968-1970, 100,000 t o n s . 1 0 The Finnish Government i s underwriting a f e a s i b i l i t y study of draining 23 m i l l i o n acres of swampland to plant pine and s p r u c e . 1 1 Tests done on a sample region showed that i n a drained and f e r t i l i z e d area, a tree w i l l reach 10 inches i n diameter i n ten years.. I f t h i s program i s implemented, Finland could, i n the 1980*s, once more undergo a rapid expansion of her pulp industry. However, fo r the next ten years, t h i s nation i s not a contender for the expanding pulp market. Sweden has not yet reached the point of overcutting but i s now being forced to log forests previously c l a s s i f i e d as high cost areas. The companies are spending large sums 10 Albert W. Wilson, "Scandinavia Improves i n World Competition", Pulp and Paper, v o l . 39, no. 40; October 4,1965, p..38. 11 Loc. c i t . 49 of money on f e r t i l i z a t i o n of the forests to stimulate f a s t e r growth. The Swedish Government has financed a research and development program to improve mechanization of logging equipment. A l l these factors point to Sweden's desire to maintain her p o s i t i o n i n the world market. Current plans f o r expansion w i l l add the following tonnages of B/K market pulps 35,000 i n 1965? 75,000 i n 1966? 285,000 i n 1967? 165,000 i n 1968? and 165,000 i n 1969. Therefore, the t o t a l 12 increase anticipated by 1970 i s 725,000 tons. In the United States, exports of bleached k r a f t o r i g i n a t e mostly from the south and western states. Southern pulp i s similar i n c h a r a c t e r i s t i c s to pulp made from Douglas F i r and thus i s normally used i n lower grades of p r i n t i n g and w r i t i n g papers as well as i n boxboard. Western pulp i s s i m i l a r to B.C. pulp i n q u a l i t y . Expansions are new m i l l s planned for 1966-1969 t o t a l $2.7 b i l l i o n . 1 3 However, l i t t l e of t h i s c a p i t a l i s going into market pulp production. The major part i s f o r captive pulp and self-contained pulp and paper operations. Expected a d d i t i o n a l tonnages of bleached k r a f t market pulp ares 50,000 i n 1965?. 200,000 i n 1966? 14 320,000 i n 1967? and 220,000 i n 1968. The t o t a l of 790,000 tons w i l l probably be increased before 1970 by expansions s t i l l unannounced. 12 Pulp and Paper, v o l . 39, no. 40, p. 37. 13 G. Hodges, "Outlays Race Toward Record", Pulp and Paper, v o l . 39, no. 49, December 6, 1965, pp. 43-57. 14 These figures were extracted from the Hodges' a r t i c l e . 50 The most intense rush to b u i l d market pulp m i l l s i s occurring i n Canada with strong encouragement from every p r o v i n c i a l government. The explosion i s concentrated i n B r i t i s h Columbia where the wood i s p l e n t i f u l and r e l a t i v e l y low cost as compared to Ontario and Quebec. Vancouver news-papers have used a figu r e of 3,000,000 tons increased production expected by 1970, but the m i l l s c u r r e n t l y i n expansion or under construction do not as yet t o t a l that f i g u r e . In addition to B r i t i s h Columbia; there are new m i l l s i n construction i n Ontario and Quebec. The t o t a l bleached k r a f t market pulp to be "on stream" i n the next f i v e years i s i;810,000 tons. Table 3-19 presents the pertinent data. Supply Versus Demand to 1970 The forecast for demand showed that the 1964 l e v e l of 3.9 m i l l i o n tons would r i s e to 7.1 m i l l i o n by 1970. The supply-demand pi c t u r e f o r the same period t o t a l s : TABLE 3-18 1970 SUPPLY c f . DEMAND OOO's S.A.D.T. Finland Sweden U.S. Canada To t a l New B/K 1964 B/K Total World Supply To t a l World Demand Surplus 240 725 790 1,810 3,565 3,858 7,423 7.100 323 51 TABLE 3-19 NEW SUPPLY BLEACHED KRAFT MARKET PULP, CANADA 1965-1969 (OOO's S.A.D.T.) Area and M i l l 1965 1966 1967 1968 1969 B r i t i s h Columbia B.C. Forest 55 55 Can. Forest 45 Intercontinental 100 Kamloops 90 MacMillan Bloedel 40 125 Northwood 45 170 Prince George P&P 60 55 Rayonier 60 30 Skeena 260 Tahsis 60 75 B.C. T o t a l 200 280 285 435 125 Ontario A b i t i b i 50 50 Great Lakes 90 30 Ontario T o t a l 140 80 Quebec Consolidated 100 Domtar 165 Too Quebec T o t a l 165 GRAND. TOTAL 200 420 530 535 125 52 The s i z e of the surplus i n 1970 does not appear to be too significant., The importance of the build-up can be seen c l e a r l y i n the graph. Figure 2. Figure 2. Supply c f 0 Demand; Bleached k r a f t market pulp. 53 In absolute terms the surplus f o r each year from 1964 to 1970 i s shown i n Table 3-20. TABLE 3-20 SUPPLY c f . DEMAND (000»s S.A.D.T.) Year Supply Est. Demand Surplus 1964 1965 1966 1967 1968 1969 1970 3,858 4,143 4,928 6,113 7,083 7,423 7,423 3,858 4,143 4, 750 5, 300 5,900 6,500 7,100 178 813 1,183 923 323 Comments on the Controversy Table 3-20 confirms the b e l i e f s of the industry leaders of B r i t i s h Columbia, i . e . ; given a growth of world demand at 5% per annum and supply as those m i l l s with f u l l expectation of being i n production, there w i l l be a surplus of pulp for the next four years. At t h i s point, we w i l l examine i n d e t a i l the figures supplied by Trade and Commerce Minister Loffmark on December 2, 1965 (see Chapter I ) . F i r s t , the Minister's appreciation of the demand for B r i t i s h Columbia pulp appears to be based upon t o t a l world figures while t h i s study l i m i t e d the avail a b l e markets r 54 to those normally sold to by B r i t i s h Columbia exporters. Canadian export figures show that Russia, China, and Eastern Europe have not imported any Canadian B/K i n the past ten years- therefore, those areas have been, and should be, l e f t out of the demand p i c t u r e . Secondly, paper i s seldom, i f ever, made from one type or grade of pulp e x c l u s i v e l y . I t i s composed of a mixture of sulphates, sulphites, groundwood, and selected waste paper. Therefore, any demand estimate f o r pulp must be based upon the expected usage of the pulp grade i n question and not on t o t a l demand.-Thi r d l y , the figures quoted by Mr. Loffmark bear no r e l a t i o n to those provided by the industry. For instance, the Minister stated that 1964 world pulp demand was 92 m i l l i o n short tons, but Pulp and Paper compiled a t o t a l of only 85 m i l l i o n tons. F i n a l l y , the Minister gave production figures f o r B r i t i s h Columbia i n 1964 that d i f f e r s i g n i f i c a n t l y from those provided by the Bureau of Economics -and S t a t i s t i c s , which comes under h i s p o r t f o l i o . This discrepancy i s noted i n Table 3-21. In contrast to the above, t h i s study has c a r e f u l l y deduced the demand figures by projection of past experience using a s t a t i s t i c a l technique that has shown i t s merit. Supply figures are supported by a highly r e l i a b l e source. Therefore, we must conclude that the i n d u s t r i a l leaders have 55 attempted to present a precise appreciation of the s i t u a t i o n , and that Mr. Loffmark has not received s u f f i c i e n t l y accurate data upon which to make public forecasts. TABLE 3-21 COMPARISON OF B.C. PRODUCTION TONNAGES, 1964 (000,OOO's S.A.D.T.) Mr. Loffmark Bureau* T o t a l Pulp Produced 3.5 2.8 Converted to Paper 1.8 1.4 Shipped as Pulp 1.7 1.4 * Bureau of Economics and S t a t i s t i c s , Summary of Economic A c t i v i t y 1965, Department of I n d u s t r i a l Development, Trade, and Commerce, V i c t o r i a , B.C., December 1965, p. XIV. SUMMARY The demand for bleached k r a f t market pulp was derived from the expected consumption of paper and paperboard i n those areas which normally purchase pulp from B r i t i s h Columbia producers. The supply estimate i s based upon a l l announcements of new m i l l s currently under construction, or those with a reasonable chance of being b u i l t . The r e s u l t i s a surplus of pulp f o r the period 1966-1970, with 1968 being the year of greatest surplus or, i n other terms, 56 l o w e s t o p e r a t i n g r a t e . S i n c e c o n s t r u c t i o n o f a m i l l r e q u i r e s from two and one-half to three years, any company commencing today would have pulp "on stream" i n mid 1969, when the surplus i s being reduced. The above data would indicate, therefore, that the optimum time for commencement of construction of a bleached k r a f t market pulp m i l l would be the spring of 1968. 5 7 CHAPTER IV ANALYSIS OF SELLING PRICE AND PRODUCTION COST DATA ANALYSIS OF FACTORS AFFECTING NET MILL VALUE The f i v e factors which determine the net inflow of cash to a B/K m i l l ares 1. S e l l i n g P r i c e 2 . Exchange Rate s 3 . Freight Rates 4. S e l l i n g Commission 5 . Insurance Costs. S e l l i n g Price Normally, pulp i s sold on the i n t e r n a t i o n a l market on a delivered basis. Prices are quoted i n United States d o l l a r s , cost; insurance and f r e i g h t (C.I.F.) included, i n a l l countries except the United Kingdom, A u s t r a l i a and New Zealand, where the monetary unit i s pounds s t e r l i n g (C.I.F.). A few countries, such as Taiwan and Venezuala, i n s i s t on a p r i c e free at ship (F.A.S.). A l l pulp sold i n the United States i s quoted i n U.S. d o l l a r s F.O.B. m i l l , f u l l f r e i g h t allowed to buyers at r a i l s i d i n g . Prices are announced four times a year, f i f t e e n to t h i r t y days p r i o r to the beginning of each quarter. Price increases have always followed t h i s pattern, but o f f i c i a l 58 announcements of p r i c e drops have occurred at other times. European p r i c e s have always been set by the Scandinavians, while American pr i c e s are normally set by Canadian producers. Canadians also e s t a b l i s h the p r i c e s i n Japan and A u s t r a l i a . In the remainder of the world, o f f i c i a l p r i c e s are dictated by the Scandinavians, although, i n actual f a c t , they merely act as guidelines f o r bargaining or tendering. The u n i t of measure i s not uniformly standard. Pulp i s sold i n short, long, and metric tons. Short tons, (each 2/000 pounds),' are common to North America, Japan, the P h i l l i p i n e s / South A f r i c a , and I s r a e l . Long (2,240 pounds) tons are used f o r the United Kingdom, A u s t r a l i a ; New Zealand/ Pakistan/ Malaysia, and Egypt. The remainder of the world uses metric (2,204 pounds). * The p r i c e of B/K i s subject to constant change and i s quite d i f f e r e n t i n each major area. An example of p r i c i n g i s i l l u s t r a t e d belowg TABLE 4-1* DECEMBER 1965 BLEACHED KRAFT PRICES Area Price Currency Ton U.S. $145-$155 U.S. Short Europe $144.00 U.S. Metric U.K. 56.10.0 h Long Japan $139.00 U.S. Short A u s t r a l i a 60.0.0 L Long Argentina $189.00 U.S. Metric * Provided by leading B.C. Exporter. 59 The following table i s the h i s t o r y of p r i c e s i n the American market. TABLE 4-2* AMERICAN PRICES 1955-1965 FULLY BLEACHED KRAFT (G.E. 89/90) Year Month Price Range US $/S.A.D.T. 1955 January $142.50-147.50 A p r i l 147.50 October 150.00 1956 A p r i l 155.00 1957 October 157.50-162.50 1960 November 160.00 1962 October 140.00 1963 A p r i l 133.00-145.00 October 148.00-150.00 1964 October 145.00-155.00 * Woodpulp S t a t i s t i c s , USPPA, October 1965, p. 131. In addition to the above; there are lower p r i c e s fo r lower G.E. Brightness. For example; G.E. 84-86 i s $2 lower than 89/90. Semi-Bleach (G.E. 68/75) has sold f o r as much as $20 below B/K p r i c e s but recently has been only $6 to $8 lower. European p r i c e s have followed the inverted graph of producer m i l l inventories. When B r i t i s h buyers l i t e r a l l y ceased buying i n the f a l l of 1960 due to slower paper demand and high pulp inventories at t h e i r m i l l s ; the Scandinavians lowered p r i c e s 10%. In 1961 Weyerhauser was overstocked and in s t i g a t e d a p r i c e drop of $20 i n the U.S. market. The recent p r i c e collapse i n Europe was discussed i n Chapter I. 60 Pulp p r i c e s have not yet recovered to the 1957-1959 l e v e l / and i t i s u n l i k e l y that they w i l l do so u n t i l the early 1970's. In order to move pr i c e s higher i n 1963, the Scandinavians v o l u n t a r i l y and e f f e c t i v e l y reduced production to 90% of t h e i r rated capacity. The same countries are proposing a month's moratorium of production i n 1966 i n order to reduce t h e i r inventories and p o s s i b l y r a i s e the p r i c e back to the early 1965 l e v e l . A leading B.C. exporter of B/K f e e l s that current p r i c e s f o r Europe w i l l not decrease due to increasing costs/ c h i e f l y labour, i n Scandinavia. 1 However, the same company i s not so o p t i m i s t i c about American pr i c e s which, they f e e l could drop to the $130-$135 l e v e l by the end of t h i s year. Japanese p r i c e s w i l l probably remain at t h e i r current low l e v e l because a r i s e i n p r i c e of $5 a ton i n 1964 encouraged the Scandinavian s e l l e r s to compete there. A f t e r the removal of the p r i c e increment, the Scan-dinavian B/K traders l o s t i n t e r e s t in t h i s market. The forecast of bleached k r a f t p r i c e s deduced f o r t h i s study appear i n Table 4-3 on page 61., Exchange Rate Canadian exporters receive from $9.75 to $11,625 Canadian d o l l a r s for every ton sold i n U.S. currency because of the exchange rate. This i s a s u b s t a n t i a l amount when 1 On March 15; 1966; Greaker C e l l u l o s e f a b r i k , a Norwegian producer of bleached s u l p h i t e / shut down due to high losses;' wood costs rose $1 m i l l i o n i n the past ten years, and the recent drop i n p r i c e s cost Greaker another $1 m i l l i o n . Pulp and Paper; v o l . 40/ no. 13; March 28, 1966, p. 9. 61 p r o f i t per ton a f t e r tax i s often under $20. The established exporters r e c a l l the 1955-1960 period when the exchange rate lowered t h e i r return by as much as $7 per ton. I t i s assumed that the exchange rate w i l l remain unaltered for the next f i v e years. TABLE 4-3 FORECAST OF BLEACHED KRAFT PRICES (Per Ton) Area 1966-1970 1971-1972 1973-U.S. $140.00 $155.00 $165.00 Wo Europe 144.00 160.00 170.00 Japan 139.00 145.00 155.00 A u s t r a l i a £.60. 0.0 £.65.0.0 £.68.0.0 Others $137.00 $140.00 $150.00 Freight Rates Freight rates can be divided into two categories -r a i l and water. R a i l rates to the American market have remained s t a t i c f o r the past f i v e years and a c t u a l l y decreased ten cents per hundred pounds i n 1964 i f the producer loaded 120,000 pounds i n each f o r t y - f o o t boxcar. The four f r e i g h t zones i n the United States are P a c i f i c , Mid West, Great Lakes, and Eastern. The corresponding average f r e i g h t rates per S.A.D.T. are $17.50, $22.25, $24.50 and $27.00 f o r B.C. shippers. The d i s t r i b u t i o n of U.S. pulp buying paper m i l l s according to Freight zones i ss P a c i f i c , 5%; Mid West; 40%; Great Lakes/ 20%; and Eastern, 35%. 62 By assuming pulp sales to those areas i n proportion to the buyers gives an average f r e i g h t rate of $24.13 Canadian per S.A.D.T. An i n t e r i o r m i l l s e l l i n g to overseas markets faces the problem of transporting the pulp to a dock v i a r a i l , s t oring the pulp u n t i l the ship a r r i v e s , and paying f o r the transportation cost ex warehouse to ship's side. The only B.C. i n t e r i o r m i l l with experience i n t h i s area i s the Castlegar plant of Columbia C e l l u l o s e . The average cost 2 per ton i n 1964 was $7.45. Water rates are highly v a r i a b l e and depend upon the demand for bottoms. Shipping conferences have a f i x e d rate subject to change with a 90-day notice. Also there are open-rated areas (U.K. and North Europe) where the rate can vary monthly. In s p i t e of the f a c t that a forecast of water rates can be invalidated by the signing of a major wheat export contract, some estimation i s required i n order to a r r i v e at a m i l l net value. TABLE 4-4* EXPECTED AVERAGE WATER FREIGHT RATES 1966-1970 Area Rate-Can$/S.A.D.T. Western Europe $27.50 Japan 19.00 A u s t r a l i a 34.25 Others 30.00 * Provided by a leading B.C. Exporter. 2 Personal Interview with Mr. J . Livingston; Columbia Pulp Sales, 63 S e l l i n g Commission Many market pulp producers employ pulp agents to s e l l t h e i r output. For example, MacMillan Bloedel Limited have used P r i c e and Pierce Limited of London since the 3 company began production of B/K pulp. Recently, however, t h i s firm began to market pulp through i t s own sales companies i n the United Kingdom, American, and Japanese areas. The average agents" commission i s 3% of the F.A.S. value, and i t i s f e l t that a company sales force w i l l cost about 2%%m An independent m i l l would be more successful i n marketing i f i t employed agents because experienced sales personnel are d i f f i c u l t to obtain and, hence, command a high salary. Pulp s e l l i n g involves knowing the buyers, being f a m i l i a r with each buyer's p e c u l i a r i t i e s , having an extensive t e c h n i c a l back-ground or support from the firm's own t e c h n i c a l sources, possessing knowledge of f r e i g h t rates and d e l i v e r y problems, and, f i n a l l y , having a standard q u a l i t y product to s e l l . Insurance Costs The s e l l e r i s required under .a'C.I.F. contract to pay f o r the marine insurance/ and, i n some contracts, war r i s k . Insurance rates; on the average, are $0,125 per $100.00 and, therefore, average 18 to 20 cents per ton. In addition; most Canadian exporters place insurance on t h e i r accounts receivable through the Export Credit Insurance Corporation. The premium fo r t h i s study i s an average derived from present rates of $0.20 per $100 for the U.K. and $1.40/$100 fo r Taiwan. 3 MB&PR, Annual Report 1965/ p. 12. 64 AN AVERAGE MILL NET VALUE C a l c u l a t i o n o f a M i l l Net The method f o r c a l c u l a t i n g t h e m i l l n e t i s i l l u s t r a t e d i n T a b l e 4-5. The f o l l o w i n g terms o f r e f e r e n c e were employeds (a) S e l l i n g p r i c e s w i l l be as shown i n T a b l e 4-3. (b) U.S. Exchange r a t e w i l l be unchanged a t 7.5%. Pound S t e r l i n g = $3.00 Canadian. (c) Water f r e i g h t r a t e s as p e r T a b l e 4-4. (d) R a i l r a t e $24.13 p e r S.A.D.T. (e) I n t e r i o r - t o - s h i p c o s t $7.45 per S.A.D.T. ( f ) S e l l i n g c o s t s 3% o f F.A.S. v a l u e . (g) Insurance c o s t s $0.55 p e r S.A.D.T. TABLE 4-5 CALCULATION OF MILL NET 1966-1970 Area P r i c e + Exchange - F r e i g h t - Comm. -Marine & ECIC Insur . = M i l l Net U.S. $140.00 $10.50 $24.13 $3.-79 $122.58 W. E u r . 140.43 10.53 34.95 3.48 $0.55* 111.98 Japan 139.00 10.43 26.45 3.69 0.55 118.74 A u s t . 160.71 — 41.70 3.57 0.55 114.89 Others 137.00 10.28 37.45 3.29 0.55 106.20 Determination of Market D i s t r i b u t i o n 65 An i n t e r i o r m i l l should concentrate i t s sales i n the United States market since; f o r the past ten years, Western Canadian m i l l s have received an average incremental m i l l net of $7.50 a ton there as compared with the highest return from a l l other countries. This high m i l l net i s due to the lower f r e i g h t costs as well as the higher p r i c e s . One Canadian m i l l , North West Pulp and Power at Hinton, Alberta, s e l l s i t s t o t a l production i n that market; but, on the other hand, Celgar at Castlegar, B.C., s e l l s approximately 60% of i t s product there and the balance goes to Europe and the Far East. By d i s t r i b u t i n g sales to a number of countries, the firm w i l l receive a lower return but acquire a degree of safety. Sales of woodpulp are affected by economic conditions and market d i v e r s i f i c a t i o n w i l l provide a more stable return than market concentration. In Table 3-16, the estimates of future demand f o r ••• B/K show the larg e s t market w i l l be Western Europe, followed by the United States, Japan; and Others. An excellent strategy f o r the In t e r i o r m i l l would be a concentration of sales e f f o r t i n the U.S., coupled with selected customers i n Western Europe/ A u s t r a l i a , and Japan. By t h i s means, the firm would have a balance i n d i s t r i b u t i o n and could expect to earn a sui t a b l e return f o r the r i s k involved. Therefore, the firm should set as sales targets 55% to U.S.A., 30% to Europe; and the balance evenly d i s t r i b u t e d to A u s t r a l i a , Japan, and Others. 66 At t h i s point, i t i s possible to project the Weighted Average M i l l Net, 1966-1970, as i n Table 4-6. TABLE 4-6 WEIGHTED AVERAGE MILL NET 1966-1970 Area % of Sales M i l l Net Weighted Value U.S. 55 $122.58 $67.42 W. Europe 30 111.98 33.59 Japan 5 118.74 5.94 A u s t r a l i a 5 114.89 5.74 Others 5 106.20 5.31 To t a l 100 • $118.00 Conclusion Table 4-6 establishes an expected m i l l net of $118.00 per ton. However; the variance from t h i s value could be su b s t a n t i a l . If American p r i c e s were to f a l l to the A p r i l 1963 l e v e l , and the Japanese p r i c e to drop to $130.00, the r e s u l t i n g m i l l net would then be $111.40. In contrast, the m i l l net at 1965 pr i c e s would have been $126.60. A question could be asked here. "Is a m i l l net of $111.40 reasonable, or could the s e l l i n g p r i c e s be even lower than estimates?" One method of answering that question i s to examine the costs of the Scandinavian producers to determine how f a r pric e s i n Europe might decrease. A recent a r t i c l e by the manager of the Husum B/K M i l l i n Sweden; rated as the producer of the f i n e s t B/K pulp 67 i n the world, compared h i s costs with h i s estimate of Canadian. These costs, converted from Crowns per metric ton to.Canadian d o l l a r s per short ton, are presented i n Table 4-7. TABLE 4-7* COMPARISON OF SWEDISH AND WESTERN CANADIAN B/K COSTS Factor Sweden New M i l l i n Western Canada Wood $ 65.64 $ 46.80 Chemicals 12.54 12.54 Salarie s 8.42 17.78 Fuel 0.94 2.81 E l e c t r i c i t y 1.87 1.87 Miscellaneous 4.68 4.68 Interest & Depreciation 6% f o r 15 years 28.09 37.45 Ship to Europe 9.36 18.72 Tota l $131.44 $142.65 * Mr. B. Arensjo, Manager, Husum M i l l , . "Sweden versus Western Canada"/ Paper Trade Journal, v o l . 150, no. 4, January 24, 1966, p. 26. The current p r i c e i n Europe was given as $144.00 U.S. per metric ton or $140 Canadian per short. Since the Swedish producers' p r o f i t margin i s only. $8.99 per ton, i t i s u n l i k e l y that they would i n s t i g a t e a further decrease i n p r i c e . The lowering of the p r i c e i n the United States to $130 would preclude the Scandinavians from s e l l i n g i n that market. This would enable Canadian producers to improve t h e i r m i l l nets by s e l l i n g more pulp to the U.S. The Japanese p r i c e i s c l o s e l y linked to the cost of producing pulp i n that country. Volume might be greatly increased at the $130 l e v e l , but any 68 p r i c e below that would l i k e l y meet resistance from the Japanese Government who want the national pulp industry to maintain f u l l employment. Should the Australian p r i c e decrease three or four pounds, most producers would cease s e l l i n g i n that area. The "Others" p r i c e was estimated at an extremely low l e v e l . Therefore/ a m i l l net of $111.40 can s a f e l y be assumed as the minimum l e v e l f o r planning purposes. MILL PRODUCTION COSTS Actual production costs of B.C. producers of B/K are not attainable f o r p u b l i c a t i o n . However, Sandwell and Company Limited, one of the foremost consultants i n t h i s industry, kindly divulged t y p i c a l costs f o r m i l l s located on the coast and i n the i n t e r i o r of B r i t i s h Columbia (see Appendix I ) . TABLE 4-8 TYPICAL PRODUCTION COSTS OF BLEACHED KRAFT PER S.A.D.T. Factor Coast I n t e r i o r Wood $35.00 ' $31.00 Chemicals 11.95 . 17.10 Fuel 2.90 3.55 Other Materials 6.25 6.90 E l e c t r i c i t y 3.05 3.65 Labour . 7.15 8.60 Admin. & Overhead 6.60 7.10 Miscellaneous 2.10 1.60 Total $75.00 • 179.50 69 "Other materials" includes r e p a i r and maintenance costs. Administration and Overhead covers supervisory wages, management s a l a r i e s , employer-paid benefits, employer-paid benefits, municipal taxes, and insurance. Depreciation and i n t e r e s t costs are not included. Wood costs for the i n t e r i o r are lower because the supply of chips i s greater than the demand, and the p r i c e of a sawlog i s lower than that of a coastal log. Cost Trends ——————— r Wood costs have remained quite steady f o r the period 1959-1963 i n s p i t e of r i s i n g wage costs i n the logging industry. TABLE 4-9* B.C. WOOD COSTS (Per Cord) Year Chips Pulpwood 1959 $15.68 $16.41 1960 15.57 16.68 1961 15.01 17.07 1962 15.65 15.40 1963 15.45 15.68 * Dominion Bureau of S t a t i s t i c s , no. 36-204, 1959-1963. A ton of B/K requires 2.25 cords of f i r , hemlock, or balsam. B/K manufactured from cedar, with i t s lower density, needs 2.6 cords. I t i s assumed that wood costs w i l l remain at the average l e v e l of 1959-1963. 70 The cost of chemicals has a c t u a l l y decreased i n recent years as the advent of the new caustic and chlorine plant of the Food and Machinery Corporation at Squamish forced Hooker Chemicals to lower t h e i r p r i c e s . I n t e r i o r p r i c e s are higher owing to the cost of r a i l transportation. Economies of scale show that f o r a m i l l producing 700 tons a day or more, i t i s cheaper to b u i l d i t s own chemical plant. • 4 Therefore, chemical costs are assumed to remain as shown. Labour costs are subject to an average increase of 5 4%. But p r o d u c t i v i t y increases have n u l l i f i e d the e f f e c t on p r o f i t s . An example of t h i s i s the m i l l at Hinton, A l b e r t a / whose production has r i s e n from the 1958 rated capacity of 147,000 tons to 190,000 i n 1965 without the 6 addition of any major equipment. Therefore, wage costs per 7 ton are expected to be unchanged. Fuel and e l e c t r i c i t y costs should also be unchanged. I t i s possible that with the completion of the new power sources on the Peace and Columbia Rivers that power rates may be lower. 4 "Chemical Costs", Canadian Forest Industries, March 1966, pp. 21-24. 5 D.B.S., #36-204, 1959-1963. 6 North Canadian O i l s Limited, Annual Report 1965, p. 6. 7 A s i m i l a r conclusion was reached by the Royal Commission on Canada's Economic Prospects. The Outlook for the Canadian  Forest Industries. Queen's Printer, Ottawa, 1957, p. 225. 71 Summary On the basis of the preceding information, the •cost per ton should remain at the 1966 l e v e l f o r the next f i v e years. However, a pe s s i m i s t i c view would add 2% per annum and a r r i v e at an average cost for the 1966-1970 period of $82.70 for an i n t e r i o r m i l l . 72 CHAPTER V FINANCIAL PROSPECTS FOR AN INDEPENDENT MILL In t h i s chapter, we w i l l examine the p o s s i b l e outcomes f o r an independent B/K m i l l to be b u i l t i n the i n t e r i o r of B r i t i s h Columbia,, In Chapter II, i t was stated that; to date, not one of the new m i l l s i s a true' independent/ but rather has one or more corporate partners who are experienced, f i n a n c i a l l y sound producers with established outlets i n the world markets. The d a i l y papers are co n t i n u a l l y announcing proposals for b u i l d i n g of pulp m i l l s i n t h i s province. The l a t e s t count shows twelve m i l l s on the proposed l i s t . Of t h i s assemblage of companies, f i v e are planned i n conjunction with e x i s t i n g firms. The major shareholder i n Alexandra i s B.C. Forests Products. A sawmill i s now under construction, but no plans f o r s t a r t i n g to b u i l d the pulp m i l l have been announced. The Bulkley V a l l e y project has been taken over by Bowaters and Bathurst Paper. This consortium received the r i g h t s to the wood with the under-standing that production could be put o f f u n t i l the end of 1971. Canal Development involves the f i r s t p a r t i c i p a t i o n of the Japanese into B.C. f o r e s t industry, and i s a combin-t i o n of Mitsubishi and Honshu Paper, a leader i n the Japanese paper industry. 73 TABLE 5-1 PROPOSED B/K MILLS Size Tentative Name Location Tons/day Start-up Date Alexandra Forest. Parsnip R. 750 1970 Bulkley V a l l e y Houston 600 1972 Canal Development Canal F l a t s 350 1968 Cariboo P&P Quesnel 750 1972 Cattermole Timber Parsnip R. 200 no date Crow's Nest Nelson 600 no date Greater Peace River Ft. St. John 500 no date Iskut Pulpower Iskut N/A no date P a c i f i c Logging Nelson N/A no date Peace River K r a f t Taylor N/A no date Rupert Enterprises Grand Forks N/A no date United Pulp Squamish 850 no date Sources "How to Find Your Way Among the B.C. M i l l Projects", Paper Trade Journal, November 8, 1965, pp. 54-55. Cariboo P & P i s a partnership of Weldwood and Price Brothers of Quebec. The l a t t e r o r i g i n a l l y were partners with Mr. H e l l e r i n the United Pulp and Newsprint proposal but withdrew shortly a f t e r the $10 p r i c e cut i n West Coast newsprint. F i n a l l y , P a c i f i c Logging i s wholly owned by Canadian P a c i f i c Railway which, i t i s i n t e r e s t i n g to note, also owns 6% of MacMillan Bloedel Limited. In short, of the above l i s t , seven are a c t u a l l y independents thus f a r . How many of these independents w i l l a c t u a l l y b u i l d a m i l l , and when, i s anyone's guess. The forecast i n Chapter I I I demonstrated that 5.3 m i l l i o n tons of B/K pulp would be required between 1970 and 1975. 74 Assuming the average m i l l i s capable of producing 200,000 tons, then approximately 27 new m i l l s w i l l be necessary to meet the 1975 demand. In the summary of Chapter III, i t was shown that an optimum date f o r commencement of construction would be 1968, which coincides with the predicted period of large surpluses and depressed p r i c e s . MacMillan Bloedel Limited have twice b u i l t extensive additions during such periods, and, as a r e s u l t ; have had pulp a v a i l a b l e l a t e r when the demand soared. I t would appear that t h i s company i s again contemplating t h i s strategy, i . e . , t h e i r new m i l l planned at Whitecourt, Alberta, with a tentative start-up date of 1971. • There i s every reason to presume that the firm's plan w i l l succeed once more. Following on from the above idea, we w i l l examine the possible f i n a n c i a l p o s i t i o n of an independent m i l l i f i t were to begin construction i n l a t e 1966 and be i n production i n 1970. Such a m i l l would then be marketing pulp as the surplus i s being sharply reduced. As has been demonstrated i n Table 3-20, pr i c e s would be depressed, but subject to sharp increases i n the next few years. FEASIBILITY STUDY Assumptions This f e a s i b i l i t y study i s based upon the following assumptions? 1. An i n t e r i o r B/K m i l l with an annual capacity of 200,000 tons and market d i s t r i b u t i o n as per Chapter IV. 75 2. C a p i t a l outlay required i s $60 m i l l i o n , spread evenly over a three-year period. 3. Financing $20 m i l l i o n equity and $40 m i l l i o n i n 6% 20-year bonds. Annual Interest i s $2.4 m i l l i o n . 4. 1970 Production cost per ton i s $82.70 per ton subject to an annual increase of 2%. Variable portion i s $64 per ton and f i x e d production costs are $3,740,000. 5. Average m i l l net values areg 1970 $111.40 1971 118.00 1972 126.60 1973 & 4 130.00 1975 - on 130.00 plus 2% per annum 6. Depreciation - 5% s t r a i g h t l i n e or $3 m i l l i o n per year. 7. Income Tax - 50%. 8. After-tax cost of C a p i t a l - 8%. Break-even Analysis - 1970 Fixed Expenses $3,740,000 Interest 2,400,000 Total $6,140,000 Variable = $64.00 per ton M i l l Revenue = $111.40 per ton Break-even Volume = 6.14 = $14,430,000 1 _ 64.00  X 111.40 The Break-even Volume i s equivalent to sales of 129,533 tons; or only 64.8% of the m i l l ' s capacity. This analysis does not include depreciation expenses because i t i s necessary to determine i f the m i l l could survive considering only out-of-pocket costs. In Table 3-19p supply 76 was estimated to be 7.423 m i l l i o n tons. By adding t h i s m i l l ' s production to supply, the operating r a t i o f o r the industry becomes 7100 = 93.1%, which i s just below the 7623 l a s t three-year average of 94.0%. The m i l l would not only survive, but would show a p r o f i t . Pro Forma Income Statement - 1970 M i l l Revenue $22,280,000 Production Costs 16,540,000 5,740,000 Interest 2,400,000 3,340,000 Depreciation 3,000,000 P r o f i t Before Tax 340,000 Tax 170,000 Net P r o f i t $ 170;000 Return on Investment - 20 Years of Operation, 1970-1989 Discounting the outflows and inflows at 8% y i e l d s a benefit cost r a t i o of 1.05, thereby j u s t i f y i n g the b u i l d i n g of a m i l l . Conclusion In s p i t e of depressed prices,, i t would-be advan-tageous fo r an entrepreneur to commence construction of a B/K m i l l i n B.C at the end of t h i s year. The income s t a t e -ment f o r the f i r s t year w i l l show a p r o f i t only i f the m i l l can s e l l i t s t o t a l output. The break-even point was f a r below the industry average operating r a t i o ; and, therefore; the p r o b a b i l i t y that a new m i l l would meet i t s f i x e d charges and recover f u l l depreciation i s close to one. A f t e r the f i r s t year a l l signs point to an expected return i n excess of 8%. 77 DEFENSIVE STRATEGIES OF ESTABLISHED PRODUCERS An independent m i l l promoter must assess the strategies of established producers and set a course of action to optimize h i s chances of success. He can obtain the services of an agent to s e l l h i s output and thereby l i k e l y acquire a competent sales force. The incremental cost of ^2% of s e l l i n g p r i c e i s probably the l e a s t c o s t l y method of entering the market. D i f f i c u l t y may be encountered i n f inding experienced production and maintenance personnel. However, high mobility has been t r a d i t i o n a l i n the industry. The main concern w i l l be overcoming the mixed strategies of the large corporations, who through integration, formation of partnerships; and conclusion of long term contracts are l i m i t i n g the outlets for market pulp. Integration In the l a s t ten years, paper m i l l s throughout the world have been acquired by major pulp producers. Crown Zellerbach have control of Van Gelder i n Holland and ship B/K pulp here and to t h e i r South A f r i c a n Company,"Crown Ca r e l t o n . 1 MacMillan/ Bloedel and Powell River acquired a 36% i n t e r e s t i n Koninklijke Nederlandsche Papeierfabrich (KNP), a Dutch producer of coated and uncoated papers. In conjunction with KNP/ the company i s b u i l d i n g a 60;000 ton paper m i l l i n Belgium and a 20,000 ton m i l l i n Spain. 1 Crown Zellerbach Canada Limited, Annual Report 1965/ p. 5. 2 MB&PR, Annual Report 1965/ p. 19. 78 Consolidated Paper Corporation bought control of Doeskin Products Inc. of the United States and exchanged stock with Rolland Paper Company to ensure a market f o r a large per-centage of i t s production from the new B/K m i l l at Pontiac, 3 Quebec. St. Regis Paper Company, who co n t r o l the only B/K m i l l i n Alberta, has 106 m i l l s and plants i n the U.S., Canada/ 4 Great B r i t a i n , Belgium, B r a z i l , Argentina, and A u s t r a l i a . This movement towards f u l l i ntegration from the tree to the consumer reduces the r i s k f o r a market pulp producer by providing a captive buyer f o r i t s pulp and removing a p o t e n t i a l customer from the e l i g i b l e l i s t of the competition. Integration i n t o Europe has been pursued by the Swedish suppliers with great vigour f o r many years. As surpluses begin to b u i l d up, one might s a f e l y p r e d i c t that forward integration w i l l continue. Partnership In Chapter II the r o l e of partnership i n the financing of the new m i l l s i n B r i t i s h Columbia was discussed. Such action provides the pa r t i e s concerned with the required resources. Columbia Cellulose needed a powerful sales organization i n Europe; while Svenksa's p r i n c i p a l weakness 5 was the s c a r c i t y of raw material. The j o i n t project; 3 Consolidated Paper Corporation, 1965 Annual Report, p. 9. 4 St. Regis Paper Company, 1964 Annual Report, p. 11. 5 Columbia C e l l u l o s e Company Limited, Annual Report 1964, pp. 1 0 - l l o 79 Skeena Kraft; answers both problems. Noranda Mines resolved t h e i r marketing question by jo i n i n g forces with the Mead Corporationo When Canadian Forest Products, a privat e company;1 was searching f o r f i n a n c i a l resources to b u i l d a new m i l l , i t contacted the Reed Group, a heavy purchaser of k r a f t linerboard f o r i t s corrugated container plants, as wel l as B/K for i t s f i n e paper mills» Feldmuhle has always been a large buyer of market pulp (estimates range from 100,000 to 150,000 tons per year) and divided up his purchases evenly between Swedish and B.C. producers* Feldmuhle began integration "back to the tree" by bu i l d i n g the Rothesay Newsprint m i l l outside St„John/1 New Brunswick,; i n 1963„ When the Intercontinental m i l l comes "on stream" i n 1968, great blocks of pulp currently shipped to Feldmuhle w i l l be freed to the market. An example of a partnership i n which a promoter with no experience i n the industry managed to win timber resources over a well-established firm (Crown Zellerbach) i s Eurocan Pulp and Paper Company. Mr. Ben Ginter formed a consortium with four Finnish companies to b u i l d an unbleached k r a f t pulp and paper m i l l at Kitimat. In t h i s case the start-up date was the deciding factors Eurocan planned on 1969; while Crown Zellerbach proposed 1970 for beginning of construc-t i o n 0 P r i o r to t h i s sudden rush to f i n d partners} the only example of such an arrangement was B.C. Forest Products. A portion of t h i s companyBs stock i s held by Scott Paper and the Mead Corporation. Mr. Hel l e r of United Pulp i s rumoured 8 0 to be i n search of an associate since Price Brothers deserted him for Weldwood. Partnership apparently has become the accepted method of financing a m i l l and of providing an assured o u t l e t f o r the product. Long Term Contracts Established producers often u t i l i z e the technique of long term contracts to reduce the v a r i a b i l i t y of sales, as well as to lower marketing costs and e f f o r t . It i s not uncommon to f i n d contracts of ten years or more which include growth clauses along with p r i c e discounts as high as 5°o0 With a novel approach, Great Lakes Paper Company offered stock options to i t s customers i n return f o r long term contracts for newsprint. COURSES OF ACTION OPEN TO AN INDEPENDENT MILL An independent must come to a trade-off between secure o u t l e t s and p r o f i t . An unrestrained market pulp s e l l e r stands to make the highest p r o f i t s when demand exceeds supply, but suffers the lowest return when the si t u a t i o n reverses. The integration approach is"not open to him, given a l i m i t on funds available, while partnership destroys h i s independence. Long term contracts are d i f f i c u l t to obtain u n t i l the customer has had a s a t i s f a c t o r y r e l a t i o n -ship with the trader. In any case, the lower p r o f i t of a long term contract must be weighed against the s t a b i l i t y i t 6 Great Lakes Paper Company, Annual Report 1964, p. 9. 81 provides. As a further r e s t r a i n t , the s e l l e r must be c a r e f u l in choosing h i s customers f o r a number of buyers ( e s p e c i a l l y the Japanese) have f a i l e d to purchase the minimum tonnages s p e c i f i e d i n contracts. Quality For a large range of paper products, any West Coast B/K pulp i s suitable raw material. However, i n t e r i o r spruce and pine w i l l produce a grade of pulp with c h a r a c t e r i s t i c s s i m i l a r to the world's f i n e s t , i . e . , Scandinavian. Alberta H i - B r i t e , the product of the Hinton m i l l , and the f i n e s t pulp produced i n Canada, can be equalled i n q u a l i t y by using a s i m i l a r mix of i n t e r i o r woods. High q u a l i t y pulp at a com-p e t i t i v e p r i c e from the i n t e r i o r w i l l o u t s e l l the t y p i c a l West Coast grade. Therefore, the main advantage of an i n t e r i o r m i l l over a coastal i s superior q u a l i t y pulp. Customer Service By coupling high q u a l i t y with emphasis on customer service, the firm should be able to remain independent and prosperous. The most frequent complaint of buyers i n the author's experience, was lack of service, p a r t i c u l a r l y regarding d e l i v e r y dates. Many producers shipping to Europe charter large vessels i n order to obtain lower f r e i g h t charges. Inventories must be b u i l t up to provide f u l l cargoes on these ships with the r e s u l t that d e l i v e r y dates are juggled to f i t the a r r i v a l time of the ships. Customers are thereby incon-venienced by shipments a r r i v i n g e i t h e r before or a f t e r the 82 desired date. Regular f r e i g h t service between B.C. and Europe i s a v a i l a b l e but rates are $4 to $5 per ton more than on charters. With comparatively small production, an independent i^ould have d i f f i c u l t y i n f i l l i n g a chartered vessel, but by being forced to use regular l i n e r s would gain the advantage of meeting customer-required d e l i v e r y dates. Of p a r t i c u l a r advantage to the i n t e r i o r operator would be the a b i l i t y to service the American market r a p i d l y . A l l c oastal producers must barge the r a i l cars to Vancouver and, hence, are subject to the requirements of f i l l i n g a barge (18 to 25 cars), t i d e , weather, and other delays. An i n t e r i o r m i l l could have a car loaded within 10 to 15 minutes, and have the pulp on the way the same day. Further customer service can be provided through ^technical assistance and advice. Buyers frequently request d e t a i l e d s c i e n t i f i c information on f i b r e c h a r a c t e r i s t i c s ; as well as explanations, and occasionally assistance, to improve the q u a l i t y of t h e i r manufactured products. At present; only a few of the major producers have t e c h n i c a l experts on s t a f f to provide such a service. Warehousing Warehousing at a d e l i v e r y port i s not the current i n d u s t r i a l p r a c t i c e due to the incremental costs. However, for a newcomer such a t a c t i c might be explored. The firm would charter a ship at a lower f r e i g h t rate, warehouse the pulp i n London or Antwerp; and d e l i v e r to the customer as ordered. Such service would promote good r e l a t i o n s with buyers. 83 Prices . As was explained e a r l i e r , o f f i c i a l p rices which are set by both Scandinavian and Canadian s e l l e r s ; can be meaningless i n many markets. For example, i n 1962, only a small percentage of pulp was sold at the l i s t p r i c e i n the United States. S i m i l a r l y , a c e r t a i n measure of f l e x i b i l i t y i s possible f o r the independent producer. A p r i c e cut i n i t i a t e d by a producer when stock accumulates w i l l generate a temporary increase i n demand, but as knowledge of the reduction becomes widespread the general p r i c e l e v e l w i l l f a l l (see Chapter I ) . To i l l u s -t r a t e ; when the Scandinavians lowered t h e i r p r i c e s i n 1960, inventories d i d not vanish and p r i c e s remained at t h e i r low l e v e l . The answer l a y i n reducing production to 90% of capacity. In the past, therefore, indiscriminate p r i c e -cut t i n g has resulted i n lower p r i c e s without any increase i n demand. Because of the world surplus of pulp, the Scan-dinavians are now proposing a month's moratorium of produc-t i o n by a l l traders i n the European market for 1966, which i s equivalent to a reduction of operating rate to 91.3%. Although the American s e l l e r s cannot concur with t h i s action because of the fear of government interference (Anti-Trust laws); the Scandinavian industry hopes the American producers w i l l not increase t h e i r sales drive i n Europe. The p o l i c y of c o n t r o l l i n g production was successful i n 1962-3 i n Europe? inventories f e l l while pr i c e s rose $15 to $25 a ton. The 8 4 independent firm represents such a minor force i n the market that a judicious p r i c e cut would probably be t o l e r a t e d . This same a t t i t u d e of tolerance by large producers has been demonstrated towards Celgar of Columbia Ce l l u l o s e , which has consistently sold i t s top grade (equal to Scan-dinavian q u a l i t y ) at $5.00 below the Scandinavian p r i c e . F i n a l l y , p r i c e f l e x i b i l i t y can be acquired by es t a b l i s h i n g d i f f e r e n t i a t e d products at varied p r i c e l e v e l s . SUMMARY An independent entrepreneur, by using s e l l i n g agents, maintaining a high q u a l i t y of product and customer service, plus c a r e f u l handling of i t s p r i c i n g p o l i c y , should be able to combat the t a c t i c s of the strong established companies. Signing of a number of advantageous long term contracts as soon as possible a f t e r commencing production would reduce the v a r i a b i l i t y of the firm's return. Eminent newcomers, such as Georgia P a c i f i c and Boise Cascade, have achieved success i n j u s t a few years. Given the conditions of supply and demand projected i n t h i s study, an independent i n t e r i o r m i l l i n B r i t i s h Columbia should t h r i v e despite aggressive competition. 85 CHAPTER VI CONCLUSIONS World Demand for Paper and Paperboard An analysis of the growth of demand f o r paper and paperboard f o r the years 1955 to 1964 disclosed an increase of 40 m i l l i o n tons over the 1955 l e v e l of 63.5 m i l l i o n . This dramatic expansion was found to be c o r r e l a t e d with the increase i n per capita income and population growth. Certain assumptions were made concerning those variables, and a p r o j e c t i o n of demand for the non-Communist countries showed that paper demand should reach 117.8 and 143.'4 m i l l i o n tons by 1970 and 1975 respectively. The Demand f o r Bleached Kraft Market Pulp Based upon the expected demand f o r paper/ a forecast was made of the anticipated l e v e l of production of chemical pulp. Following t h i s , the r e l a t i o n s h i p between chemical and market bleached k r a f t pulp was analyzed and extrapolated to obtain a forecast of demand f o r that grade for 1970 and 1975. The resultant tonnages, 7.1 and 12.4 m i l l i o n tons respectively, were then d i s t r i b u t e d to major areas, using past imports and the expected future growth of demand as guidelines. 86 Supply of Bleached Kraft Market Pulp The estimate of supply was derived from a v a i l a b l e data on expansions of e x i s t i n g m i l l s and new m i l l s under construction i n the major producing countries. Shortage or Surplus A year-by-year comparison of the supply of, and demand f o r ; B/K market pulp c l e a r l y established that a surplus condition w i l l e x i s t u n t i l 1970-1971. The largest surplus i s forecast to occur i n 1968 and w i l l amount to 1.2 m i l l i o n tons. This study confirms the p o s i t i o n taken by prominent executives of the B r i t i s h Columbia pulp industry. F i n a n c i a l Outcome for an Independent M i l l A l l factors a f f e c t i n g s e l l i n g p r i c e s and costs were analyzed i n d e t a i l , and a forecast of the f i n a n c i a l outcome f o r an independent m i l l indicated that the rate of return would exceed 8% f o r the period 1970 to 1989. Strategies of Producers Integration, partnership, and long term contracts, the three main strategies of producers, were examined to point out t h e i r possible e f f e c t on the competitive s i t u a t i o n of an independent firm. Counter Strategies f o r the Independent Firm To overcome the t a c t i c s of established competitors, , a new firm must place great emphasis on pulp q u a l i t y , 87 customer service, and a f l e x i b l e p r i c e p o l i c y . With demand of bleached k r a f t market pulp forecast to exceed 12 m i l l i o n tons by 1975, and adoption of the above courses of action, an independent firm should be able to survive i n an industry l a r g e l y dominated by a few p r i n c i p a l producers. 8 8 BIBLIOGRAPHY Government Publications . Bureau of Economics and S t a t i s t i c s . Summary of Economic A c t i v i t y 1965. Department of I n d u s t r i a l Development, V i c t o r i a , Queen's P r i n t e r . Dominion Bureau of S t a t i s t i c s . Pulp and Paper M i l l s . No. 36-204, 1959 - 1963. Ottawa, Queen's P r i n t e r . Royal Commission on Canada's Economic Prospects. The Outlook for the Canadian Forest Industries. Ottawa, Queen's Printer, March 1957. United Nations. Demographic Yearbook 1964. New York. .Food and Agri c u l t u r e Organization. Pulp and Paper Development i n Asia and the Far East. Bangkok, 1962. .FAO. Pulp and Paper Prospects i n Western Europe. Rome} 1963. .FAO. Reports of the UN Pulp and Paper Advisory Group to L a t i n America. New York, 1959. .FAO. The Productive P o t e n t i a l of Europe's Forests. FAO/EFC-59/4. Rome, Jul y 1954. .FAO. World Demand for Paper to 1975. Rome, 1960. .FAO. World Pulp and Paper Resources and Prospects. New York, 1954. United States, House of Representatives. Report of the Committee on Interstate and Foreign Commerce. Report no. 573, June 17, 1957. Washington, U.S. Government Pr i n t i n g O f f i c e . .Forest Service. Timber Trends i n the United States. Resource Report no. 17, March 1965. 89 Books Aitchison, J . and Brown, J.A.C. The Log-Normal D i s t r i b u t i o n . U n i v e r s i t y of Cambridge, Cambridge Un i v e r s i t y Press, 1957. Grant, J u l i u s . C e l l u l o s e Pulp and A l l i e d Products. London, Leonard H i l l (Books) Limited, 1958. Guthrie; J.A. and Armstrong^ G.R. Western Forest Industry. Baltimore, the John Hopkins Press, 1961. Periodicals Paper Trade Journal, v o l s . 147-150. New York. 1963-1966. Pulp and Paper, v o l s . 19-40. New York. 1955-1965. Pulp and Paper International, v o l s . 7-8. Antwerp. 1965-66. Svensk Papperstidning, vols, 66-67. Stockhom. 1965-1966. A r t i c l e s "Chemical Costs". Canadian Forest Industries. March 1965. "The 500 Biggest I n d u s t r i a l s " . Fortune, v o l . LXXII, no. 1. July 1965. "The 200 Largest Corporations Outside the U.S.". Fortune, v o l . LXXII, no. 2. August 1965. Special Studies "A Report to the President by the President's Material P o l i c y Commission". Resources for Freedom. U.S. Government P r i n t i n g O f f i c e . June 1952. Smith, Dr. J . Harry. "Wood Supply i n B r i t i s h Columbia -Present and P o t e n t i a l " . B r i t i s h Columbia's Future  in A s i a and the P a c i f i c Area. Edited by T. Matthews. Department of University Extension, The Unive r s i t y of B r i t i s h Columbia. Vancouver 1965. Stanford Research I n s t i t u t e . A Study f o r the Weyerhauser Timber Company. 1954. 90 Newspapers American Paper Ins t i t u t e , "How Paper Serves America". The  New York Times, October 8, 1965, pp. A1-A2. "Checklist of Pulp and Paper Expansions". The F i n a n c i a l  Post, January 22, 1966, pp. 25-40. "Firms H i t Loffmark Pulp Claim". The Sun, November 30, 1965, p. 1. "Industry Says Loffmark Errs on Pulp". The Province, December 1, 1965, p. 21. "Loffmark Attacks Industry C r i t i c s " . The Sun, December 1, 1965, p. 33. "Loffmark Doubts Pulp Glut". The Province, November 30, 1965, p. 20. McKenzie, Ar t . "Loffmark Retorts with Data Claiming Strong Pulp Demand". The Province, December 2, 1965, p. 17. McMurray, R. "How Pulp M i l l s Stand Today". The Province. February 10, 1966, p. 16. Reports - Industry Canadian Pulp and Paper Association. Reference Tables. September 1965. .Proceedings. Fifty-Second Annual Meeting, 1965. .Pulp and Paper i n Canada. 1965. P h i l l i p s Directory, World Pulp and Paper M i l l s . New York, 1965. United States Pulp and Paper Association. Woodpulp S t a t i s t i c s . 1955-1965. Reports - Corporation B.C. Forest Products. Annual Reports/ 1964, 1965. Columbia C e l l u l o s e Company Limited. Annual Reports, 1964, 1965. Consolidated Paper Corporation. Annual Reports, 1964, 1965 i 91 Reports Corporation continued Crown Zellerbach Canada Limited. Annual Report 1965. Great Lakes Paper Company Limited. Annual Report 1964. International Paper Company. Annual Report 1964. MacMillan, Bloedel and Powell River Limited. Annual Reports,: 1959 to 1965. North Canadian O i l s Limited. Annual Reports, 1958 to 1965. St. Regis Paper Company. 1964 Annual Report. Personal Inquiry Mr..K. Kinoshita, Manager, Ataka Limited. Vancouver. Mr. J . Livingstone, Columbia Pulp Sales, Columbia C e l l u l o s e Corporation. Montreal. Mr. A. C. McGougan, Assistant Vice-President Pulp and Paper Marketing, MacMillan, Bloedel Limited. Vancouver. Sandwell and Company Limited. Vancouver. APPENDIX I L J S A N D W E L L A N D C O M P A N Y L I M I T E D 21 February 1966 Mr. W i l l i a m F. J . Wood The U n i v e r s i t y of B r i t i s h Columbia F a c u l t y of Commerce and Business A d m i n i s t r a t i o n Reference: 010.554 Dear S i r : With reference to your l e t t e r of 6 February the t y p i c a l costs which you r e q u i r e are as f o l l o w s : Cost/A.D. ST Bleached Pulp Coast I n t e r i o r Wood 35.00 31 .00 Chemicals - l i q u o r 2.00 2.05 - b l e a c h i n g 9-95 15.05 F u e l 2 . 9 0 - 3-55 Other M a t e r i a l s 6 . 2 5 • 6.9O E l e c t r i c Power 3.05 3.65 Labour 7.15 8 . 6 0 A d m i n i s t r a t i o n and Overhead 6.60 7.10 Contingency 2.10 1.60 $75.00 $79.50 The above f i g u r e s do not c o n t a i n d e p r e c i a t i o n , f i n a n c i a l charges, or s e l l i n g expense. Labour i n c l u d e s both o p e r a t i n g and maintenance s t a f f s . S A N D W E L L A N D C O M P A N Y L I M I T E D 010.551-1-, Mr. ¥. F. J . Wood, U. B. C , 21 February 1966 93 A d m i n i s t r a t i o n and overhead i n c l u d e s s u p e r v i s o r y , management and a d m i n i s t r a t i v e s a l a r i e s , employer p a i d b e n e f i t s , m u n i c i p a l taxes, insurance and sundry expense. The item, other m a t e r i a l s , i n c l u d e s among other th i n g s r e p a i r and maintenance m a t e r i a l . For d e p r e c i a t i o n a f i g u r e of about f i v e percent s t r a i g h t 'time of the depreciable c a p i t a l i s u s u a l l y used f o r 'book' purposes. Tax c a p i t a l cost allowances are of course s u b s t a n t i a l l y higher. For semi-bleached pulp a saving of the order of $5-00 Per ton might be achieved. As f a r as trends during the past f i v e years are concerned we are r e l u c t a n t to provide data because a. Wood cost s i n general have been i n c r e a s i n g . b. Labour r a t e s have been i n c r e a s i n g but p r o d u c t i v i t y i s improving. c. Chemical costs through intense competition are decreasing. One cannot i n view of a l l the v a r i a b l e s determine the tren d i n o v e r a l l c ost without considerable work i n weighing up a l l these f a c t o r s which vary according to the m i l l s l o c a t i o n . In your study you s t a t e t h a t you wish to show B. C.'s unique p o s i t i o n . I f I might be per m i t t e d a word of advice, do not f o r g e t to in c l u d e f r e i g h t costs which are a s i g n i f i c a n t and expensive item almost as much as wood. These are p a r t i c u l a r l y important i n world markets such as the European area. Yours t r u l y SANDWELL AND COMPANY LIMITED I . R. Hudson TRH /br 

Cite

Citation Scheme:

        

Citations by CSL (citeproc-js)

Usage Statistics

Share

Embed

Customize your widget with the following options, then copy and paste the code below into the HTML of your page to embed this item in your website.
                        
                            <div id="ubcOpenCollectionsWidgetDisplay">
                            <script id="ubcOpenCollectionsWidget"
                            src="{[{embed.src}]}"
                            data-item="{[{embed.item}]}"
                            data-collection="{[{embed.collection}]}"
                            data-metadata="{[{embed.showMetadata}]}"
                            data-width="{[{embed.width}]}"
                            async >
                            </script>
                            </div>
                        
                    
IIIF logo Our image viewer uses the IIIF 2.0 standard. To load this item in other compatible viewers, use this url:
http://iiif.library.ubc.ca/presentation/dsp.831.1-0102395/manifest

Comment

Related Items