THE PAPER AND ALLIED PRODUCTS INDUSTRY: PERSPECTIVE

With over 500 paper and paperboard mills spread throughout virtually every state, the U.S. paper and allied products industry is the world's largest, accounting for 29 percent of 1994 global paper and paperboard capacity and 34.5 percent of global papergrade wood pulp capacity. It includes the processes necessary to transform wood and/or other materials to pulp and finally to finished paper products. The value of paper industry shipments in 1994 was $143.8 billion or 4.3 percent of the all-manufacturing total of $3.34 trillion. From 1992 to 1995, this industry, which constituted 3 percent of consumption expenditures in 1994, experienced an average growth rate of 2.9 percent, lower than the allindustry average of 4.2 percent.

Compared to the manufacturing average of 12 thousand British thermal units (btus) of energy used per dollar of value added, the paper industry is among the most energy-intensive of the major industries, using 43.9 thousand btus per dollar of value added. While natural gas and coal are the predominant purchased fuels, more than half of the energy used in this industry (in 1994, about 55.9 percent) was derived from spent pulping liquors, bark removed from pulpwood, residue wood used as fuel chips, and self-generated hydropower.

Korea. It is estimated that approximately 3 to 5 percent of the paper firms in the U.S. are foreignowned.

Investment and Employment

Capital expenditures in the paper industry were about $7.3 billion in 1994, out of an allmanufacturing total of $112 billion. Approximately $6.6 billion was spent on machinery and equipment, with the remaining $0.7 billion spent on buildings and structures.

Of the total of approximately 123 million civilians employed in the U.S. in 1994, 18.3 million were employed in manufacturing sectors. Paper workers numbered 621,400, with 478,700 of them production workers. There has been very little variation in total paper employment totals in the last 30 years, with a low of 633,000 in 1975 and a high of 707,000 in 1969.

THE PAPER AND ALLIED PRODUCTS INDUSTRY

1. SUMMARY OF RON SLINN'S PAPER

Overview

Ron Slinn used much of his paper to present background information that described the industry in terms of historical energy use, gains in energy efficiency, and regional aspects of the industry's energy resources. One of the main conclusions reached was that the impact of increased fuel costs on the industry would be highly uneven across this industry. The industry description presented by Slinn is important in appreciating the diversity that exists among mills in terms of fuel use and reliance on purchased fuels.

In emphasizing the diversity among mills, Slinn explains that the industry is somewhat unique in the amount of energy that is self-generated. In 1994, about 56 percent of the energy used in paper production was derived from spent pulping liquors, bark removed from pulpwood, residue wood used as fuel chips and self generated hydro power, whereas in 1972 these sources accounted for only 40.3 percent of paper industry energy use. Large integrated paper companies typically produce their own pulp and also tend to produce much of their energy needs. In contrast, smaller paper companies tend to purchase their pulp from others and rely on purchased power.

The fuels used for purchased energy vary significantly among regions. In New England, fuel oil is the dominant fuel. In the Atlantic and North Central regions, coal is widely used. Natural gas is used extensively in the North and South Central regions and in the Pacific Mountains. The distinction between large integrated paper mills and smaller non-integrated paper mills determining the use of purchased versus self-generated energy and the regional variations in fuel choice indicate that any fuel price adders would have highly unequal effects across regions and firms in this industry.

Slinn presented a set of conclusions which summarized his views of the impact of the assumed fuel price adders on the paper and allied products industry.

•Regional aspects of the industry's fuel use will render the impact of a GHG mitigation initiative mill- and site-specific. Under baseline policy conditions, Slinn takes the view that mills located in coal-dependent areas, such as the Mid-Atlantic, the North Central and the South Atlantic regions, may actually experience a reduction in energy prices as a result of increased competition in electricity markets. He then notes that the fuel price adder scenarios considered in these workshops affect coal more than any other fuels. Therefore, under these scenarios, mills relying on coal-based fuels would be relatively disadvantaged. Furthermore, many of these mills are older and less efficient than newer mills and would therefore be

particularly vulnerable to closure should the relative cost of fuel inputs move in an adverse direction rather than a favorable one.

•Integrated facilities appear to be the least vulnerable. Non-integrated mills are likely to be the most vulnerable. The facilities that are integrated to wood pulp have the best opportunity to increase their use of self-generated biomass fuels, where such fuels are not subject to the assumed fuel price increases. Non-integrated mills rely on purchased energy for almost all their energy needs and would therefore feel the full impact of the assumed energy price adders. Some of these mills would close as a result of the fuel cost increases, even independent of any international trade effects.

•Capital constraints will likely limit the rate at which the industry is able to adopt more energy efficient technologies. The industry is capital intensive and historically has not earned a high rate of return, particularly during periods of slow economic growth. Capacity is increasingly added to existing mills rather than to new mills. The industry would be unlikely to respond to the assumed fuel price adders by constructing new and efficient mills, nor would capital be readily available to refurbish existing mills.

⚫A GHG mitigation initiative must be considered in the context of existing environmental requirements. Proposed environmental regulations, such as EPA's Cluster Rule, will require industry to use the Maximum Achievable Control Technologies for emissions. The combination of these environmental requirements and potential new climate change policies must be closely examined.

•Timing of economic cycles will be a critical factor in determining the industry's ability to absorb or pass on any externally induced increases in its purchased energy costs. The industry is more able to absorb cost increases if such increases occur gradually and the industry is experiencing strong demand for its product. Many of the industry's recovery furnaces and solidfuel boilers are in need of replacement or overhaul over the next decade. With a strong demand for its product, industry could undertake investments in furnaces and boilers that would improve overall productivity. Such investments could offset some increases in energy costs. However, industry would be less able to offset energy cost increases if they occurred during periods of low demand, or required investments outside of the normal turnover of the capital stock.

●Significantly higher purchased energy prices could deter recycling of recovered paper. If fuel price adders were applied to purchased energy, the industry would look for fuel substitutes not subject to the price increases and one substitute could be lower grades of waste paper that are currently being recycled.

●Competition from alternative products will depend on the breadth of the impact of the initiative. Paper containers are highly competitive with plastic containers in a number of uses, such as grocery sacks, plates, cartons, etc. The impact of the assumed fuel price adders on the paper industry depends on the effect of these price adders on competitive industries. In the