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Management Side

2012: A year of transitions

In reality, every year is a year of change, but 2012 seemed in many ways to be a watershed for the pulp and paper industry. Not all of the change was negative, but the overriding reflection is that the year has been one of an opportunity missed.

Recent criticisms in the Australian press of company liquidators have been less than complimentary about their integrity and standing in the community. Australia does not have the equivalent of a Chapter 11 for companies in financial stress (and a recent review suggests that such an arrangement is unlikely any time soon). An administrator can be appointed whose job it is to determine if it is technically possible to salvage the company or indeed to initiate bankruptcy proceedings. For most companies, the appointment of an administrator seems to be a trigger for a major lender to call in the receivers and so effectively it is then all over for the company before the administrator has an opportunity to identify strategies for restructuring and renewal. Such was the case with Gunns.

Gunns' principal lender, a syndicate of banks with the ANZ Bank as lead banker was swift out of the blocks to call a receiver when Gunns announced that they had put themselves into voluntary administration. The ANZ Bank had been Gunns' banker for generations, but they had buckled under community pressure to deny Gunns financing for their proposed pulp mill, although they remained their banker for other business operations. That signalled the start of the challenges for Gunns to secure a financier for the pulp mill and ultimately precipitated the collapse of Gunns.

The main objective of a receiver appointed by a lender is to recover the debts owed to the lender. This often leads to less than optimal outcomes in the sale of assets, and often with minimal concern for the impact on other creditors and certainly no necessary consideration of the prospect for maintaining the company as an ongoing business. So it has been with Gunns. Disposal of assets has been fast and brutal. In late December, the receiver announced the sale of Gunns' timber business to a company called New Forests Pty Ltd.

The good news is that on this occasion, the business has been sold as a going concern, thereby ensuring ongoing employment for the 380 people employed in that Division. History would suggest that not all will remain employees in the longer term. The business consists of two high quality saw mills (Bell Bay in Tasmania and Tarpeena in South Australia) and a national sales and distribution network. This purchase locks into place the value adding potential of previous acquisitions of New Forests Pty Ltd of softwood plantations in Tasmania and in the Green Triangle, which provide the core wood supply to each mill. It is not known what price was paid for the assets, but the speculation is that it was a very favourable price. There has been speculation that the Bell Bay mill would have been acquired for about one third of the original cost of the mill of about A$75 million.

So who is New Forests Pty Ltd? According to their press release, they “manage investments in sustainable forestry and associated environmental markets for institutional and other qualified wholesale investors. New Forests executes three investment strategies that provide clients with diversity and choice around risk-adjusted returns, geography, and market exposure: sustainable timberland investment in Australia and New Zealand; forestry investment in high-growth markets of the Asia Pacific region; and conservation real estate and environmental markets investment in the United States.”

The company also has offices in Singapore and San Francisco and currently manages more than $1.25 billion in assets and over 400,000 hectares of land in Australia, the United States, and Asia. The Company is based in Sydney and was founded in 2005 by a Dr. David Brand, who has strong credentials in the forestry industry in Australia and Canada.

In addition to their forest assets in Tasmania and the Green Triangle, New Forests also previously purchased on behalf of clients the 240,000 hectares of Great Southern Plantations, a major casualty of the MIS forestry debacles.

Also in December, Elders completed the sale of SmartFibre, a hardwood and softwood chip processing and export company also located at Bell Bay in North Eastern Tasmania. Earlier this year, Elders had divested a large plantation estate and the Albany woodchip terminal in Western Australia. The SmartFibre sale is the latest step in a saga that will see Elders, once Australia’s foremost pastoral and agricultural company ignominiously fade into virtual obscurity. The ongoing and now seemingly entrenched decline in export volumes of hardwood chips from Australia perhaps made these divestures inevitable. Tasmania, once the leading state for hardwood chip exports, now exports the least of the wood chip exporting states.

The forest and forest products landscape in Australia has been comprehensively transformed, but the final shape of the industry is still a work in progress. It remains to be seen whether these changes will ultimately be value adding.

The Gunns Receivers are still evaluating what to do with the pulp mill project. They note that it presents “a very complex issue, very unusual assets for sale and they need to complete a strategic review before they decide on what's the next step in considering that asset”. They also note that "there is significant stakeholder support for pursuing the pulp mill development".

December also marked a major transition in paper manufacture. The day after the Gunns sawmill transaction was completed, Amcor turned off the lights at its Fairfield Mill in Melbourne. The Mill had been operating since 1921 and once boasted 5 operating paper machines. At the time of its closure, only the PM 6 Board machine, which started up in 1967 was in operation with an annual capacity of about 130,000 metric tons. PM 4 was intended to be a tissue machine but was never built, hence the numbering inconsistency.

The mill also had a significant facility dating from 1996 for recycling, deinking and bleaching of printing papers. Australian Paper (Subsidiary of Nippon Paper) confirmed in October 2012 that it would proceed with plans to construct a similar facility at Maryvale Mill at a cost of A$90 million as it was the major customer of pulp from the Fairfield facility. The capacity of the new facility is rated as around 50,000 metric tons pa and will incorporate much of the equipment from the Fairfield mill.

The closure of the Fairfield mill is a direct consequence of the consolidation of Amcor’s containerboard manufacture to the Botany Mill in Sydney, where the 2 previously operating machines have also been retired. Botany mill now operates a new single machine, PM 9, supplied by Metso with a capacity of about 400,000 metric tons pa, and reportedly built at a cost of A$500 million. PM 9 has a design capability to manufacture recycled papers between 80 and 200 gsm basis weight at a trim width of 5.66 meters. PM 9 was declared “operational” in October.

At about the same time the reality of consolidation and contraction of the industry was starkly demonstrated with the final stage of the demolition of the Kimberly Clark Tantanoola pulp mill in South Australia (by controlled detonation) almost exactly one year on after the closure of the mill in November 2011. The mill had operated for only 18 years. In retrospect, the pulp mill probably should not have been built, certainly not at its low 70,000 tpa capacity, but again there remains a sense of an opportunity missed.

An investment may not achieve its originally anticipated return, but once it becomes a sunk investment the opportunity to consolidate a potential advantage seems one that is too valuable to let go. There may have been bigger issues for Kimberly Clark, but the fact that tissue imports have about doubled since the pulp mill closed (along with a connected tissue machine) suggests that there are more fundamental shortcomings in the business model.

The overriding challenge for Australian manufacturing companies and raw material exporters remains the ongoing strength of the Australian dollar. Despite a series of interest rate cuts, the Australian dollar remains doggedly above parity against the US Dollar and at record levels against most other currencies. Under this scenario, consolidation rather than expansion will continue to dominate business thinking in 2013.



 


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