NewPage A Case In Point: U.S. Paper Industry On The Ropes As Industry Slides

The mating sound of dinosaurs

By Greg O'Brien


NewPage reported that its profit dropped 62 percent in the first quarter of 2010.

All eyes in the paper industry, with consequences from Cape Cod to California and around the world, will be focused once again on NewPage Corp early next month as the embattled company releases its second quarter earnings report.  NewPage in many ways is emblematic of segments of corporate America today, a case study in progress.

The earnings report announcement comes in the wake of the resignations last month of top company executives: NewPage President and Chief Executive Officer E. Thomas Curley, Board Chairman Mark Suwyn and Vice President of Human Resources Michael Edicola. Curley had been CEO for only a few months, the fifth CEO at the Ohio-based company in four years in an industry plagued with severe losses and rigorous competition from the electronic media. The company is a unit of NewPage Group Inc., which is owned by the private investment firm Cerberus Capital Management LP.  Curiously enough, in ancient Greek and Roman mythology, Cerberus is a multi-headed hound that guards the gates of Hades.

Earlier this year, the company reported that its profit dropped 62 percent in the first quarter of 2010, in spite of an increase in sales and an increase in market share in coated paper sales volume, and NewPage year-end debt in ’09 was up $697 million over the previous year, according to reports. The company had planned an IPO, but in May withdrew an initial public offering plan that was underwritten by Goldman Sachs.

Former CEO Curley has been replaced in the interim by Robert Nardelli, CEO of Cerberus Operating & Advisory Co. and former chairman of Chrysler LLC and Home Depot Inc; Nardelli was named director and non-executive chairman. Nardelli has the distinction of being named in a CNBC survey as one of the “Worst American CEOs of All Time.” Ranking Nardelli 17th  on the list, CNBC wrote on its website that “Nardelli was fired from Home Depot after losing market share, alienating executives, downplaying customer service, and refusing to cut his fat pay package. He was then hired by the private equity group Cerberus, which put him in charge of its struggling Chrysler unit (and overseeing its Chapter 11 bankruptcy filing). There he took billions in government aid, only to face an ultimatum: Merge or face certain liquidation.” CNBC noted that “Nardelli’s Home Depot exit package of $210 million was regarded as one of the largest ever.”

It would appear that Nardelli has the same challenge before him yet again—both on internal and external business fronts and in public relations sectors. Stereotypical of today’s corporate culture, Nardelli’s tenure at Chrysler was highlighted by the private jet he took to Washington, D.C. to plead for a government bailout. Not surprisingly, NewPage bonds” fell the most in almost six weeks” after Nardelli took over, Bloomberg Businessweek reported. Now there is industry speculation that the company will be sold as a whole or Balkanized, broken into smaller divisions and sold off separately, before the end of the year.

The Miamisberg-Ohio-based NewPage owns paper mills in Kentucky, Maine, Maryland, Michigan, Minnesota, Wisconsin and Nova Scotia, Canada with yearly capacity to produce 4.4 million tons of paper. The company has about 7,500 employees. And for a firm that posted a $175 million net loss the first quarter of 2010, a 62 percent drop in spite of an overall sales gain of 13 percent, a company that—observers say—faces potential sale or possible dissolution of some manner by the end of the year, NewPage indeed takes care of the help, but only in executive suites and the boardroom. Even recent management castoffs exit with a smile.  The math is stunning.

In sharp contrast to earning statements, it was reported late last month that several NewPage corporate executives are expected to receive millions of dollars in bonuses on the heels of poor company performance and mill closures, assuming they stay with the company through the end of 2012 and meet certain performance criteria, according to company financial reports filed last month with the U.S. Securities and Exchange Commission.

In a filing with the U.S. Securities and Exchange Commission, NewPage said it will give outgoing executive Curley, CEO for just four months, $1.1 million in severance pay—equal to twice his base pay, as part of his contract, as well as a $165,000 pro-rated performance bonus. Suwyn will receive a $2 million severance payout. And Michael Edicola, vice president of human resources who also recently resigned, will receive $650,000 for severance and a $243,000 prorated performance bonus. Two weeks ago, yet anotherNewPage senior management official resigned— Mike Marziale, senior vicepresident of marketing, strategy and general management. Marziale will receivemore than $1.4 million in payments from NewPage, according to a newspaper report and documents filed with the U.S. Securities and Exchange Commission.

Great country, America! When do the rest of us get to become citizens.

NewPage's long-term incentive plan, adopted in January, provides key executives with cash bonuses, based on performance and/or length of service, as incentives for staying with the company, according to SEC documents filed earlier this year. Such nosebleed executive bonuses must be debilitating to hundreds of workers unemployed or temporarily laid off as a result of recent downtime and mill closures. 

On related fronts, there is a serious threat to U.S. printing jobs from what appears to be   unfair and anti-competitive paper industry tactics, assisted by generous tax loopholes and subsidies, that are restricting industry and distorting the market to raise prices as high as possible. While some paper company executives are getting rich, the American printing industry is on the brink. Overall demand for paper is down due to market conditions and competition from electronic publishing. More than 73,000 printer and graphic communications jobs have been lost since mid-2008, with thousands more expected, according to reports. In today’s economy, a rise in paper costs—a printer’s biggest expense—is ruinous.

For corporate executives, the best defense is often a good offense: deflect and point fingers around the world, wrapping oneself in the American flag. NewPage and other American paper companies today are pressuring the International Trade Commission (ITC) and the Department of Commerce to investigate whether countries like China and Indonesia have engaged in illegal “dumping” of coated paper suitable for multi-colored catalogues, books, magazines, labels, graphics, greeting cards and other products requiring high-quality print graphics. Backed by U.S. labor unions, NewPage and others are seeking tariffs of up to 100 percent on coated paper from China and Indonesia. Given corporate strategies of shutting down North American mills and taking paper off the market, this would have catastrophic impacts on the printing industry and other related industries, now struggling with the worst economy since the Depression.

Some revealing statistics: NewPage shut down six mills in 2008. It closed its paper mill in Niagara, Wisconsin, the only major source of employment in a city of 1,800. The mill provided 319 jobs, with workers averaging $60,000-a-year. According to local officials, the plant had two potential buyers, but NewPage let the mill sit idle. Wrote newspaper columnist Ed Lowe at the time, “The hardship of the mill closure here parallels that of Kimberly (Wis.), where 600 well-paying paper mill jobs were scuttled as part of the evolving business plan of NewPage…Both mill closures devastated their communities…Some lifelong residents of Niagara worry that their city’s future ended with the production at the mill.”

In Kimberly, NewPage refused to sell to two buyers and declined the support of the Governor to keep the plant open. “This is a case of a corporation taking a productive, profitable plant and closing it, and refusing to sell it to anyone else,” Andy Nirchl, president of the United Steel Workers local, said at the time.

Other similar examples:

  • In March 2010, NewPage bought out Domtar’s coated-groundwood (CGW) business,
  • In May, NewPage reportedly reached an agreement with Kruger to ensure that company doesn't restart its soon-to-be-idled coated-paper operation at its Quebec mill.
  • NewPage does not appear to have the resources to invest in itself or the industry. In Maine, one of the most important paper producing states, the president of its pulp and paper association says they “haven’t seen any new coated free sheet paper mills in decades.”
  • Notes Verle Sutton, Chicago-based editor of Reel Time Report, a unit of industry data provider Forestweb Inc. in Los Angeles, “NewPage’s prices are higher than its competitors. If NewPage was more reasonable about price increases, they wouldn’t have driven out demand and they wouldn’t have had to diminish capacity like they have.”

Nationally and internationally, there is clearly a double standard at play in the paper industry. Fair trade laws, governed by agencies like the ITC are written to guarantee a level playing field on which all companies and industries can compete on equal terms, without unfair help from governments and other sources. Ironically, U.S. paper firms that are accusing China and Indonesia of gaining unfair subsidies are actually the ones benefiting most from the largesse of market-distorting government subsidies. Analysts report that U.S. paper makers as an industry received a collective $9 billion in “black liquor” tax subsidies last year. Observed U.S. Sen. Jeff Bingham, the Democrat from New Mexico, “Congress never intended that this tax credit would be used in this way to avoid payment of taxes. Added U.S. Sen. John Kerry, the Massachusetts Democrat, “Bad economic times are no excuse to cheat, and that’s the only word for what these companies are doing.”

The Obama Administration is clearly in a political squeeze—support the U.S paper industry and its constituent-rich unions, or risk losing thousands more jobs in the printing industry.  In supporting the paper industry and its unions, President Obama will contribute to a disruption of paper supplies, a reduction in the number of available paper supplier options, and the elimination of U.S. printer jobs because some publishers will simply ship business to less costly printers in Canada or Mexico or cutback on printing products. Dr. Thomas Prusa, Ph.D., a professor of economics at Rutgers University, is referenced on the website saveprinterjobs.com as noting that “market-distorting protective actions, such as tariffs, destroy 10 to 20 times as many jobs as they create, most often because the jobs move outside the U.S. Once those jobs are lost, they don’t return. In printing, jobs would move to Canada and Mexico and hundreds of printers would have to close their doors.”

There is plainly no legal or factual basis to suggest that Chinese and Indonesian paper producers are harming domestic production of coated paper: there has been no significant increase in imports, sales are at normal levels and domestic companies are not losing business. Domestic shipments of coated paper are down only because overall demand is down in this economy, not as a result of alleged unfair practices of the Chinese and Indonesian producers and importers. But U.S. paper companies are asking the federal government to keep the Chinese and Indonesian coated paper competitors out of the U.S. market through high tariffs.

A tariff on imported coated paper from China and Indonesia would hurt the U.S printing industry in the following ways: paper supplies would be disrupted; deliveries would be delayed; paper supplier options would be reduced; higher costs will force publishers to seek cheaper printing options in Mexico and Canada or eliminate printing products; thousands more U.S. printer jobs would be lost and the competitiveness of the U.S. printing business would be at risk.

In recent developments:

  • The U.S. Department of Commerce, which typically favors domestic industries in these disputes, has insured two preliminary decisions that recommended extremely high tariffs.
  • The preliminary tariffs are so high and out of line with international standards that Indonesian and Chinese government are expected to ask the World Trade Organization to intervene in the case this summer.
  • The case will be settled in late October or early November by the U.S. International Trade Commission, which must determine if U.S. industries have been materially harmed by the imports in question.

Any way you cut the cards in the paper industry deck, real money indicates that U.S. paper companies, backed by special interests, are the aggressors, not the victims of market distortion.

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