Analysts: Slumping demand why Franklin paper mill closing

ISLE OF WIGHT COUNTY

The uncoated truth, analysts say, is this: Demand for uncoated freesheet paper, the main product at the International Paper mill outside Franklin, has sunk to the floor, thanks to the economic slump and the advent of technology.

Even after the recovery, the outlook is blurry.

So "you've got to look carefully at where your assets are sprinkled across the country and determine how to best serve the majority of your customers, minimizing shipping distances and maintaining the lowest-cost facilities," said Steve Chercover, senior research analyst for D.A. Davidson & Co. in Portland, Ore.

"It's not an indictment or statement about that particular plant in Franklin," he said. "It's just how Franklin stacks up against other facilities."

For the leaders of International Paper, it didn't stack up high enough.

In October, the company

announced it would close the mill, eliminating the jobs of 1,100 workers. The mill's last day of operation, International Paper said, will be Thursday, though many employees will continue maintenance work for the next month or two. The mill, established in 1887, began producing paper in 1936.

"It's always traumatic when a local mill gets shut down," Chercover said. "But at the end of the day, if they don't make tough decisions, then everyone's out of a job."

John Tumazos, who runs Very Independent Research in New Jersey, isn't so sure.

"I don't think that 'hope' was a business alternative," Tumazos said last week, "but I think there's a choice."

He said International Paper could have transformed the facility into a pulp mill, which converts wood chips into other substances to be used by paper mills.

"Right now, pulp prices are near a record," Tumazos said - though he also said such plants are "accident-prone" and permits for them are hard to acquire.

Sean Kerlee, a 16-year veteran who left the mill in December, also said he thought it could have been reconfigured for other uses, given the company's varied interests. "We could make a lot of great changes," he said.

Local workers, Kerlee said, were told that the mill was profitable, even last year. Just last summer, he said, International Paper CEO John Faraci visited and reassured employees the mill would stay open as long as it made money.

"Imagine how blindsided we were when we heard on October 22 that they were shutting us down," Kerlee said.

In response to questions from The Virginian-Pilot this month about the plant closure, local International Paper spokesman Desmond Stills last week e-mailed a two-paragraph statement.

The company "needed to further reduce its excess uncoated-freesheet capacity... to match our supply with our customer demand," the statement said.

"After careful evaluation of factors such as capacity, capabilities and product mix at the Franklin Mill, unfortunately, the company believes the Franklin closure is the best decision for our paper businesses and the company."

The Franklin paper mill is among the three largest in Virginia, said Paul Howe, executive vice president of the Virginia Forestry Association. The others, he said, are the Smurfit-Stone operation in West Point and the Mead Westvaco mill in Covington.

Another paper company, Georgia-Pacific, has six locations in Virginia, including a plywood plant in Emporia, employing about 1,000. Spokesman James Malone said that he couldn't comment about the future but that no layoffs have occurred recently at the Virginia sites for Georgia Pacific.

When International Paper announced the Franklin shutdown last year, the mill had three machines producing uncoated freesheet paper and one producing coated paperboard.

Uncoated freesheet goes primarily for products such as copy paper and envelopes; coated paperboard is used for direct-mail advertising, greeting cards and book covers.

The mill's freesheet capacity was 600,000 tons a year, or 19 percent of the total for the Memphis, Tenn.-based company. International Paper late last year closed the paperboard machine and one of the freesheet machines, leaving two freesheet machines running.

Nationally, freesheet capacity plunged nearly 30 percent to 10.4 million tons last year from 14.7 million in 1999, Tumazos said. The total is estimated to continue falling, to 9.5 million tons in 2016, he said.

"The question," Tumazos said, "is how far does electronic substitution go."

He best defines "electronic substitution" with an example: This year, Tumazos' accountant for the first time gave him no paper, just a disc with his tax return.

"The Internet has had a massive impact on the way we communicate, sending e-mails instead of letters, making electronic bill payments," Chercover said. "You add new technologies - Kindles, now the iPad, which are used for books. All of those technological challenges aren't going to go away.

"Then you overlay on that the economy, which went sour, and its impact on mortgage documentation, credit-card solicitation, white-collar employment. That's a double-whammy for white paper."

Kerlee, now a crane operator with Northrop Grumman Corp., said: "The real problem is imports. There's no way to get around it: Imports are killing us.... I'm America First. Not only do we make better products here; they're environmentally sound."

Yet no paper mills have opened in this country since the '80s, said Howe, from the state forestry association.

It's not just a question of cheap overseas labor, Chercover said.

"You can grow a tree to maturity in seven years in Brazil," he said. "It takes 25 years in Southeastern states."

Paper companies "have a future if they can make a transition," said Urs Buehlmann, an associate professor of wood science at Virginia Tech. "They have a tremendous opportunity to transfer wood fiber into whatever renewable material might be needed."

Howe, too, has heard the buzz about "using woody biomass for energy" but isn't yet sold. "The problem is the cost of making it happen. Is it cost-effective?"

International Paper will announce its first-quarter earnings April 29. In February, it reported net earnings for 2009 of $663 million, compared with a $1.3 billion loss in 2008.

In a statement, Faraci credited the turnaround to "our focus on reducing overhead costs, matching our supply with our customer demand and realizing industrial-packaging synergies."

Earlier this month, Moody's Investors Service upgraded its "outlook" on some of the company's debt from negative to stable. Tumazos gives its stock a "neutral" rating. Chercover lists it as "buy."

"They've actually been very good actors," he said. "They are taking the necessary steps to make sure supply does not exceed demand.

"I know it's tough on guys who lose their jobs and tough on the community," Chercover said, "but in some respects, if you're in the buggy-whip industry, you've got to evolve. Toilet paper is not a buggy whip. But newspaper definitely is. Franklin is kind of in between."

The thing is, workers at the mill have always been willing to change their ways, said Kerlee, 39, of Suffolk.

"We did everything we were asked to do for the company since Day One," he said. "Most of us are still in shock."

Philip Walzer, (757) 222-3864, phil.walzer@pilotonline.com