The Ink Is Red At Canadian Mills

CANADA'S paper and pulp industry is in the middle of its biggest financial and manufacturing crisis in 50 years.

Battered by slack demand and production overcapacity, hounded by environmentalists, and hit with regulations forcing costly new pollution controls, Canada's paper manufacturers are under siege, mill managers and industry analysts say.

"I don't know if this is as bad as what happened in the '30s, but it's certainly the worst since then," says Ross Hay-Roe, a Vancouver forest-industry specialist at Research Capital Corporation, a brokerage house.

To the recession, add unfavorable exchange rates, tougher competition abroad, and a shift toward recycled newsprint in the crucial United States market that caught Canada's newsprint makers unprepared. Permanent shrinkage?

The result has been not a cyclical dip, but a monumental belly-flop in earnings, with the Canadian industry likely to shrink its capacity permanently by 10 to 20 percent, analysts say. That would be a blow to the nation's No. 1 industrial employer, with 180,000 workers.

Only two of the top 17 publicly held Canadian forest-products companies made money last year, resulting in a net loss of $1.5 billion (Canadian; US$1.3 billion) on sales of $17 billion, according to Pulp & Paper Week, an industry publication.

Improving exchange rates have recently helped profit margins on exports. Prices for pulp, the raw material from which paper is made, seem also to have bottomed out. And cost cutting has made the industry leaner.

In the past, US and Canadian companies typically suffered from overcapacity at the same time. This time, Canadians are scrapping antiquated machinery, laying off workers, and closing mills while US paper mills with newer machinery and lower labor and raw materials costs - especially those in the South - continue cranking full speed ahead.

"All the Canadian companies are running in the red now," says Jean-Luc Pellerin, manager of Stone-Consolidated Inc.'s Wayagamack mill in Trois Rivieres, Quebec. "We realized that if we didn't do something drastic to reduce our costs, we were not going to be here next year." Labor agreement

What Mr. Pellerin and Stone-Consolidated did here last summer in Trois Rivieres - a community of 130,000 people that is the self-proclaimed "world capital" of newsprint - was to talk turkey with labor unions. The result: a one-third reduction in work force from 900 workers to 625 this month.

Most important, management gained more flexibility in union work rules. They also shut down one small-output machine that was 36 years old.Despite the tough measures, Pellerin says employee morale and productivity havce risen as line workers have been given more control, training, and responsibility at the 80-year-old mill. Besides, he says, nodding his head across the river, what happened at this plant is better than what happened at the Canadian Pacific Forest Products Ltd. mill.

In January, Canadian Pacific announced it would close its 1,000 tons-per-day Trois Rivieres mill in June, eliminating 1,500 jobs and 4 percent of Canada's newsprint capacity. Old machines, including eight built in the 1920s, were cited among reasons for shutting the mill.

Despite this blow, industry cutbacks have been small so far, says Mr. Hay-Roe. He predicts more severe layoffs this year, as companies address the following problems:

Ancient machinery. Long criticized for nursing along "small" papermaking machines, many built before the Great Depression, Canadian papermakers spent nearly $5.8 billion in 1989 to modernize plants. But that high level sagged to $4.8 billion in 1990 and $2.8 billion last year, according to the Canadian Pulp and Paper Association (CPPA).

Rising energy costs. Eastern Canadian papermakers had a built-in advantage of cheap hydropower for years. No more. The energy component of paper production is about 20 percent of the production cost, and hydroelectric rates have jumped, making a roughly $50-per-ton cost advantage only $2 per ton now.

Expensive raw materials. Wood lots near Canadian mills are virtually exhausted, forcing producers to haul wood chips and logs 300 miles or more from northern Quebec. Unlike the southern US, where pine trees mature in 25 years and where a continuous supply is cultivated near mills, it takes 75 years for a tree to mature in Canada's northern clime. That's a $65 per ton disadvantage.

Recycling newsprint. Laws in Toronto and the US require that waste newsprint be recycled, and often that newspapers contain a certain percentage of recycled pulp. Canadian companies are far from sources of recycling's raw material - the "urban forests" of waste newsprint. Canadian mills now must truck waste paper in from US cities and build expensive de-inking plants.

Environmental cleanup. Canadian laws mandating cleanup of mill effluent and air emissions will begin kicking in this year. But chlorine bleaching of paper pulp, which produces dioxins that environmental groups say are dangerous, is also under assault. The CPPA voted in January to open an office in Germany to work against a move in that country to ban paper products bleached with chlorine.

This confluence of hard hits has left mill managers like Pellerin circumspect about industry losses that are limiting its ability to invest in high-speed machinery that he and others say ultimately determines whether a mill survives.

A trip inside Pellerin's Wayagamack mill is a study in the present and past of Canadian papermaking. In one dimly lit section, an ancient, rumbling monster built in 1921, but outfitted with modern controls, supplies a niche market by slowly, but steadily winding out a 115-inch-wide sheet at 6 miles per hour (9 metric tons a day) of brown carbon paper. In another corner of the factory, sits Pellerin's pride and joy, a 10-year-old, 50-yard long machine, winding a 213-inch-wide roll of yellow paper for phon e books in the US at 40 kilometers per hour (25 miles per hour), 200 tons per day - a much fatter niche market.

But across town is a vision of the future at a mill owned by Kruger PTR Inc., a smaller, privately held company. Kruger, analysts say, has thrived in the shadow of bigger players by investing steadily, starting recycling early, and by cleaning up its waste before it was forced to. Study in contrasts

The Kruger mill seems the antithesis of the old Canadian Pacific mill nearby. Kruger bought this mill in 1973, pouring in $600 million here in the last decade. That included building a metal barn to house paper machine No. 10, a $300 million, two-year-old, football-field-long Goliath. It sucks in thousands of tons of pulp at one end and at the other shoots out a 318-inch wide sheet of newsprint onto a mammoth roll at 70 kilometers per hour, 550 metric tons per day.

"In seven hours we make enough newsprint to lay out a road of paper from here to Boston," says Louis Sabourin, the engineer who oversees the continuous feeding of the machine and its state-of-the-art computer controls. "It takes a lot of money," he says, "but you've got to invest in these kinds of machines."

Back at Stone-Consolidated's Wayagamack mill, Pellerin reflects on the demand to invest more in equipment and worker training, something he admits will be difficult for an industry caught in a whirlpool of red ink.

"That Canadian Pacific mill [that is closing] had small machines similar to ours, but they didn't invest as we did," he says flatly, without a trace of gloating. "They made a lot of money with that mill, but they aren't making any more."