Well, my friends, it’s a new year. In the paper industry, that means the end of the “Black Liquor” tax credits that served to subsidize the industry in 2009 to the tune of $8 billion. That’s right, no typo there. The black-liquor program expired on December 31, 2009, leaving all players to wonder what the ramifications will be for 2010. Let’s take a look at this and other factors affecting the paper market as we move into the New Year.

What's the Chaser for Black Liquor?
The end of the black liquor credits presents a significant problem for the paper industry, whose pricing, according to its executives, is below its cash costs. General consensus is that unless other government subsidies takes the place of Black Liquor, mills will either have to raise prices or shut down more machines and mills. The less optimistic out there think that bankruptcy for one or more U.S. paper companies is not out of the question.

So, are there any programs that could step in and take the place of Black Liquor? To start, there is the infamous Son of Black Liquor. As I reported last time around, Son of Black Liquor is not currently likely to see the light of day for a few reasons:

• The credit, intended for use of cellulosic biofuels, is currently limited to transportation fuels.
• The EPA would have to approve the liquid under the Clean Air Act (see Will the EPA Stop ‘Son of Black Liquor’?)
• In November, House Democrats attached a measure to health care reform legislation that would restrict paper companies from qualifying for this biofuel tax credit—effectively "saving" the federal government $24 billion and thereby offsetting costs of the health care bill.
• Environmentalists are fighting to close all black liquor-related loopholes for the pulp industry, arguing that the tax credits were intended to incentivize innovation with fuel alternatives (rather than reward long-existing practices), and that black liquor actually rewarded paper makers for using high-energy, carbon-intensive virgin fiber rather than lower-energy, lower-carbon recycled paper (see Pulp Fiction: Eco-Credits for Black Liquor).

Of course, it’s impossible to say if the Son of Black Liquor has disappeared for good.

Another subsidy out there is the Biomass Crop Assistance Program (BCAP). This program provides subsidies to suppliers (not users) of biomass. The only apparent benefit to paper makers is that, if approved as Biomass sites, they will be able to buy biofuel at less-than-market prices. Dead Tree Edition reports that three-fourths of the pulp and paper companies that received U.S. black-liquor tax credits are signed up to benefit from this biofuel subsidy.

There are also various state grants available through the federal economic-stimulus programs that may provide some help to paper companies, although these are focused on helping these companies reduce their reliance on fossil fuels—an objective that will require investment on the part of the paper companies. It appears doubtful that another windfall will come along that will generously reward paper companies for simply doing what they’ve been doing—as was the case with the black liquor tax credits.

Supply and Demand
North American paper manufacturers have been systematically reducing capacity and inventory in order to chase the decline in demand and achieve supply/demand equilibrium. They have been quite successful, with mills maintaining average operating rates of 90% and up. Meanwhile, demand for coated paper is now on the rise, although indications are that the uptick may be due more to inventory building than a substantive increase in consumption.

According to my statistics-tracking friends at RISI, demand for coated papers increased in 6 out of 8 months from its low in March 2009 through November 2009. Coated groundwood shipments were up 15.6% in November; while coated freesheet shipments were up 7%. While these statistics are somewhat encouraging, indications are that demand is improving modestly. Projections for 2010 are that magazines and catalogs will post further declines in 2010 but that these declines will be much less severe than those of 2009. For example, RISI forecasts a 2-3% drop in ad pages versus the 25% decline of 2009. In terms of 2010 consumption, RISI projects a modest 2-5% increase in apparent consumption of coated paper in 2010 and 2011. Glimmers of hope as we bump along the bottom?    

It’s worth noting that a drop in paper imports is a factor that contributes to these higher domestic shipment levels. Imports are down for three reasons: the weak U.S. dollar, generally lower U.S. paper prices, and the pending tariffs on paper from China and Indonesia. As I explained last time around, the tariffs, which would affect 30% of the supply in the coated sheet market, would most likely drive prices up in this market. Fortunately, this will not affect Lane Press customers, at least in terms of their magazine and catalog production. The tariffs would apply only to papers sold in sheets or intended for conversion into sheets once in the U.S. The commerce department’s ruling on the countervailing duty in this suit has been postponed until February 22, 2010, while the ruling on the antidumping portion is expected in early March.

Looking Ahead
So, the black liquor tax credits are gone—effectively taking the wind out of the sails of paper companies. And, there is no significant increase in demand in sight to fill the gap. Therefore, I see two realities taking shape in 2010: reductions in capacity and rising prices. I’m not sure who or when, but I see possible acquisitions among paper companies and surely more capacity closures. I also see paper companies attempting to raise prices as of April 1st. Given weak demand and current capacity, I’m not confident this initial attempt to raise prices will stick. However, I don’t see a way around prices going up starting July 1st and possibly again in the fourth quarter. My hope is that the slowly improving economy will lead to further increases in demand, which would serve to keep capacity planning—and pricing—in check. My friends at Lane Press will update you when there are any indications of paper price increases on the horizon. Until next time, my friends.