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Potlatch move signals change in industry
By Bob Kelleher
Minnesota Public Radio
March 18, 2002

Potlatch Corp. is selling two of its Minnesota paper facilities, and getting out of the coated papers business. South Africa-based Sappi International is expected to keep the Cloquet paper and pulp mill operating. But it's expected to close the Brainerd plant, putting 660 people out of work. The sale reflects a recent trend in paper production - toward more consolidation, and takeovers by large global corporations.

Potlatch mill in Cloquet
The Potlatch paper and pulp mill in Cloquet is expected to remain open, even after its sale to Sappi Limited of South Africa. The Cloquet mill was substantially upgraded in 1999.
(Photo courtesy of Potlatch Corp.)

Paper production is a cyclical industry, but the downside of the current cycle has lasted much longer than expected. Gary Baum, vice president of institute operations at the Atlanta-based Center of Paper Business and Industry, says the combination of increased foreign competition and a strong U.S. dollar have worked against U.S. paper production.

Paper producers have been squeezed between low prices and, in some places, escalating costs for pulp wood. But Baum says the biggest factor is competition from new paper producers overseas.

"New capacity has come on line in Indonesia over the past several years, in uncoated free sheet. Those are copy papers and the like. And there's new capacity coming in the container board industry - those are cardboard boxes to most of us. The stresses are really intense," says Baum.

A strong U.S. dollar makes paper produced in the United States more expensive than paper produced elsewhere. With the downturn in the economy, Baum says, a lot of firms have been trying to consolidate operations and reduce costs.

The South African firm buying the two Minnesota Potlatch facilities is one of the world's leading producers of coated printing papers. Sappi Limited already holds three U.S. paper mills - one in lower Michigan and two in New England. Baum says the domination of major producers like Sappi gives them an economy of size.

"It seems as though, since there's economy in size, one of the main drivers here is to try to increase market shares. One has a little better handling on the pricing and the like," says Baum.

And the trend is for more acquisitions by large, global paper producers.

Chart of employment in paper industry
Employment in the paper industry in Minnesota has declined dramatically ove the past 20 years.
(Data courtesy of Minnesota Department of Economic Security)

In the past few years, Wisconsin-based Consolidated Papers bought out Duluth's Lake Superior Paper Industries. Two years ago Consolidated was bought out by the Finnish-based Stora Enso. Another Finnish producer, UPM-Kymmene, recently bought the Blandin Paper Co., which includes a sprawling paper and pulp plant in Grand Rapids.

"I think you're going to see more and more of this large-company syndrome. In fact, there are some people who are saying five or 10 years from now, there are going to be five or six large, global paper companies," says Baum.

Despite several years in a slump, Baum says there's some optimism that the fortunes of paper production may be looking up. He says a report from the National Paper Trade Alliance predicts growth and improved earnings in the coming year. An upswing in the U.S. economy could generate a renewed demand for paper.

"People who use papers - advertisers for example, will start to expand and require more paper, and so on," Baum says.

But that won't come soon enough to help Potlatch workers in Brainerd. Wayne Brandt with the Minnesota Timber Producers Association says his heart goes out to the more than 600 workers to be laid off. But Brandt says the future looks good for the Cloquet facility. Brandt says Minnesota facilities have done well when taken under the wing of a large corporation, that can more readily withstand economic downturns.

"For the state of Minnesota, there obviously are some important concerns that we have a strong and viable forest products sector - particularly for northern Minnesota, as well as for the secondary manufacturers and the printers in the Twin Cities area," says Brandt.

He says consolidations are helping strengthen the paper sector of the state's forest industry.

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