EPA-230/3-76-014
ECONOMIC IMPACTS OF PULP AND
PAPER INDUSTRY COMPLIANCE WITH
ENVIRONMENTAL REGULATIONS
VOLUME II
Price and Demand Effects on the Industry's Major Product Sectors
\
MAY 1977
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Planning and Evaluation
Washington, D. C. 02460
-------
ECONOMIC IMPACTS OF PULP AND PAPER
INDUSTRY COMPLIANCE WITH
ENVIRONMENTAL REGULATIONS
VOLUME II
PRICE AND DEMAND EFFECTS ON THE INDUSTRY'S
MAJOR PRODUCT SECTORS
Prepared by:
Claire R. Canty
Louise M. Firth
Fred D. lannazzi
Nelson R. Lipshutz
Henry R. Martin
Peter L. Oliver, Project Leader
of
Arthur D. Little, Inc.
Report for
Office of Planning and Evaluation
U.S. Environmental Protection Agency
June 1977
EPA-230/3-76-014
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TABLE OF CONTENTS
Page
List of Tables v
List of Figures vii
I. INTRODUCTION , 1
A. PURPOSE AND SCOPE 1
B. KEY BASES OF ANALYSIS 4
II. OVERVIEW 5
A. MARKET STRUCTURE 5
B. LONG-RUN PRICE IMPACTS 5
C. COST RECOVERY REQUIREMENTS FOR THE
EXISTING INDUSTRY 5
D. OUTPUT EFFECTS 9
III. PRODUCT SECTOR ANALYSES 13
A. CONTAINERBOARD 13
B. PACKAGING PAPERS 23
C. RECYCLED PAPERBOARD 32
D. CONSTRUCTION PAPER 42
E. MARKET PULP 44
F. PRINTING, WRITING AND RELATED PAPERS 56
G. BLEACHED BOARD 63
H. TISSUE 72
111
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TABLE OF CONTENTS (Continued)
Page
III. PRODUCT SECTOR ANALYSES (Cont'd.)
I. NEWSPRINT AND UNCOATED GROUNDWOOD PAPER 81
J. SPECIALTY PAPERS 89
APPENDIX - PRODUCT SECTOR PRICE SERIES AND
ECONOMETRIC EQUATIONS 97
IV
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LIST OF TABLES
Table No. Page
1-1 U.S. Production and Trade by Paper Industry Product Sector, 1974 2
11-1 Concentration in Pulp and Paper Products 1975 6
II-2 Long-Run Price Impacts of Studied Environmental Regulations 8
II-3 Investment Required by Existing Mills to Comply with Studied
Regulations 10
11-4 Price Increase Necessary for Existing Mills to Recover the Cost of
Selected Environmental Regulations 11
11-5 Price Elasticity of Demand Pulp, Paper and Paperboard Products 12
111-1 U.S. Containerboard Production, 1973 14
III-2 Corrugated Shipping Container End Uses 16
III-3 Concentration of U.S. Kraft Linerboard Suppliers, 1975 17
III-4 Concentration of U.S. NSSC Corrugating Medium Suppliers, 1975 18
III-5 Containerboard Price Trends 19
III-6 Effect of Environmental Regulations on Unbleached Kraft
Paperboard Prices 21
III-7 Effect of Environmental Regulations on NSSC Corrugating
Medium Prices 22
III-8 U.S. Packaging Paper Shipments, 1973 by Major Product 26
III-9 Concentration of U.S. Unbleached Kraft Papers Suppliers, 1975 29
111-10 Concentration of U.S. Packaging Paper (Excluding Unbleached
Kraft) Suppliers, 1975 30
111-11 Unbleached Kraft Paper Price Trends 31
111-12 Effect of Environmental Regulations on Unbleached Kraft
Paper Prices 33
111-13 U.S. Recycled Paperboard Production by Major Grades
and Uses, 1973 35
111-14 Concentration of U.S. Recycled Paperboard Suppliers, 1975 38
111-15 Recycled Paperboard Price Trends 39
111-16 Effect of Environmental Regulations on Recycled Boxboard Prices 40
111-17 Concentration of U.S. Construction Paper Suppliers, 1975 43
III-18 Effect of Environmental Regulations on Construction Paper Prices 45
111-19 Free World Dissolving Pulp Demand by Major Application, 1973 47
III-20 U.S. Consumption of Bleached Market Pulp, 1973 48
111-21 Concentration of North American Market Pulp Suppliers, 1975 51
III-22 Effect of Environmental Regulations on Dissolving Pulp Prices 55
III-23 Concentration of U.S. Printing and Writing Paper Suppliers, 1975 58
III-24 Effect of Environmental Regulations on Printing and Writing
Paper Prices 61
III-25 U.S. Boxboard Production by Major Grades and Uses, 1973 64
III-26 Folding Carton End-Uses, 1974 66
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LIST OF TABLES (Continued)
Table No.
111-27 Concentration of Bleached Paperboard and Bristols, 1975 67
III-28 Bleached Paperboard and Recycled Boxboard Price Trends 69
III-29 Effect of Environmental Regulations on SBS Board Prices 71
III-30 1974 Tissue Production - By Product 74
111-31 1974 Sanitary Tissue Shipments Consumer vs. Industrial Market 75
III-32 Concentration of Tissue Suppliers, 1975 77
111-33 Effect of Environmental Regulations on Tissue Prices 80
111-34 Concentration of North American Newsprint Suppliers, 1975 84
111-35 Concentration of Uncoated Groundwood Paper Suppliers, 1975 85
III-36 Effect of Environmental Regulations on Newsprint Prices 88
III-36A Concentration of U.S. Special Industrial Paper Suppliers, 1975 93
III-37 Concentration of U.S. Wet Machine Board Suppliers, 1975 94
III-38 Concentration of U.S. Molded Pulp Suppliers, 1975 95
VI
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LIST OF FIGURES
Figure No. Page
11-1 Long-Run Price Increase Resulting from Environmental
Regulations in the Pulp and Paper Industry 7
111-1 Unbleached Kraft Board Forecast of Demand and
Capacity Utilization 24
III-2 NSSC Corrugating Medium Forecast of Demand and
Capacity Utilization 25
III-3 Unbleached Kraft Paper Forecast of Demand and
Capacity Utilization 34
III-4 Recycled Paperboard Forecast of Demand and
Capacity Utilization 41
III-5 Bleached Paper Pulp Market Price versus Capacity Utilization 52
III-6 Dissolving Pulp Market Price versus U.S. Capacity Utilization 53
III-7 Printing and Writing Paper Market Price versus Capacity Utilization 60
III-8 Printing and Writing Papers Forecast of Demand and
Capacity Utilization 62
III-9 Bleached Boards and Bristols Market Price versus
Capacity Utilization 70
111-10 Bleached Board and Bristols Forecast of Demand and
Capacity Utilization 73
111-11 Tissue Market Price versus Capacity Utilization 79
111-12 Tissue Forecast of Demand and Capacity Utilization 82
III-12A Newsprint Market Price versus Capacity Utilization 87
111-13 Forecast of Newsprint Consumption and Capacity Utilization 90
Vll
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I. INTRODUCTION
This volume addresses the supply/demand/price impacts for each of the pulp and paper
industry's major product sectors. It brings together all of the descriptive information, data, and
econometric analyses which were applied to estimate the price/demand effects of the studied
environmental regulations and the potential for short-run shortages. It describes the economic
characteristics of each product sector in sufficient detail to allow readers unfamiliar with the
industry to understand its key economic characteristics and how price increases caused by
regulations and accompanying restrictions in potential demand compare with historical price,
demand and supply trends.
For the purposes of this analysis, Arthur D. Little, Inc. subdivided the paper industry into
13 major product sectors and selected, of these, 10 as representative products or product groups
for the econometric analyses (Table 1-1). To provide a complete description of the entire paper
industry and to facilitate future studies, Arthur D. Little also outlined the economic character-
istics of the three remaining product sectors: bleached packaging papers, construction paper, and
specialty papers. Available historical price data for bleached packaging and construction papers
are not sufficiently accurate for econometric analyses. Specialty papers were excluded from the
impact analyses because water effluent guidelines have not yet been proposed for this sector.
The 13 major product sectors were chosen primarily on the basis of common markets or
applications and also to combine products that usually are produced together. In some cases, the
products within a sector are complementary; in others, they compete directly with each other
(and sometimes with nonpaper products) for various end uses.
A. PURPOSE AND SCOPE
To assist various government agencies in making decisions concerning environmental regu-
lations for the U.S. paper industry, the EPA retained Arthur D. Little to undertake a com-
prehensive study aimed at measuring the potential economic impacts resulting from the
industry's total cost to comply with the following existing and proposed regulations:
Water Regulations those issued by EPA for existing and new capacity. Two
levels of control for the existing industry are assessed that for compliance with
BPT ("best practicable control technology currently available") which is required
for 1977 and BAT ("best available technology economically achievable") which is
required for 1983. New capacity control costs are based on the New Source Per-
formance Standards (NSPS) currently in effect. These regulations do not affect
pretreatment standards and other costs associated with use of municipal treat-
ment facilities, but the latter were considered in the mill closure analysis.
Air Regulations those issued by states (State Air Quality Implementation
Plans SIP) for the existing industry, and those issued by EPA as they apply to
new capacity.
Noise Regulations those issued by the Occupational Safety and Health Admin-
istration (OSHA) for compliance with a 90-dBA noise level using engineering
and/or administrative controls to achieve compliance. Noise regulations apply
equally to both existing and new capacity.
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TABLE 1-1
U.S. PRODUCTION AND TRADE BY PAPER INDUSTRY PRODUCT SECTOR, 1974
(Thousands
of Short
Product Sector Production
Containerboard
Unbleached Kraft1
NSSC Medium1
Packaging Papers
Unbleached Kraft
Other
Recycled Paperboard
Construction Paper
Market Pulp
Bleached Paper Grade
Dissolvingl
Printing/Writing Papers
Bleached Board and Bristols
Tissue
Uncoated Groundwood Papers
Newsprint
Groundwood Specialties
2
Specialty Papers
TOTALS
13,333
4,175
4,197
1,207
7,634
1,764
3,296
1,611
10,887
4,979
4,086
3,480
1,246
731
62,626
Tons)
Imports
10
142
24
60
2,219
226
217
__
7,398
117
8
10,421
Exports
1,743
71
224
283
26
1,557
806
302
375
24
188
53
128
5,780
Apparent
Consumption
11,590
4,114
5,322
7,375
1,798
3,958
1,031
10,802
4,604
4,062
10,690
1,310
611
67,267
Denotes sectors which were analyzed econometrically.
2
Includes special industrial papers and wet machine board.
SOURCE: U.S. Department of Commerce and American Paper Institute.
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Three types of existing or proposed environmental regulations were not included in these
economic impact analyses:
All regulations affecting woodland management (e.g., use of herbicides and pesti-
cides), harvesting practices, and alternate timberland uses;
Regulations which mandate fuel switching and/or require S02 removal. (This study
assumes the use of low-sulfur fuel.)
"Nonsignificant deterioration" regulations under consideration by Congress which
would tighten current air emission limitations for new or expanded pulp and paper
mills; and
Priority pollutants regulations, currently being studied by the EPA for possible
inclusion in the 1983 water effluent guidelines..
The study analyzes cost recovery impacts of the above water, air, and noise regulations on
the pulp, paper, and paperboard product sectors of the total paper and allied products industry.
Thus, the analysis does not include costs or impacts associated with timberlands, or pa-
per/paperboard converting operations (except in cases where converting is done at the paper
mill). The study also excludes specialty paper products, for which Federal water effluent guide-
lines have not yet been proposed; such products account for less than 2% of total U.S. paper and
paperboard production. Specific product sectors studied are:
Sector % of U.S. 1974 Capacity
Unbleached Kraft Paper 7.1
Unbleached Kraft Paperboard 22.6
NSSC Corrugating Medium 7.2
Recycled Paperboard 14.0
Construction Paper 3.5
Bleached Market Pulp 7.81
Dissolving Pulp 3.81
Printing/Writing Paper 18.8
Bleached Board and Bristols 8.3
Tissue 7.0
Newsprint and Uncoated Groundwood . 8.1
Bleached Packaging Paper 2.1
Total (Excluding Pulp and Construction Board) 98.7
1. Based on total pulp.
In 1975, the above product sectors accounted for about 45% of the paper and allied products
industry's sales, 55% of its assets and 42% of its employment.
The report assesses the industry's incremental costs to meet the environmental regulations
defined above. Then it estimates the following economic impacts of these costs on the product
segments they affect directly and on the industry and economy as a whole:
Price and Demand Effects
Short-Term Capacity Constraints
Secondary Impacts on Suppliers
Closure and Employment Effects
External Financing Requirements
Balance of Trade Effects
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B. KEY BASES OF ANALYSIS
The results of this analysis should be interpreted in the light of the following key assump-
tions and study parameters:
1. The base case assumed that regulatory timetables and standards will be enforced with no
exceptions. It is already evident that this assumption does not hold in the case of EPA's BPT
water guidelines which required effective treatment systems to be operating by July 1977; a
number of mills report that they will be unable to meet this deadline and some have been allowed
to continue with lower quality standards to 1978-1980. A sensitivity analysis was performed to
test the capital effects of stretching the effective compliance date to January 1980. The 1977
closure estimates excluded any mill that indicated it had obtained a variance in the 1977
guidelines, or timetables; however, such mills were often judged to be likely candidates for closure
by 1983.
2. Starting dates for the forecasts were: January 1976 for the industry's capital and
financing requirements; January 1975 for environmental control and operating costs (includ-
ing capital recovery). The earlier date was used for operating costs because the 1975 recession
prevented most paper companies from raising prices in 1975 and 1976; thus the incremental costs
incurred since January 1975 generally are not reflected in 1976 prices.
3. Product quality will not change significantly through 1983. There has been much in-
dustry discussion about employing lower-brightness, higher-yield pulp in their products, thus
reducing pollution loadings as well as costs. However, as yet, there is no evidence that this trend
has begun; thus, it would be very speculative to predict its timing and effects.
4. Competitive pricing is assumed in all price, demand, and capacity forecasts. To the
extent that Federal price controls or guidelines are imposed and sustained, the capacity and
capital requirement forecasts made in this report would be altered.
5. Cost models and dollar projections employ constant 1975 dollars, unless otherwise noted.
This assumes no "real" inflation relative to the general GNP deflator. If the paper industry
experiences real cost inflation, its price, capital, and financing requirements will be higher than
that projected here. However, its relative cost-recovery price increases resulting from the studied
regulations would not change.
6. Chase Econometric's, May 17, 1976, Economic Growth Forecasts for the Council on
Environmental Quality were used as the bases for the demand and capacity forecasts. The
industrial production index and GNP series in the Chase forecasts reflect a mild recession in
1978-1979 followed by four years of sustained growth to 1983. Chase Econometrics predicted
average annual growth rates of 4.3% for GNP and 6.5% for industrial production, 1976-1983.
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II. OVERVIEW
This chapter summarizes the impact of the studied environmental regulations on the
individual pulp and paper product sectors.
A. MARKET STRUCTURE
Most of the paper industry and its major product sectors are quite competitive. Market
share concentration of the industry's largest firms clearly illustrates this. At the level of aggrega-
tion of a 4-digit SIC code, an industry is generally considered oligopolistic if the four-firm
concentration ratio is more than 50% and the eight-firm concentration ratio 65%. Throughout the
U.S. economy, the concentration ratio for specific products is generally higher than that for the
corresponding four-digit SIC industry without oligopoly being indicated. The product sectors
described in Chapter III are generally five- to seven-digit SIC product categories (e.g., linerboard
is a seven-digit product).
Table II-l shows that all sectors except dissolving pulp (where the largest firm has 44% of
the market) uncoated groundwood and wet machine board have low to moderate concentration
ratios. Environmental regulations will contribute to a trend toward increasing concentration in
the paper industry by increasing the minimum efficient scale of new mills and generally increas-
ing barriers to entry by making it more difficult for small to medium firms to expand capacity.
B. LONG-RUN PRICE IMPACTS
In the long-run, prices in the pulp and paper industry will primarily reflect new mill costs
and profit margins. Long-run price impacts for each product sector were estimated using new mill
cost models for representative products in each product sector. The calculated prices were
consistent with the discounted life-cycle cash flows of the mills, using a 10% cost of total capital.
Comparison of the projected price with environmental controls and the price without yielded the
estimated long-run price impact.
The relative price impacts vary by product sector, from an estimated 15.6% for NSSC
corrugating medium to a low of 4.1%) for tissue (Figure II-l and Table II-2). The variation in
impact is a function of product value as well as the environmental costs associated with produc-
ing it. For example, the long-run price increase due to the studied regulations is estimated to be
$31 per ton for both NSSC corrugating medium and tissue. However, because of different product
values this increase translates into a relative price impact of 15.7%' for NSSC and 4.1%: for
converted tissue. The other reasons for variability in impact are process-specific. For example, a
stand-alone NSSC mill has process characteristics which make effluent more costly to control
than most other sectors.
C. COST RECOVERY REQUIREMENTS FOR THE EXISTING INDUSTRY
The prices required for existing pulp and paper mills to recover their incremental environ-
mental could reflect an estimate of intermediate-run price impacts during the period 1977-1983.
Existing mills are required to comply with regulations similar to those for new mills, but they
generally have implemented some environmental controls already. In estimating price increases
necessary for existing mills to recover incremental costs of compliance with the studied regu-
lations, it was assumed that none of these costs were reflected in the base 1975 market prices
which were held down by the 1974-1975 recession. The required price increase was computed by
-------
TABLE II-l
Containerboard
NSSC Corrugating
Unbleached Kraft
Construction Paper
Market Pulp
Bleached Pape
Dissolving
Newspaper
Printing & Writing
Recycled Paperboard
Specialty Paper
Tissue
Unbleached Kraft Paper
Uncoated Groundwood
Wet Machine Board
CONCENTRATION
IN PULP AND
1975
Percent
PAPER PRODUCTS
of U.S. Capacity
Top 4 Firms Top 8 Firms
Bristols
ng Paper
Linerboard
rade**
d
aper
d
44.9
36.4
27.8
34.8
57.7
30.9
77.0
44.0
26.1
23.3
25.7
55.8
41.0
65.2
77.9
67.1
49.9
46.2
57.0
81.0
50.5
100.0
64.5
42.1
38.2
42.1
77.6
64.9
84.8
92.0
Total
Number
of Firms
26
40
21
28
23
25*
8
14
71*
101
51*
51*
28*
20*
11
*Approximate number of producers.
**North American producers and capacity.
SOURCE: ADL estimates. See Vol. IIProduct sector descriptions for
basis of estimates.
-------
Industry Aggregate
Bleached Board (SBS)
Newsprint
NSSC Corrugating.
Medium
Printing & Writing
Bond Paper
Book Paper
Recycled
Recycled Boxboard
Gypsum Linerboard
Tissue
Tissue
DCinked Tissue
Unbleached Kraft
Linerboard
Unbleached Kraft
Bag Paper
FIGURE 11-1
LONG-RUN PRICE INCREASE RESULTING FROM
ENVIRONMENTAL REGULATIONS IN THE PULP AND PAPER INDUSTRY1
$/Tpn Without
Environmental Regulations
$327 £
^ 7-3Z
362 £
^g 8.0%
280 £
H3 5.7%
198 £
436 J~~
449
260 P"
219 f
7SA f_
782 ^
15-7%
^y 6.4%
l%i§| 6'2*
NSPS Water! 1
OSHA Noisel^
}/; 5.3% . .
J^6.3% riiPAU M
^H4-i%
^ 5.4%
185 £
1^10.3%
297 5~
[^^J^IO.1%
1 i i.i 1 1.^-1 1 1 1 1 i i 1 1 t i i
^.x
woodland regulations.
100.0 105.0 110.0 115.0
Relative I'rir.e Increase Necessary
(100.0 = I'rii-p without Knv IriinmCMit.il Controls)
-------
TABLE II-2
oo
Bleached Board & Bristols
Containerboard
NSSC Corrugating Medium
Unbleached Kraft Linerboard
Newsprint
Printing & Writing
Bond Paper
Book Paper
Recycled Board
Recycled Boxboard
Gypsum Linerboard
Tissue
Tissue
Deinked Tissue
Unbleached Kraft Bag Paper
WEIGHTED AVERAGE
LONG-RUN PRICE IMPACTS
OF STUDIED ENVIRONMENTAL REGULATIONS
$/ton, Without
Environmental
Regulations
$362
198
1 185
280
436
449
260
219
754
782
297
327
Increase in
NSPS Water
$
$24
25
14
12
21
21
12
13
22
30
21
19
%
6.6%
12.6
7.5
4.1
4.8
4.7
4v6
5.9
2.9
3.8
7.1
5.8
NSPS
$
$3
2
2
1
3
3
1
1
3
5
3
2
Price/Ton
Air
%
0.8%
1.0
1.1
0.3
0.7
0.7
0.4
0.5
0.4
0.6
1.0
0.6
From
OSHA Noise
$ %
$2
4
2
3
4
4
2
2
6
9
6
3
0.6%
2.1
1.1
1.0
0.9
0.9
0.8
0.9
0.8
1.2
2.0
0.9
Price After
Cumulative Increase
$ ^Increase
$391
229
203
296
464
477
275
235
785
826
327
351
8.0%
15.7
9.7 .
5.7
6.4
6.2
5.8
7.3
4.1
5.6 .
10.1
7.3
Source: ADL Estimates.
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adding the estimated incremental operating costs' to the investment expenditures (Table II-3),
which were annualized by the level recovery method, using a 10% cost of total capital. The
annualized costs were converted to a per ton cost based upon the capacity existing in 1975 that
was estimated to still be in operation by 1977 and 1983.
The required price increases for the existing industry to recover the incremental cost of the
studied regulations range from a high of 7.9% for uncoated groundwood to a low of 3.7% for
construction paper (Table II-4). As was the case with the estimated long-run impacts, most of
the impact is from water regulations and the relative impact differences were caused by unit
value differences and process-specific factors.
D. OUTPUT EFFECTS
As a result of the price increase caused by environmental regulations, reductions in quantity
demanded will occur for products with a price elasticity of demand greater than zero. Price
elasticities of demand calculated from econometric models are consistently inelastic, ranging
from 0.1 for bleached board and bristols to 0.90 for unbleached kraft paper with a weighted
average of 0.37 (Table II-5).
The elasticity of demand indicates the reduction in output that will occur as a result of a
price increase. For example, if the price of unbleached kraft bag paper increases by lO'-'o, the
quantity demanded will fall by 9% because the price elasticity of demand is 0.9.
1. See Volume I, Chapter 3.
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TABLE II-3
INVESTMENT REQUIRED BY EXISTING MILLS
TO COMPLY WITH STUDIED REGULATIONS
(Millions of
Bleached Board &
Bristols
Bleacked Pkg.
Construction Paper
Dissolving Pulp
Newsprint
NSSC Medium
Printing & Writing
Recycled Paperboard
Tissue
Unbleached Kraft Paper
Unbleached Kraft
Paperboard
Uncoated Groundwood
Total
1977
Water
$177
54
34
102
162
112
595
187
268
122
373
62
$2,250
1983
Water
$144
36
24
52
91
108
363
54
155
90
258
41
$1,410
SIP
Air
$102
21
9
22
54
28
193
34
68
76
232
20
$860
Dollars)
OSHA
Noise
$19
6
23
9
29
30
101
55
48
15
50
15
$400
Total
$439
117
90
185
336
278
1,252
330
539
303
913
138
$4,920
Source: ADL estimates.
10
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TABLE II-4
PRICE INCREASE NECESSARY FOR
EXISTING MILLS TO RECOVER THE COST OF
SELECTED ENVIRONMENTAL REGULATIONS
Bleached Boards
& Bristols
Bleached Pkg.
Construction Paper
Dissolving Pulp
Newsprint
NSSC Medium
Printing & Writing
Recycled Paperboard
Tissue
Unbleached Kraft
Paper
Unbleached Kraft
Paperboard
Uncoated
Groundwood
Weighted Ave.
1975
Price
$353
376
246
398
265
193
591
215
769
242
195
335
$292
$ 8
10
3
13
10
5
12
5
15
6
5
11
$8
1977
$
.08
.16
.50
.88
.67
.00
.79
.08
.30
.26
.83
.90
.40
Wat :.r
%
2.3%
2.7
1.4
3.5
4.0
2.6
2.2
2.4
2.0
2.6
3.0
3.6
2.9%
1983
$6.11
6.27
2.57
9.69
5.99
4.28
7.50
1.61
8.82
4.97
4.73
10.79
$5.44
Water
%
1.7%
1.6
1.0
2.4
2.3
2.2
1.3
0.7
1.1
2.1
2.4
3.2
1.9%
SIP
$
$2.79
2.47
.91
1.86
2.31
1.21
3.09
.89
2.57
2.50
2.41
2.52
$2.20
Air
%
0.8%
0.6
0.4
0.5
0.9
0.6
0.5
0.4
0.3
1.0
1.2
0.8
0.7
OSHA Noise
$ .67
.84
2.12
.58
1.33
1.26
1.60
1.28
2.12
.62
.69
1.36
$1.18
0.2%
0.2
0.9
0.1
0.5
0.7
0.2
0.6
0.3
0.3
0.4
0.5
0.4%
Cumulative
$ %
$17.65
19.74
9.10
26.01
20.30
11.75
24.98
8.86
28.81
14.35
13.66
26.57
$17.22
5.0%
5.3
3.7
6.5
7.7
6.1
4.2
4.1
3.7
5.9
7.0
7.9
5.9%
SOURCE: ADL estimates. See Volume 1, Chapter 3 for details of cost data and Volume 1, Chapter 4,
for a cost sensitivity analysis (range of cost/price estimate).
-------
TABLE II-5
PRICE ELASTICITY OF DEMAND
PULP. PAPER, AND PAPERBOARD PRODUCTS
Product
Bleached Board
& Bristols
Bleached Market Pulp
Dissolving Pulp
Newsprint
NSSC Corrugating
Medium
Printing & Writing
Paper
Recycled Paperboard
Tissue
Unbleached Kraft
Linerboard
Unbleached Kraft
Paper
Estimated
Elasticity *
.18
lp .46
.63
.22
.35
.26
d .46
.45
95% Confidence
Interval
+ .18
+ .35
+ .32
+ .09
+ .09
± !*
± '35
+ .18
.50
.90
+ .27
+ .26
All Paper & Board
Eq. 1: Weighted
Sector Prices
Eq. 2: Wholesale
Price Index
,37
.57
+ .08
+ .27
*Equation for Arc elasticity of demand:
AP
(Q, + Q0)/2 (P. + P.)/2
Source: Derived from econometric models estimated by Arthur D. Little, Inc.
12
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III. PRODUCT SECTOR ANALYSES
A. CONTAINERBOARD
1. Product Description
Containerboard is the largest single product category in the United States paper industry. It
accounted for more than 60% of total paperboard production and more than 30% of total paper
and paperboard production in 1973. This category includes a series of products which are used
primarily in the construction of corrugated shipping containers for secondary packaging
purposes:
(1) Linerboard, made either from unbleached kraft pulp, wastepaper, or a com-
bination of both;
(2) Corrugating medium, made either from a combination of semi-chemical (NSSC)
pulp and wastepaper, or entirely from wastepaper; and
(3) Container chip and filler board, made entirely from wastepaper.
Linerboard provides the top and bottom substrate of a corrugated container. Corrugating
medium is the fluted material between the linerboard layers. Container chip and filler board is
used to form the partitions or to line the inside of the corrugated container.
Unbleached kraft linerboard and semi-chemical corrugating medium dominate this product
sector, accounting for about 91% of 1973 containerboard production (Table III-l). This descrip-
tion will emphasize these products; the supply/demand/price characteristics of the recycled
products will be included under the recycled paperboard section.
Since linerboard forms the surface layer of the corrugated sandwich, its chief function is to
provide the strength required of the container, primarily resistance to bursting and crushing.
Standard physical requirements for corrugated containers in the United States are set forth in
Section 3 of Rail Rule 41, which governs shipping containers for goods shipped by rail across state
borders. Similar standards for containers used for goods shipped by truck are contained in Rule
222 of the National Motor Freight Classification. Unbleached kraft linerboard produced in the
United States (typically at a basis weight of 42 lb/1000 sq. ft.) fully provides the strength required
to meet Rules 41 and 222. The basis weight of recycled linerboard must be increased to more than
42 lb/1000 sq. ft. if this material is to match the strength of 42-pound kraft liner.
The chief function of corrugating medium is to provide a low-cost material for the corru-
gated inner layer. Tearing resistance and folding properties can be minimal, since these proper-
ties are provided by the linerboard layers. Thus, both semi-chemical and recycled corrugating
medium (the latter containing more than 25% wastepaper) are applicable for this use. The most
common basis weight for corrugating medium is 26 lb/1000 sq. ft.
Container chip and filler board generally consists of paperboard that is lighter than 26
lb/1000 sq. ft. It is employed either as single sheets or as the facing of corrugated materials used
for interior packaging such as partitions, dividers, pads, and cushioning.
13
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TABLE III-l
U.S. CONTAINERBOARD PRODUCTION, 19731
BY.MAJOR PRODUCT
Thousand Tons £
Linerboard
Unbleached Kraft 12.6642 68
Recycled 289 1_
Sub Total 12.953 69
Corrugating Medium
3
Semi-Chemical 4,234 23
Recycled 1,129 6_
Sub Total 5,363 29
Container Chip and Filler Board
3
Recycled 317
Total 18,633 100
Includes Exports
Includes 128,000 tons of Solid Bleached Board
Includes small amounts of Unbleached Kraft
SOURCE: API, Statistics of Paper and Paperboard, 1974
14
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2. Demand
In 1973, apparent domestic containerboard consumption was 16.9 million tons. Demand for
the products in this group is directly related to the shipping container requirements of the full
spectrum of American industry; thus, it is strongly,influenced by the main macro-economic
indicators including the industrial production index and GNP.
Most containerboard material is consumed in the major metropolitan areas where the box
plants that convert containerboard into corrugated containers are concentrated to be near their
customers. About 38% is consumed in the Midwest, 26% in the South, 18% in the Northeast, and
18'V in the West.
Table III-2 shows a breakdown of 1973 shipments of corrugated box by major end use. Here
it can be seen that food applications are the most important end uses for corrugated shippers.
Paper, wood and allied products and glass products are also important end-use market areas.
The only real competitive threat to corrugated shipping containers has come from the use of
heavy-gauge shrink plastic film. This film can be wrapped around a pallet of packages and then
shrunk by the application of heat to hold the load securely. However, because of the superior
cost/performance characteristics of the corrugated containers, shrink film now competes only in
limited applications. Other products have not encroached significantly into corrugated container
markets.
Probably because corrugated containers have become established as an essential low-cost
packaging material with few substitutes, its price elasticity of demand is low. Arthur D. Little's
econometric analysis indicates price elasticities of 0.50 for linerboard and 0.35 for NSSC medium.
3. Supply
U.S. containerboard capacity was about 19.2 million tons in 1973. The industry has an-
nounced plans to expand capacity at the rate of about 3.0% per year (1976-1979). Interestingly,
virgin liner and medium capacity will expand more slowly (2.7% per year) than the recycled
products; this is a reversal of the historical pattern and reflects mounting expansion obstacles for
virgin pulp products.
About 80% of U.S. linerboard production is in the South and the remainder is in the West.
Production of semi-chemical corrugating medium is distributed roughly 60% in the Northeast
and North Central regions, 35% in the South, and 5% in the West (in proportion to the
distribution of the hardwood pulpwood used for this product). Recycled containerboard products
are manufactured near the major population centers.
Although there are about 28 U.S. suppliers of kraft linerboard and NSSC medium, eight of
these account for 57% of total linerboard capacity, while 20 companies share the remaining 43%
(Table III-3). Eight companies account for 46% of total NSSC corrugating medium capacity,
while about 21 companies share the balance (Table III-4). Production of recycled containerboard
products is more fragmented.
The leading containerboard suppliers are large, integrated and financially strong manufac-
turers. Being a low-cost producer is a key to success. This implies that substantial vertical
integration is desirable both backward to the control of pulpwood resources and forward to the
converting of corrugated containers.
15
-------
TABLE III-2
CORRUGATED SHIPPING CONTAINER END USES
(1973)
1
Food
Share of Total Shipments
(Percent)
Meat Products
Canned Fruits & Vegetables
Beverages
Bakery & Confectionary Goods
Fresh Fruits & Vegetables
Dairy Products
Other
Subtotal
Paper, Wood & Allied Products
Glass Products
Chemicals & Allied Products
Electrical/Electronic Equipment
Metal & Fabricated Metal Products
Rubber & Misc. Plastic Products
Textile Products
Furniture & Fixtures
Transportation Equipment
Machinery
Other
Total
27.8
15.3
9.2
6.6
6.4
6.1
4.3
4.0
3.3
2.6
2.4
12.0
100
Basis: Square Footage Shipped
Source: Fibre Box Association
16
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TABLE III-3
CONCENTRATION OF U.S. KRAFT LINERBOARD SUPPLIERS, 1975
of U.S. Total Number of Mills
International Paper 11.7 5
Weyerhaeuser 8.4 3
Georgia Kraft (Mead & Inland Container) 7.8 3
St. Regis 6.9 3
Union Camp 6.8 2 ,
Container Corp. of America 5.6 2
Ownes Illinois 5.0 2
Continental Can 4.8 3
Top eight companies 57.0
Others (about 20 companies) 43.0
Total (about 28 companies) . 100.0
SOURCES: Lockwood's directory of the Paper and Allied Trades, 1975.
Arthur D. Little, Inc., estimates.
17
-------
TABLE III-4
CONCENTRATION OF U.S. NSSC CORRUGATING MEDIUM SUPPLIERS, 1975
Number
of U.S. Total of Mills
Owens Illinois
International Paper
Weyerhaeuser
Container Corp. of America
Menasha
Packaging Corp. of America
Hoerner-Waldorf
Stone
8.9
7.5
6.5
4.9
4.9
4.8
4.6
4.1
2
2
3
2
2
1
2
1
Top eight companies
46.2
Others (about 21 companies)
53.8
TOTAL (29 companies)
100.0
SOURCES: Lockwood's directory of the Paper and Allied Trades, 1975.
Arthur D. Little, Inc., estimates.
18
-------
Industry practice confirms this view. The leading containerboard producers listed in Ta-
bles III-3 and III-4: (1) are integrated to pulp; (2) control a significant portion of the woodlands
that support their pulp mills; and (3) are forward integrated to the production of corrugated
shipping containers. Furthermore, roughly 80% of total corrugated container shipments in 1973
was generated by integrated linerboard suppliers.
Because of the barriers to entry, posed primarily by the vertical integration requirements in
linerboard, the containerboard industry will become more concentrated. New entrants into this
business are unlikely except through the acquisition of existing firms or possibly entry into the
recycled products components business.
4. Prices
Containerboard is a commodity-oriented industry that offers little opportunity for product
differentiation or brand identity. Orders go to the supplier that is most readily available and
offers the lowest price. Thus, selling price is the major marketing tool.
Table III-5 shows the price increases which have occurred between 1971, when average
operating rates were at the 85%-90% level; 1974, when operating rates were at a practical
maximum (about 95%-99% of capacity), and the 1975 recession when operating rates averaged 80-
83%. From 1973 to 1974, prices increased between 34% and 41%, depending on grade. These
significant price increases reflected not only a tight supply/demand situation, but also pass-
through of accumulated cost inflation that producers were unable to pass on when price controls
were in effect. Prices remained firm in 1975 despite low capacity utilization primarily because of
production curtailments to hold inventories in check.
TABLE III-5
CONTAINERBOARD PRICE TRENDS
(Annual Average Contract Prices, $/Ton)
Product 1971 1972 1973 1974 1975
Unbleached Kraft Linerboard ' 112 126 142 180 195
NSSC Corrugating Medium 112 119 136 169 193
Recycled Corrugating Medium 108 116 130 164 185
Container Chip and Filler 115 120 140 185 188
SOURCE: Arthur D. Little, Inc., Industry Survey.
19
-------
5. Import/Export Balance
In addition to meeting domestic consumption, large amounts of linerboard are exported to
foreign markets. About 1.6 million tons of unbleached kraft linerboard (13% of total U.S.
production) were exported in 1973. Domestic linerboard producers are in a favorable export
position because their wood is less costly, and their mills larger and more efficient than those of
producers in the other major producing regions (Canada and Scandinavia). U.S. Exporters ship
from the Pacific Northwest to Asian and Latin American markets and from the South to Western
European and Latin American markets. The economics of production and shipping do not favor
export of other containerboard grades, such as corrugating medium or the recycled products.
Thus, these are not significant export products.
There are no significant imports of containerboard materials. Consequently, this industry
has a favorable impact on the U.S. balance of payments.
6. Price Impacts
The relative long-run price increases estimated for the two container board products studied
(linerboard and NSSC corrugating medium) will be higher than average. These products have a
lower than average unit value and the impact upon NSSC mills is large because of the particular
characteristics of the process.
As shown in Table III-6, the long-run price increase in linerboard due to the studied
regulations will be 10.3%. The existing industry requires a 7.3% price increase to recover the
incremental costs of compliance with the studied regulations.
The long-run price increase in NSSC corrugating medium due to the studied regulations is
15.6',o (Table III-7). This figure, however, is based upon a stand-alone NSSC mill integrated to
pulp and it is unlikely that such a mill would be constructed. The more likely situation is
construction of an NSSC mill at a site with linerboard to minimize effluent control costs. This
15.6% estimate therefore is in the upper range of the likely price impacts.
In sharp contrast, existing NSSC mills will require a 6.1% price increase to recover the
incremental cost of compliance with the studied regulations.
Linerboard and NSSC corrugating medium are bonded together to form cartons. The final
consumer will see price increases in products that are shipped in the corrugated boxes. For
example, the price impact on canned vegetables will be 0.15% of the selling price because of the
combined impact of linerboard and NSSC price increases.
7. Output Effects
The price elasticity of demand was estimated at 0.50 for linerboard and 0.35 for NSSC
corrugating medium. This means that the long-run price increase of 10.3% in linerboard will
result in a 5.2% decline in demand and the 15.6% increase in NSSC price will result in a 5.5%
decline in demand.
20
-------
TABLE III-6
EFFECT OF ENVIRONMENTAL REGULATIONS
Environmental
Regulation
EPA Water
1977
1983
NSPS
Federal Air
SIPS
NSPS
OSHA Noise
Total
11975 Price
2
Baseline Price
ON UNBLEACHED KRAFT PAPERBOARD PRICES
Existing Industry
Investment Necessary
Required Price Increase Long-Run Price Effect
$ Millions $/Ton % 1975 Price $/Ton % Baseline Price"
$373 $5.38 3.0%
258 4.73 2.4
15 8.1%
232 2.41 1.2
2 1.1
50 .69 .04 2 < 1.1
$913 $13.21 7.0% 19 10.3%
$195
$185
New Capacity Differential - 5%
SOURCE: Arthur D. Little, Inc., estimates.
-------
TABLE III-7
EFFECT OF ENVIRONMENTAL REGULATIONS
ON NSSC CORRUGATING MEDIUM PRICES
Environmental
Regulation
Existing Industry
Investment
Required
$ Millions
Necessary
Price Increase
$/Ton
% 1975 PriceJ
Long-Run Price Effect
$/Ton
% Baseline Price
K)
K)
EPA Water
1977
1983
NSPS
Federal Air
SIPS
NSPS
OSHA Noise
Total
$112
108
28
30
$278
$5.00
4.28
1.21
1.26
$11.75
2.6%
2.2
0.6
0.7
6.1%
25
$31
12.6%
1.0
2.0
15.6%
1975 Price $193
Baseline Price $198
New Capacity Differential: 3%
SOURCE: Arthur D. Little, Inc., estimates.
-------
8. Supply/Demand Balance
NSSC corrugating medium will face a tight capacity situation in 1977-78 if demand is
ebullient. Both NSSC and unbleached kraft board face potential tight capacity situations in
1982-93 (Figures III-l and III-2).
Since no mill shutdowns are forecast for this sector, any tight capacity will be the result of
demand growing at a faster rate than capacity expansions and not environmentally-related
pollution closures.
B. PACKAGING PAPERS
1. Product Description
Table III-8 lists the major products that comprise the packaging papers sector and shows
their 1973 shipments. This sector consists of two major categories:
Unbleached kraft paper, which is used primarily for grocery bags and sacks and
shipping sacks (multi-wall bags);
Bleached kraft and relatively minor quantities of bleached and unbleached sulfite
packaging papers (primarily glassine and greaseproof papers), which are utilized
for a variety of specialty wrapping bag and food carton inner-wrap applications.
The unbleached kraft paper sector is characterized by large-volume production in large-
scale mills fully integrated to pulp. Most of the manufacturers produce linerboard and un-
bleached kraft paper in the same mill since both products use the same type of pulp (primarily
unbleached softwood made from southern pine or Douglas fir). Often this dual product mix
encompasses one or more "swing machines" which can be shifted back and forth between the
heavy grades of sack kraft paper and the lightweight grades of linerboard. Market conditions and
prevailing prices for the two products determine the grade mix. Most unbleached kraft paper
producers are forward integrated to converting and in aggregate have about a 50% share of the
multi-wall bag market and a 75% share of the grocery bag and sack market.
Strength is the most sought-after property in unbleached kraft paper. The essential proper-
ties are tearing and bursting strength to fit the product's primary application in bags and sacks.
Bleached kraft and non-kraft packaging papers have much the same applications as un-
bleached kraft papers, but the end uses are highly fragmented and more specialized. Strength is
somewhat less important and visual and printing characteristics much more important than for
unbleached kraft.
Nearly all bleached packaging papers are produced in mills integrated for the most part to
bleached kraft pulp. The main exceptions are glassine, greaseproof, and vegetable parchment
papers which are used as inner linings for food packages (e.g., dry cereal and cake mixes),
specialty bags and a variety of other products. They are produced from various bleached and
unbleached softwood sulfite and kraft pulps, often in nonintegrated mills.
23
-------
FIGURE 111-1
UNBLEACHED KRAFT BOARD
FORECAST OF DEMAND AND CAPACITY UTILIZATION
DEMAND
TONS
DEMANDED*
20000--
18000-
*
(000) 16000-
14000-
12000-
10000-
CAPACITY
UTILIZED
100.0
90.0--
80.0-
70.0--
60.C--
I I II I I _L L I I I
75 76 77 78 79 80 81 82 83
CAPACITY UTILIZATION
J \ 1
Range of
demand Forecast
75 76
*Total U.S. Consumption
78 79 80 81 82 83
High Growth
Medium Grov:
. . .Low Growth
24
-------
7000-
6000-
TON S
DEMANDED*
(000)
5000-
4000-
FIGURE 111-2
NSSC CORRUGATING MEDIUM
FORECAST OF DEMAND AND CAPACITY UTILIZATION
DEMAND
Range of
Demand Forecast
75 76 77 78 79 80 81 82 83
CAPACITY UTILIZATION
CAPACITY 100-°""
UTILIZED
90.0--
80.0
70.0--
60.0--
4
4-
75 76
*Total U.S. Consumption
i i i
High Growth
Medium Growth
Low Growth
77 78 79 80 81 82 83
25
-------
TABLE.111-8
U.S. PACKAGING PAPER SHIPMENTS, 1973 BY MAJOR PRODUCT
Thousand
Tons -
Unbleached Kraft Papers
Wrapping 272 5.2
Bag and Sack (Except Shipping Sack) 2,006 38.2
Shipping Sack 1,026 19.6
Other Converting 715 13.6
Subtotal 4,019 76.6
Bleached Packaging Papers
Wrapping 151 2.9
Bag and Sack (Except Shipping Sack) 254 4.8
Shipping Sack 104 2.0
Other Converting 489 9.3
Subtotal 998 19.0
Glassine, Greaseproof and Vegetable i'archment 230 4.4
TOTAL 5,247 100.0
SOURCE: American Paper Institute, Statistics of Paper and Paperboard, 1975
26
-------
Econometric analysis was employed only for the larger unbleached kraft component of the
packaging papers sector, because it was not possible to obtain an accurate composite of historical
bleached packaging paper prices owing to the many grades included in this sector. However,
Arthur D. Little believes that the elasticity of demand is somewhat higher and cost pass-through
potential somewhat lower than that of unbleached kraft paper.
2. Demand
The growth rate for unbleached kraft and other packaging paper demand is now among the
lowest of all the paper industry product sectors. Persistent substitution of plastic film, partic-
ularly in the grocery bag and multi-wall bag markets and to a lesser extent in shopping bags, has
caused paper demand to remain almost static since 1968. Plastic substitution has been relatively
more severe in the bleached kraft and glassine paper sectors, which cost more than unbleached
kraft and which must compete to a greater degree with the excellent barrier properties and
acceptable graphics of plastic film. From 1964 to 1974, total U.S. consumption of unbleached
kraft paper has grown at the rate of 2.7% per year while demand for all other packaging papers
has grown at the rate of 1.3% per year.
The Arthur D. Little econometric analysis found that unbleached kraft paper demand
correlates most closely with the Gross National Product. This probably reflects the fact that its
primary markets are split between consumer markets (grocery bags) and industrial markets
(multi-wall bags).
Polyethylene film is the primary substitute product for all packaging papers, particularly
those used in grocery and merchandise stores. Its initial penetration was into markets for multi-
wall bags (primarily fertilizers and chemicals). Now polyethylene film has become more of a
complementary product in these markets; it is used in the inner layer of the multi-wall bag to
provide moisture proofing while the paper provides abrasion and impact resistance. Most of the
slow growth in multi-wall bags is now accounted for by a trend toward bulk shipment of fertilizers
and chemicals. Polypropylene film also is used as a substitute for packaging papers but not nearly
to the same extent as polyethylene film.
The substitution of plastic film for packaging papers appears to have abated in 1973 and
1974, primarily because of plastic shortages and rapidly rising prices. Arthur D. Little antici-
pates, however, that large supplies of plastics and their raw materials will be brought on-stream
over the next ten years and these will cause supply unbalances that will reactivate the sub-
stitution effect on packaging papers.
Almost all packaging papers (of all grades) are distributed direct from the manufacturer to
the paper converter. As indicated previously, many of the paper producers are integrated forward
to converting, particularly in the case of multi-wall bags and grocery sacks. Integrated bag and
sack producers account for over 50% of the production and sales of these products.
The price elasticity of demand for unbleached kraft packaging paper calculated by the
econometric methods in this study was 0.9. This was the highest coefficient measured for any
pulp and paper sector. The relatively high value is undoubtedly caused by the substitution effect
from plastics. Arthur D. Little believes that the price elasticity of bleached packaging paper may
be even larger since they are higher priced and thus face greater substitution from plastics.
27
-------
3. Supply
About 94% of U.S. unbleached kraft paper is produced in mills fully integrated to pulp and
usually to timberlands. Surprisingly, in view of the commodity nature of the product, 6% of the
production comes from 16 nonintegrated mills, most of which are very small (less than 50 tons per
day). Usually these are located adjacent to a pulp supplier.
In view of the competitive pressure from both plastic substitutes and large integrated
producers, many of the nonintegrated producers are experiencing a cost/price squeeze and thus
have a relatively high closure potential mainly for economic reasons. These mills were not
included in Arthur D. Little's closure analysis since the EPA has assigned them to the non-
integrated coarse-paper sector where water effluent guidelines have not yet been proposed.
There are 38 integrated unbleached kraft paper mills, of which the seven largest have
capacities exceeding 500 tons/day and account for 47% of the integrated capacity. The median
mill size is around 300 tons/day. Since 1960, there has been a steady increase in average mill size
but little change in the dominance of the integrated mill.
Table III-9 lists the 1974 capacity of the 12 largest producers of unbleached kraft papers.
Together they account for 81% of U.S. capacity while the top six firms account for 53%. All are
vertically integrated from woodlands to the converting and marketing of grocery, multi-wall and
other bags. Thus, this is one of the most highly concentrated as well as most vertically integrated
sectors of the paper industry.
In the other packaging papers product sector, the nonintegrated mills primarily glassine
and parchment have a more significant market share (35%), and the average mill size is far
smaller than in the unbleached kraft sector. This pattern has remained essentially the same since
1960; thus, this market is considerably more fragmented in terms of mill size as well as variety of
product mix.
Table III-10 shows the capacity shares of producers of packaging papers excluding un-
bleached kraft. It indicates that this sector is much less concentrated than the unbleached kraft
papers sector since few companies place any emphasis on this product line and all suppliers
produce these grades as a small part of their total production. In addition, there is a much lower
incidence of complete vertical integration from woodlands to converted product.
Most packaging papers are produced in the South, as is the case with other products made
in integrated kraft pulp mills. The South accounts for 62% of packaging and industrial converting
paper capacity, the West for 15%, the North Central for 12% and the Northeast regions for 11%.
Consistent with the low consumption growth for all packaging papers, capacity is being
expanded at a very low rate. The announced capacity expansion commitments between 1973 and
1977 average only 1% per year for unbleached kraft paper and 0.3% per year for other packaging
papers.
The extremely low growth in consumption, the threat of continued substitution by plastics
and the entrenched position of the major suppliers combine to make entry of new firms difficult if
not unfeasible. Because of its slow growth, the market can be supplied readily by incremental
expansions of existing mills.
28
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TABLE III-9
CONCENTRATION OF U.S. UNBLEACHED KRAFT PAPERS'SUPPLIERS. 1975
Company
International Paper
St. Regis
Union Camp
Continental Can
Crown Zellerbach
Oilman Paper
Longview Fiber
Georgia Pacific
Hudson
Top Eight Companies
Others (about 20 companies)
TOTAL (about 28 companies)
% of U.S.
Total
12.7
12.4
8.3
7.6
6.7
6.2
6.1
4.9
4.5
69.4
30.6
100 . 0
No. of Mills
3
4
1
1
5
1
1
2
1
SOURCES: Lockwood's Directory of the Paper and Allied Trades, 1975.
Arthur D. Little, Inc., estimates.
29
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TABLE 111-10
CONCENTRATION OF U.S. PACKAGING PAPER (EXCLUDING UNBl.:-...~'r;:.-.: KRAFT) SUPPLIERS, 1975
% of U.S.
Total Number of Mills
Crown Zellerbach
St. Regis
International Paper
Scott
Riegel
Weyerhaeuser
Lrovm
Georgia Pacific
Top Eight Companies
Others(about 20 companies)
TOTAL (about 28 companies)
14.5
9.2
6.1
5.2
4.9
4.5
4.0
4.0
52.4
47.6
6
3
2
2
1
2
2
1
100.0
SOURCES: Lockwood's Directory of the Paper and Allied Trades, 1975.
Arthur D. Little, Inc., estimates.
30
-------
4. Prices
Table III-11 shows the significant price increases achieved by the major unbleached kraft
packaging paper grades since January 1973. It indicates that the prices of both the multi-wall and
grocery bag grades have risen 61% mostly since March 1974, when price controls were beginning
to be lifted for the U.S. pulp and paper industry.
Prices for these grades were relatively stable in the 1960's because of a general condition of
excess capacity, intense competition from plastics, and productivity improvements in kraft pulp
and paper. However, as the supply/demand balance tightened in 1973, the producers found that
they could pass on their cost inflation and improve their profit margins by increasing prices.
Published market price composites are not available for the many grades of bleached
packaging papers. Industry contacts, however, indicate that price increases since 1973 have been
higher for the bleached and specialty packaging papers, reflecting larger cost increases for
bleached pulp products.
TABLE III-11
UNBLEACHED KRAFT PAPER PRICE TRENDS
(Annual Average Contract Prices, $/Ton)
Grocery Bag Shipping
and Sack Sack
1971 137 161
1972 158 170
1973 170 184
1974 204 219
1975 240 257
SOURCE: Arthur D. Little, Inc., Industry Survey.
31
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5. Import/Export Balance
There has been continual U.S. trade activity in packaging papers but the tonnages have
been small relative to domestic production. Since 1970, unbleached kraft papers exports varied
from 100,000-185,000 tons (2.6-4.4% of production) while imports grew to a peak of 120,000 tons in
1973 (3.1% of production).
Both imports and exports of packaging papers, other than unbleached kraft, appear to be
rising. In 1973, imports were 90,000 tons (7.3% of production) while exports were 28,000 tons (2.3%
of production).
6. Price Impacts
The long-run price increase for unbleached kraft paper will be higher than average (10.1%)
as a result of the studied environmental regulations (Table ni-12). The existing industry requires
a price increase of 5.9%, which is about the industry average, to cover the incremental cost of
environmental regulations for existing mills.
7. Output Effects
The price elasticity of demand for unbleached kraft paper is higher than that of any other
paper product studied (0.90). As a result, the reduction in quantity demanded due to price
increases caused by environmental regulations is higher than in other product sectors. The long-
run price increase (10.1%) will reduce demand by 9.1% while the price increase necessary to cover
the incremental cost to existing industry (5.9%) will reduce demand by 5.3%.
8. Projected Supply/Demand Balance
Demand for this sector is forecast to grow at an average rate of 2.5% over the period 1976 to
1983 (Figure III-3). Capacity utilization rates are also forecast to be lower than the industry
average throughout the period. As a result, there should be no price pressure from tight capacity
throughout the 1976-1983 period.
C. RECYCLED PAPERBOARD
1. Product Description
As the name implies, recycled paperboard is manufactured from wastepaper rather than
virgin pulp. Generally a variety of commodity wastepaper grades is used, the chief of which are
old corrugated containers, waste newspapers, and mixed wastepaper. Occasionally, small
amounts of virgin fibers are also added.
Table III-13 shows that recycled paperboard's largest application is boxboard. It dominates
the low-cost, commodity end of the boxboard market, but competes strongly with solid bleached
board in the high-value end. (See Section B-7, Bleached Board and Bristols.) The boxboard
grade is usually pigment-coated or sometimes lined with bleached or deinked pulp to improve its
appearance and printing characteristics. A stiffer and heavier grade is used to make set-up boxes
for such items as shoes and hardware; this grade is usually fabricated with a paper outer layer to
enhance its appearance and printability.
32
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TABLE 111-12
EFFECT OF ENVIRONMENTAL REGULATIONS
ON UNBLEACHED KRAFT PAPER PRICES
Environmental
Regulation
Existing Industry
Investment
Required
$ Millions
Necessary
Price Increase
$/Ton
% 1975 Price"
Long-Run Price Effect
$/Ton
% Baseline Price
EPA Water
1977
1983
NSPS
122
90
6.26
4.97
2.6%
2.0
21
7.1%
Federal Air
SIPS
NSPS
76
2.50
1.0
1.0
OSHA Noise
Total
15
$303
.62
$14.35
.3
5.9%
_6
$30
2.0
10.1%
"1975 Price
"Baseline Price
242
297
New Capacity Differential 23%
-------
5000-
4 5 00--
TONS
DEMANDED*
(000)
4000-
3500-
*',
CAPACITY
UTILIZED
/ 100.0
90.0--
80.0- -
70.0-
60.0-- '
FIGURE MI-3
UNBLEACHED KRAFT PAPER
FORECAST OF DEMAND AND CAPACITY UTILIZATION
DEMAND
Range of
Demand Forecast
75 76 77 78 79 80 81 82 83
CAPACITY UTILIZATION
High Growth
Medium Grov;
-- Low Growth
i i i
75 76 77 78 79 80 81 82 83
*Total U.S. Consumption
34
-------
TABLE 111-13
U.S. RECYCLED PAI'ERBOARD PRODUCTION
BY MAJOR GRADES AND USES, 1973
Boxboard
Folding
Set-Up
Sub Total
Thousand Tons
2,522
465
2,987
32.0
5.9
37.9
Containerboard
Corrugating Medium
Linerboard
Chip & Filler Boards
Sub Total
1,129
289
307
1,725
14.3
3.7
3.9
21.9
All Other
Gypsum Wallboard Facings
Tube, Can-& Drum'Stock
Exports
Other
Sub Total
1,050
901
31
1,191
3,173
13.3
11.4
0.4
15.1
40.2
Total
7,885
100.0
SOURCE: API Statistics of Paper and Paperboard, 1975.
35
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Recycled paperboard is much less important in the containerboard market, where it com-
petes with two well entrenched virgin pulp products: NSSC corrugating medium, and unbleached
kraft linerboard. (See Section B-l, Containerboard.) The chip and filler board (container liners)
component of this market, however, is held almost entirely by recycled paperboard.
The next most important application is gypsum wallboard facings, which is the liner
material used to make gypsum wallboard. In this application, recycled paperboard faces no direct
competition, but gypsum wallboard competes with a variety of interior wall panelling materials.
Tube, can, and drum stock is a still smaller application. It consists of paperboard that is
wound into spiral cans that range from small orange juice cans to large drums for commodities
such as chemicals. Unbleached kraft paper and paperboard compete strongly in this market.
Recycled paperboard also has a variety of other uses such as cardboard and specialty products;
production statistics on these are not reported separately by either the API or the Department of
Commerce.
2. Demand
Recycled paperboard draws its demand from a broad cross-section of the U.S. economy.
About 70% comes from packaging applications in the form of boxes, corrugated containers, and
spiral-wound cans and drums. These packages are used principally in packaging food (primarily
dried foods), durable goods and chemical commodities. Recycled paperboard's use in gypsum
wallboard facings accounts for 11% of its demand and makes it somewhat sensitive to fluctuations
in the construction market. With this fairly broad-based demand, it is not surprising that the
macroeconomic variable which correlates most closely with historic recycled paperboard demand
is the industrial production index.
Substitution by other paper industry products (greater than in any other product sector) has
been a key reason for recycled paperboard's slow growth. Solid bleached board made major
penetrations into the folding cartons used in food applications (particularly wet foods) and in
high-margin nonfood applications such as drugs, cosmetics, and toys. Bleached board displaced
recycled paperboard in these applications because the buyers place a premium on cleanliness,
aesthetics, or favorable strength/weight relationship. Recycled paperboard still dominates in
applications where an inner liner is used (e.g., cereals or crackers) and where low cost is a key
criterion for the carton stock (e.g., in soap, detergents, and paper goods).
Recycled paperboard was the original linerboard material in corrugated containers, but now
it has been displaced almost completely by unbleached kraft linerboard. This displacement
might slow or even stop, in light of kraft linerboard's slow capacity expansion, which foreshadows
large future price increases. Corrugating medium has been one of recycled paperboard's fastest
growing markets, but even here the competing NSSC corrugating medium has enjoyed a more
rapid growth and increased market share. Little substitution is occurring in chip and filler board.
However, container users are learning to use less of this material by doing without partitioning
and by using the packaged products to contribute to the structural support of the container.
Gypsum wallboard (which is made exclusively with a recycled paperboard liner material) is
a well-entrenched construction product used for both new construction and remodelling. As a
result, its demand does not fluctuate as sharply as the building cycle. It does face substitution by
other wall panelling materials, but this has been relatively minor thus far.
36
-------
Plastics have not had an important substitution impact in the major markets for recycled
paperboard. However, plastics are often used in conjunction with recycled paperboard in blister
or bubble packaging of products such as toys and hardware parts which are mounted on a printed
piece of paperboard. This approach effectively reduces the paperboard required to package the
product. The net result of displacement by competing products plus the relatively slow growth of
its major markets is that total demand for recycled paperboard has not grown since the early
1960's. Its annual rate of growth as averaged -0.6% from 1964 to 1974 and 0.8% from 1969 to 1974.
The price elasticity of demand measured in the Arthur D. Little econometric analysis was 0.46,
which is close to the average for all pulp and paper products.
3. Supply
In 1974, U.S. capacity for recycled paperboard stood at 8.7 million tons. Regionally, this
capacity is distributed fairly evenly in proportion to the country's population distribution. This
reflects the fact that wastepaper, the principal raw material, is most economically obtained from
the major metropolitan areas.
Table III-14 shows that recycled paperboard is one of the least concentrated sectors in the
paper industry. The top 16 companies account for just over 50% of total U.S. capacity, but more
than 100 companies have significant capacity in this product line. Note, however, that there is
considerable product specialization particularly in boxboard, containerboard, and gypsum wall-
board facings.
Vertical integration is most pronounced in gypsum wallboard facings followed by boxboard
and containerboard. All gypsum wallboard producers make their own wallboard facings; there is
only one significant independent supplier of this material. About 50% of the folding boxboard
capacity is forward integrated to folding carton production. There is also substantial forward
integration by the recycled corrugating medium producers. Many of the smaller corrugated
container converters have integrated backward to recycled corrugating medium, since this was
their least-cost method of integrating back to one of their major raw materials.
4. Prices
Recycled paperboard prices, as did prices of most paper and paperboard products, moved
strongly upward after the 1970 recession, and especially after price controls were removed in mid-
1974 (Table 111-15). Between 1971 and 1975, clay coated boxboard registered the largest gain
(88%) in this sector, followed by corrugating medium (71%), gypsum linerboard (68%), and
container chip and filler (63%). Prior to 1971, these product prices were essentially stable in
current dollars but declined in constant dollars.
Gypsum linerboard was the only product whose contract price declined during the 1975
recession. However, this may be misleading since the major wallboard producers are all vertically
integrated, leaving a very thin market for arm's-length sales. Prices of the other major grades of
recycled paperboard held up throughout 1975, reflecting the general pattern of price stability for
the rest of the paper industry.
37
-------
TABLE II1-14
CONCENTRATION OF U.S. RECYCLED PAPERBOARD SUPPLIERS, 1975
% of U.S. Number of
Total Mills
CCA 6.9 10
Whippany 6.9 5
Sonoco 5.4 10
U.S. Gypsum 4.1 7
PCA 4.1 5
Federal Paperboard 3.9 8
National Gypsum 3.6 5
Newark Boxboard _ 3.3_ _JL.
Top Eight Companies 38.2
Others (about 93 companies) 61.8
TOTAL (about 101 companies) 100.0
SOURCES: Lockwood's Directory of the Paper and Allied Trades, 1975.
Arthur D. Little, Inc., estimates.
5. Import/Export Balance
Wastepaper is plentiful and cheap in most of the world's industrialized regions. This factor,
coupled with widespread imposition of import duties to protect domestic recycled paperboard
industries, effectively keeps imports and exports to a minimum. In 1973, U.S. imports of recycled
paperboard were 27,000 tons (0.4% of consumption), and exports were 207,000 tons (2.6% of
production). Most of the exports were to South America and Japan where the wastepaper
supplies are relatively tight.
6. Price Effects
Table III-16 shows the price impacts, investment and annualized cost for recycled
paperboard mills compliance with the studied environmental controls. The price effects for this
sector are low to moderate, with a long-run price impact of 5.8% compared to 7.8% for the
industry aggregate. The existing industry must have a 4.0% price increase to cover incremental
compliance costs. As expected, the 1977 water regulations and NSPS water regulations will
account for the major portion (75%) of the projected total price increase. This sector is not
required to meet any New Source Performance Standards for air quality. SIP air control costs are
required for both new sources and existing mills for power boiler emissions. However, SIP costs
account for only 20% of the sector's environmental cost increases through 1983.
38
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TABLE 111-15
RECYCLED PAPERBOARD PRICE TRENDS
(Annual Average Contract Prices $/Ton)
1971 1972 1973 1974 1975
Clay Coated Boxboard 144 150 180 260 270
Gypsum Linerboard 94 97 111 168 158
Recycled Corrugating Medium 108 111 130 164 185
Container Chip and Filler 115 120 140 185 188
SOURCE: Arthur D. Little, Inc., Industry Survey.
The effect of the projected price increase on consumer prices is likely to be small. Most
recycled paper board is made into boxes used to package relatively high-value products. Average
paperboard values run 2-5% of the cost of the packaged product. Therefore, the environmentally
related paperboard price increases (4-6%) would increase packaged product prices only 0.1-0.3%.
7. Output Effects
Price increases from environmental regulations will reduce demand l%-2.4%. Long-run
price increases required will reduce demand at the higher end of this range.
8. Projected Supply/Demand Balance
Estimated mill closures or slower rates of capacity expansion resulting from water pollution
regulations will not create a tight supply situation through 1983, because the forecast capacity
utilization rate does not exceed 90% throughout the period (Figure III-4). This conclusion does
not change at the upper and lower bounds of the demand and capacity projections.
39
-------
TABLE 111-16
EFFECT OF ENVIRONMENTAL REGULATIONS ON RECYCLED BOXBOARD PRICES
Existing Industry
Investment
Environmental Required
Regulation $ Millions
EPA Water
1977 $187
.1.983 54
NSPS
Federal Air
SIPS 34
NSPS
OSHA Noise . 55
Total $330
11975 Price
2
Hr.seline Price
3
Wou C.anai-ifv Differential
Necessary Long-Run Price Effect
Price Increase . Recycled Boxboard Gypsum Linerboard
$/Ton % 1975 Price $/Ton % Baseline Price $/Ton % Baseline Price
$5.08 ' 2.4%
1.61 0.7
$12 4.6 $13 5.9%
1.89 0.6 1 0.4 1 0.5
1.28 2 0.8 2 0.9
$8.86 4.0% $15 . 5.8 $16 7.3%
$215 $270 $158
$260 219
- 4% 38%
Corrugating Medium
$/Ton % Baseline Pric.
$13 6.9%
1 0.5
2 1.1
$16 8.5%
$185
188
2%
SOURCE: Arthur D. Little, Inc., estimates.
-------
10,000 -
8,000 -
TONS
DEMANDED*
(000)
6,000 -
FIGURE 111-4
RECYCLED PAPERBOARD
FORECAST OF DEMAND AND CAPACITY UTILIZATION
DEMAND
75 76 77 78 79 80 81 . 82 83
CAPACITY
UTILIZED
100.0-
90.0-
80.0-
70. fl-
. 0-
CAPACITY UTILIZATION
75 76
*Total U.S. Consumption
77 78 79 80 81 82 83
High growth
Medium grow;
Low growth
41
-------
D. CONSTRUCTION PAPER
1. Product Description
Construction paper is a component of SIC 2661 (Building Paper and Building Board Mills).
The Department of Commerce also includes hardboard and insulation board in this industry
subcategory, but for effluent guideline purposes, the EPA has considered the latter products
under the wood products industry because of their relatively low-effluent loadings and close
market relationship with wood products.
Construction paper comprises sheathing papers, felts (roofing, floor covering, automotive
sound deadening, industrial, pipe covering and refrigerator), asbestos and asbestos-filled paper,
and flexible wood-fiber installation. Except for asbestos paper, these materials are usually made
primarily from wastepaper. Almost all forms of construction paper are converted at the mill site
to the end product, e.g., shingles, which is then sold to the construction trade.
Gypsum linerboard, the facing material for gypsum wallboard, is included in the recycled
paperboard sector, since it is a paperboard product made entirely from wastepaper. The only
other significant paper-based products employed in construction are overlay and print sheets
used for decorative wall panels; these papers are included in the specialty paper sector.
2. Demand
Like all building materials, the demand for construction paper subdivides into new con-
struction and replacement (or remodelling) components. The replacement market is a large
component because roofing shingles, which require relatively frequent replacement, are the
largest end use. Also, floor underlayment and sheathing papers are required for many remodelling
projects. Thus, the construction paper market does not experience as severe year-to-year fluctua-
tions in demand as do most other commodity construction materials. Construction paper demand
grew at a fairly steady average rate of 1.8% per year between 1964 and 1974, with only a modest
drop in consumption during the construction industry recession in 1973 and 1974.
There are no significant direct product substitutes for construction paper. However, shifts in
other construction materials use, such as the substitution of wooden floors by vinyl tile and wall-
to-wall carpeting, have reduced the consumption of underlayment paper.
Almost all construction paper is transferred internally since it is typically consumed cap-
tive ly by manufacturers of building material end products. The final product is then distributed
by regular construction industry wholesale and retail channels.
3. Supply
Table III-17 shows that the capacity distribution of the major construction paper producers
is highly concentrated among five companies. Like all of the construction paper producers, the
top five are integrated forward to the conversion of final products. This market share advantage
generally stems from a national network of mills coupled with multi-product distribution to the
construction industry.
Construction paper mills are generally near major metropolitan areas, which produce both
their source of wastepaper raw materials and their major markets. Furthermore, most of these
mills have access to municipal effluent treatment systems, which allows them to avoid spending
42
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TABLE 111-17
CONCENTRATION OF U.S. CONSTRUCTION PAPER SUPPLIERS, 1975
% of U.S.
Company - Total Number of Mills
GAF 17.6 8
Celotex 15.4 10
Lloyd Fry Roofing 14.7 13
Certain - Teed 10.0 7
Bird & Son 9.7 4
Johns - Manville 5.1 3
Flintkote 4.4 2
Congoleum 4.1 1
Top Eight Companies 81.0
Others (about 15 companies) 19.0
TOTAL (about 23 companies) 100.0
SOURCE: Lockwood's Directory of the Paper and Allied Trades, 1975.
Arthur D. Little, Inc., estimates.
43
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capital for their own inefficient-sized water treatment plants. Not surprisingly, therefore, con-
struction paper production is roughly proportional to the country's population distribution with
34% in the North Central region, 29% in the South, 26% in the Northeast and 10% in the West.
Since vertical integration from paper to conversion and wholesale distribution is the domi-
nant company structure, it also would be highly risky for an independent supplier of paper alone
to enter. Given the product's growth rate of 1-2% per year, most future capacity expansion is
likely to come from incremental expansion of existing mills.
Costs for incremental additions or even for new mills are relatively low by paper industry
standards so the required investment does not pose a difficult entry barrier. Nor does fiber
resource control pose a significant barrier at this time since the required wastepaper raw material
is still plentiful near most metropolitan areas.
4. Prices
Most construction paper is, as previously mentioned, captively produced by the manufac-
ture of the final product. Therefore, it is difficult to develop an accurate historical trend in selling
prices for the paper. Although the retail prices of the final products can be ascertained, they do
not necessarily reflect trends in the cost of the intermediate materials. The difficulty of compiling
an accurate historical trend for construction paper prices was the principal reason for omitting an
econometric analysis for this sector.
In view of the vertically-integrated and oligopolistic characteristics of the construction
paper market, the product's value or transfer price of the paper probably has been more stable
than that of most other paper industry products. Therefore, its price probably increased less than
that of the average paper industry product between 1971 and 1975.
5. Import/Export Balance
Construction paper imports and exports traditionally have been relatively small. In 1974, a
peak year, imports were 60,000 tons (3% of consumption), while exports were 26,000 tons (1.4% of
production). Standardized production techniques and use of a wastepaper furnish tends to
eliminate any relative cost/quality advantages for both importers and exporters. There is no
reason to expect that this pattern of minimal trade will change through 1983.
6. Price Impacts
Long-run price impacts were not estimated for construction paper nor was an econometric
supply/demand model employed. The price increase necessary for the existing industry to recover
the incremental cost of the studied environmental regulations was estimated at 3.7%; the
breakdown of this price is shown in Table 111-18. The necessary price increase is less than the
industry average, principally because most mills use municipal treatment systems.
E. MARKET PULP
1. Product Description
Market pulp (i.e., pulp that is sold rather than used internally by the producer) consists
primarily of dissolving pulp and bleached paper pulps both of which are made from the sulfite
and kraft processes. Market sales of the unbleached chemical pulps, groundwood pulp, and
44
-------
TABLE III-18
EFFECT OF ENVIRONMENTAL REGULATIONS ON CONSTRUCTION PAPER PRICES
Existing Industry
Environmental
Regulation
EPA Water
1977
1983
NSPS
Investment
Required
$ Millions
$34
24
Necessary
Price Increase .
$/Ton % 1975 Price
3.50 1.4%
2.51 1.0
Federal Air
SIPS
NSPS
.91
.04
OSHA Noise
Total
23
$90
2.21
$9.04
.09
3.7%
L1975. Price » $246
SOURCE: Arthur D. Little, Inc., estimates.
deinked waste pa per are relatively small. Dissolving and special alpha pulps consist of highly
refined bleached pulps with a high content of alpha or pure cellulose fibers. These pulps are used
primarily as the raw material for rayon and acetate fibers, cellophane, and a variety of cellulose
chemicals and specialty papers. Both dissolving and paper pulps are freely traded throughout the
world; thus, the U.S. market is highly sensitive to world market conditions.
The chief quality characteristics looked for in dissolving pulp are that it be extremely free
from dirt and other impurities and have an alpha cellulose content appropriate for the end-use
applications. Thus, different grades are supplied for acetate, rayon, cellophane, specialty papers,
and cellulosic chemicals. Quality consistency is extremely important; thus, a long period of
product testing is normally required before a customer will shift to a new dissolving pulp supplier.
45
-------
The bleached and semibleached grades of kraft and sulfite pulp currently constitute about
86% of the total pulp purchased by U.S. mills that are not integrated or only partially integrated
to on-site pulp production. The primary products produced by such mills are printing and writing
papers, sanitary tissue and related papers, mainly of a specialty nature. Part of the supply of
bleached papermaking pulps is produced by dissolving pulp mills, all but two of which, in the
United States, currently produce both dissolving and paper grade pulps. The paper grade pulp
mills, however, are not able to produce dissolving pulp without substantial reinvestment.
The chief function of the paper grade pulps is to provide a white surface and sufficient
strength to make the product usable. In both printing and tissue papers, a blend of hardwood and
softwood pulps is used, sometimes in conjunction with groundwood pulp, to provide the desired
properties of surface smoothness, opacity, softness, and strength. The short hardwood fibers are
used to provide a smooth printing surface and opacity while the long-fiber softwood pulps are
used to provide most of the required strength. Distinctions are also made between the coarse fiber
softwood pulps derived from southern pine and Douglas fir and the generally more highly sought
after softwood pulp derived from northern spruce. Generally a premium price is paid for the
northern pulp except when the supply/demand balance is extremely tight. Southern hardwood
pulp also has a somewhat lower utility than northern hardwood pulp in the eyes of many
customers because it often contains a larger proportion of oak fibers, which cause problems in
papermaking.
2. Demand
Dissolving Pulp
Table 111-19 shows estimates of 1973 world dissolving pulp consumption (excluding Com-
munist countries). This indicates the dominant share of demand held by rayon and acetate fibers.
These fibers accounted for about 70% of consumption in 1973. The remaining 30% was made up of
a variety of relatively small applications. Because there are few producers of rayon and acetate
fibers, cellophane and cellulosic fibers and also relatively few suppliers of dissolving pulp, this
market probably comes closest to being a bilateral oligopoly of any pulp and paper industry
sector.
From 1960 through 1973, U.S. consumption of dissolving pulp grew at an apparent average
rate of 1% per year. However, examination of the trend shows that U.S. consumption peaked in
1968 and by 1973 had declined by a total of 13%. World demand appears to have peaked in 1970
but is declining at a slower rate than U.S. demand. Thus, dissolving pulp represents a product
that appears to have reached full maturity and is now declining.
The primary reasons for this trend are the static total demand for rayon and declining
demand for acetate fibers and cellophane, while other dissolving pulp applications are growing
only slowly. Rayon and acetate fibers are facing intense competition, particularly from polyester
fibers, and cellophane is being replaced by plastic packaging films. However, there are no direct
substitutes to displace dissolving pulp itself in any of its major applications. The econometric
analysis in this study calculated a low price elasticity of demand of 0.49 in the United States
market.
46
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TABLE I11-19
FREE WORLD DISSOLVING PULP DEMAND BY MAJOR APPLICATION, 1973
Dissolving
Application Pulp Used % of Total
(000 metric tons)
Rayon
Staple and Tow 1,750 . 44.1
Regular & H.T. Filament 590 14.8
SUBTOTAL 2,340 59.9
Acetate and Triacetate
Filament, Staple & Tow 380 9.6
Cellophane 510 12.8
Special Industrial Papers 380 9.6
Cellulosic Chemicals, etc. 360 _ 9.1
TOTAL 3,970 100.0
SOURCE: Arthur D. Little, Inc., estimates.
Bleached Market Pulp
Table 111-20 shows estimates of the approximate U.S. end-use subdivision for bleached
market pulp in 1973. It indicates the importance of the printing/writing paper and tissue paper
markets, which together constitute about 80% of the demand. In 1973, bleached market pulp
amounted to 21% of the total bleached pulp consumed in the United States, the balance being
consumed by integrated mills.
47
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TABLE III-20
U.S. CONSUMPTION OF BLEACHED MARKET PULP, 1973
Consumption
Application
Thousand.Tons
Percent of Total
Printing/Writing Papers
Tissue
Other Paper Products
2,000
1,200
300
51
31
Fluffing Pulp
400
10
3,900
100
SOURCE: Arthur D. Little, Inc., estimates.
The total U.S. consumption of bleached market pulp has grown at^a very steady rate of
nearly 6% per year since 1960 with only a slight reduction in the growth rate during the five years
prior to 1973. Underlying this trend were: 1) the demand for printing/writing and tissue papers,
which grew faster than the industry average, and 2) the low and stable pulp prices, which
permitted nonintegrated producers to maintain their cost competitiveness.
Since 1968, there has been a modest tapering off of the growth rate in printing/writing paper
(more pronounced in tissue paper), but this has been compensated for in part by the extremely
rapid growth in fluffing pulp, which is used for disposable diapers and bed pads. Thus, bleached
market pulp is still one of the fastest growing areas in the pulp and paper industry. However, the
tight supply of bleached pulp and the extremely rapid price increases in 1973 and 1974 created a
cost squeeze for the nonintegrated mills which still persisted through 1976, causing them to lose
market share. This development could well cause slower growth in market pulp demand. How-
ever, the econometric analysis in this study indicates that the historic price is relatively inelastic.
48
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No other materials offer any significant direct competitive threat to bleached paper pulp.
Pulp substitute materials derived from plastics have been developed but these are several times
more expensive than wood pulp even at the new pulp price levels. The synthetic wood pulps are
being experimented with as blending pulps primarily to provide high-strength properties in
specialty applications which either require high-strength, water resistance, or a combination of
both.
While total demand for bleached market pulp has grown at a fairly steady rate, there has
been a dramatic shift in consumption from the sulfite to the kraft grades. Between 1960 and 1973,
for example, sales of bleached sulfite pulp dropped in half while that of the bleached and
semibleached kraft grades tripled. This shift has been caused mainly by the fact that bleached
sulfite pulp capacity has remained static (as a result of pollution-related closures and few
expansions) and increasing amounts have been diverted to captive use. Thus, the rapid shift does
not represent an overwhelming preference for kraft pulp.
The softwood grade of kraft pulp offers superior strength properties in comparison with
softwood sulfite. In balanced supply/demand markets, a price discount of $5-15/ton for sulfite
pulp reflects this disadvantage. However, sulfite does offer superior softness and somewhat better
opacity and thus is still desirable in certain tissue paper and writing paper grades. Hardwood
kraft pulp comes close to sulfite's strength and opacity properties, but sells at a lower price. Still
sulfite's main difficulty appears to be the uncertainty of how long its supply will be maintained in
light of current state and Federal water effluent regulations.
3. Supply
Canada is the main source of supply for bleached market pulp consumed in the United
States. Canadian imports account for 53% of the bleached market paper pulps consumed in the
United States. However, it supplies only about 12% of the dissolving pulp consumed in the
United States.
Because their locations are relatively remote and because pulp can be exported duty-free
while most paper products cannot, most of the Canadian pulp mills specialize in market pulp
rather than integrating to on-site paper production. From 1960 through 1972, Canadian pulp
producers expanded their capacity very rapidly and operated well below capacity while providing
increasing amounts of pulp to the U.S. and other world markets. In 1973 and 1974, however, the
Canadians operated near full capacity except during mill and railroad strikes. Canadian expan-
sion commitments indicate that capacity will increase more slowly through 1980.
The U.S. domestic supply of bleached market pulp comes from two sources. One is the mills
that specialize in producing market pulp; these, however, produce primarily dissolving pulp and
thus, have only a small share of the paper pulp market. The largest portion of the bleached
market-pulp supply comes from mills that are integrated to paper and paperboard. Often, during
an expansion program, the pulp mill is built larger than the paper or paperboard mill to take
advantage of economies of scale; the company then sells market pulp until it expands its paper
mill to equal the pulp mill capacity. Thus, there is a continual shifting in and out of the bleached
paper pulp market as companies become more or less integrated to pulp.
The problem of changing degrees of forward integration is not present with dissolving pulp
in that all the North American mills are dedicated to this product or to a combination of this
49
-------
product and bleached paper pulp. However, one U.S. dissolving pulp mill is partially owned by
companies that produce rayon fiber and thus is integrated forward to rayon operations not located
at the pulp mill.
j
Table 111-21 shows the shares of North American capacity for dissolving pulp and bleached
paper grade pulp held by the the major producers. It indicates that the dissolving pulp capacity is
especially concentrated. Bleached paper grade pulp is not dominated by one producer as is
dissolving pulp with the top four firms accounting for 32% of the market.
4. Prices
The substantial world trade in bleached papermaking pulps causes prices for these com-
modities to follow changes in the total world ratio between production and capacity more closely
than the operating ratio within a given country. Moreover, pulp prices tend to lead rather than
follow paper prices. Historically, when the ratio of total world production to total capacity moves
up to around 92%, as it did in 1974, market pulp prices rise strongly and suppliers' profit margins
increase. When world demand falls to 90-92% of world supply, profit margins tend to stabilize.
(That is, prices increase only if costs of the most efficient suppliers increase.) Finally, when world
operating rates drop below 90%, margins, and often prices, tend to erode.
The econometric analysis in this study found reasonably good correlations between U.S.
bleached pulp supply/demand relationships and price and employed this data because it was
more current and available in more detail than world data. Figure III-5 plots these U.S. capacity
utilization and price data since 1965.
Dissolving pulp prices are much less sensitive to changes in capacity utilization and have
fluctuated more gradually than paper pulp prices. With relatively few buyers and sellers,
purchase contracts traditionally have included price protection clauses and are of longer duration
than the typical paper grade pulp contract. This price change smoothing and muted response is
demonstrated in Figure III-6, which plots U.S. capacity utilization versus price since 1963.
Paper grade pulp prices dropped to about their lowest levels of the last decade in 1971, when
world average pulp mill operating rates were around 89% of capacity and North America, Europe
and Japan were in a business recession. There were modest price increases of $5-15 per short ton
in 1972, as the economy and operating rates began to improve. Then in 1973 and 1974, prices
increased at unprecedented rates as operating rates reached maximum levels. In North America,
for example, average contract prices for bleached softwood kraft pulp increased 100% (by
$160/ton) between the third quarters of 1972 and 1974, and those for bleached hardwood kraft
pulp, 165% (by $200/ton). Dissolving pulp prices rose about 87% from 1972 to January 1975
starting from a higher base of about $220/ton. Spot prices for relatively small orders throughout
the world were considerably above contract prices in 1973 and 1974 but these differentials were
removed as the market weakened in the second half of 1974. These increases allowed the
producers to cover the accumulated cost inflation they had been unable to pass on in weak
markets or under price controls, and brought their 1974 profits to a record high level.
The lack of price responsiveness to changes in historical operating rates was caused primar-
ily by two factors. First, in the 1960's the producers were able to hold their costs down because
inflation rates were low and they were able to improve productivity steadily by enlarging and
modernizing their mills. Second, the Canadian bleached pulp industry was expanding its capac-
ity at about 20%/year and this influx kept prices low despite fluctuations in U.S. operating rates.
50
-------
TABLE III-21
CONCENTRATION OF NORTH AMERICAN MARKET.PULP SUPFLf.LRS, 1975
% of Total North America Number
Company Dissolving Pulp Bleached Paper Pulp of Mills
ITT Rayonier 44 4.3 7
International Paper 14 5.9 6
Procter & Gamble 10 (not in top 8) 1
Ketchikan Pulp 9 - 1
Alaska Lumber 9 - 1
Canadian Cellulose 8 6.7 2
Weyerhaeuser 4 11.3 5
Tembec Forest Products 2 (not in top 8) 1
Total (Dissolving Pulp) 100
Parsons & Whittemore 7.0 2
B. C. Forest Products 5.7 2
MacMillan Bloedel 5.3 1
Georgia Pacific 4.3 2
Top Eight Companies 50.5
Other Suppliers (about 17 companies) 49.5
TOTAL (Paper Pulp) 100.0
Mill closed September 1977.
SOURCE: Lockwood's Directory of the Paper and Allied Trades.
Arthur D. Little, Inc., estimates.
51
-------
FIGURE 111-5
BLEACHED PAPER PULP MARKET PRICE
VERSUS CAPACITY UTILIZATION
;$/ton)
400
300
200
100
4
-H-
41'
i~t
- r-t
W
-
/-T\
7?
ipacit
.Ht.il
.^at.ipp51
_f-»._,..
4-J-r+
Constant Dollar Price - -
J5.H61
Lars)
f-f-*
.^
./_.
±
1965 1966 1967 1968 1969 1970 1971 1972 1973 19
*Capacity Utilization calculated from Total Bleached Sulfite and Kraft
Production and Capacity.
52
-------
FIGURE 111-6
DISSOLVING PULP MARKET PRICE
VERSUS U.S. CAPACITY UTILIZATION
U.S. Capacity
'' Utilization
: Current Dollar Price I
"onstantCollar Price
1.0
0.9
0.8
1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 197A
53
-------
5. Import/Export Balance
The United States is a net exporter of dissolving pulps and a net importer of bleached paper
grade pulps. In 1974, the United States imported 226,600 tons and exported 788,200 tons of
dissolving pulp. In that same year, it imported 3.1 million tons and exported 1.5 million tons of
bleached paper grade pulp. Bleached paper pulp thus ranks second to newsprint in import
volume and second to kraft linerboard in export volume.
The trend in exports has been down from a high point reached in 1970. Imports have
increased modestly from a previous high in 1969. Tariffs are seldom levied on pulp, thus
facilitating large-scale international trade.
The U.S. pulp export position has been based largely upon its comparatively low-cost
pulpwood and large mills. On the other hand, Canadian wood costs, on average, have been higher
than those of southern U.S. mills, but they have equally large mills with greater specialization in
the market pulp; this accounts for their large export volume to the United States. Thus, nearly all
of the pulp imports come from Canada, the world's largest producer of market pulp. U.S. exports
are largely to Western Europe, South America, and Japan.
6. Price Impacts
As mentioned previously, the demand for dissolving pulp is gradually declining. As a result,
no new dissolving pulp mills will be built in the United States. The ability of existing mills to
recover the incremental costs of compliance with the studied regulations will depend upon
market conditions. The existing industry requires a 6.5% price increase to recover environmental
costs (Table IH-22).
Few new mills will be built that are not integrated back to bleached paper pulp. The long-
run price effects for the consuming product sectors (primarily printing/writing paper and tissue)
incorporate the costs of environmental regulations on bleached pulp.
7. Output Effects
The price elasticity of demand estimated for dissolving pulp is 0.63. If existing mills are able
to increase prices by the 6.5% necessary to recover incremental control costs, demand will decline
by 4.1%.
8. Supply/Demand Balance
The dissolving pulp sector is not growing. Capacity utilization rates will be moderate to low
unless a major mill closes down. In the latter case, some short-term price pressure could result.
Over half of the bleached pulp sold in the United States is imported from Canada, the
world's largest producer. Bleached market pulp is a residual product since most domestic paper
producers sell what they can after meeting their own papermaking requirements. If capacity is
tight in the United States tissue and printing/writing paper sectors, the supply of bleached
market pulp is also likely to be tight.
54
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TABLE 111-22
EFFECT OF ENVIRONMENTAL REGULATIONS ON DISSOLVING PULP PRICES
Environmental Regulation
EPA WATER
1977
1983
NSPS
FEDERAL AIR
SIPS
NSPS
OSHA NOISE
TOTAL
Existing Industry
Investment Required Necessary Price Increase.,
$/Millions
102
52.
22
$/Ton % 1975 Price
13.28
9.69
1.86
185
.58
26.01
3.5%
2.4
0.5
0.1
1975 Price $398
SOURCE: Arthur D. Little, Inc., estimates.
-------
F. PRINTING, WRITING AND RELATED PAPERS
1. Product Description
The printing, writing, and related papers sector consists of four product groupings: coated
printing and converting paper, uncoated book paper, writing paper, and related papers. Industry
statistics also include bleached bristols in this sector, but since these are produced in bleached
paperboard mills, this analysis includes them within the bleached board sector. All of the
printing/writing papers employ bleached pulp and are used primarily for printing, publishing,
stationery, and a variety of paper converting applications.
The commodity grades generally are sold by the producer directly to large customers; both
commodity and specialty grades are distributed through paper merchants or other wholesalers to
small printers, publishers, and paper converters. The paper is usually finished by the paper mill
into rolls or sheets ready for final use by the printer or converter.
2. Demand
Printing and writing papers are used in a variety of applications; hence, consumption is
influenced by a number of demand patterns. Coated printing paper, particularly the publication
grade, is influenced not only by the business cycle effect on advertising expenditures but also
upon the share of the advertising market that magazines are able to maintain in competition with
direct mail, newspapers, television, and radio. The rapid increases in postal costs incurred by the
magazine industry have caused a substantial reduction in the weight of publication paper over
the past ten years in order to reduce magazine weight and distribution costs. Hence, measuring
consumption on the basis of tons of paper consumed understates the growth in surface area and
dollar value.
Book printing growth primarily affects the growth of uncoated book, offset paper and coated
paper that employs a nongroundwood base sheet. The large schoolbook segment of this market is
heavily influenced by Federal and state aid to education programs while demand in the trade
book segment is influenced heavily by shifts in disposable personal income and educational levels
of the population.
The general commercial printing sector of the market consumes the whole spectrum of the
printing paper grades for a wide variety of applications including direct mail advertising,
brochures, catalogs, circulars, flyers, and financial documents. This diversity of end uses causes
consumption to correlate well with the GNP. Label and wrap printing, which is a specialized
component of the commercial printing industry, also has a consumption pattern that follows the
GNP. This sector consumes primarily paper coated on one side only.
One of the largest components of the writing paper grade category is register bond or forms
bond used for a variety of business forms. As a result, consumption in this end use fluctuates
closely with the industrial production index. Other major writing paper applications include
business stationery, copy machine paper, and personal stationery. The combined demand for
these applications also correlates with GNP.
U.S. consumption of all printing and writing paper grades grew at the rate of 5.5% per year
between 1960 and 1968, and 5.2% per year between 1968 and 1973, on a tonnage basis. Within this
grade spectrum, forms bond grew at about 10% per year while the growth of coated one-side label
and paper has been about 2% per year.
56
-------
There has been some experimentation with plastic printing papers, but these products have
found only relatively small market niches in applications which require high tear strength and
water resistance. Examples are certain types of maps and book covers and children's books. Thus,
plastic printing papers have not threatened the large-volume applications for wood fiber papers
primarily because they are considerably more expensive on both a tonnage and surface area basis.
There has been considerable competition among the various grades of printing papers for
certain applications. In magazine printing, for example, coated papers have virtually displaced
uncoated groundwood papers, which once held this entire market. More recently, carbonless copy
papers have been displacing forms bond and carbon paper in business forms. Obviously, these
shifts created advantages for certain suppliers but they generally do not affect the overall demand
for paper in a given application outside of possibly causing a change in the weight of paper used.
Only the coated/uncoated groundwood substitution had a significant effect on demand for two
product sectors.
Price elasticity of demand for printing/writing papers is among the lowest of the industry's
product sectors according to this study's econometric analyses. It indicates a coefficient of 0.26.
This is not surprising in light of the essential information-transfer functions the products perform
and the absence of significant nonpaper substitutes.
3. Supply
Printing/writing papers are produced by an extremely wide variety of processes. They may
be made in paper mills integrated to all of the bleached chemical pulps (kraft, sulfite, soda, and
cotton fiber), to groundwood pulp and to deinked wastepaper, as well as in mills not integrated to
pulp. In general, the producers of the large-volume commodity grades are fully integrated to
kraft, groundwood or sulfite pulp mills while the producers of higher priced specialty papers are
either not integrated or only partially integrated to chemical fiber or deinked pulp. Most of the
paper machines, particularly the smaller ones, are quite versatile and produce a variety of
printing/writing paper grades.
The market is relatively fragmented compared with most other paper industry product
sectors. Table 111-23 shows that the 8 largest producers, all of whom are integrated to pulp,
account for 42% of U.S. capacity, but over 60 other firms compete in this product sector.
A look at specific products lines within the printing and writing category, however, reveals a
much greater supplier concentration. Consolidated Papers, for example, has nearly a 10% share of
the total U.S. capacity for coated papers and an even larger share of the magazine paper market
in which it specializes. Great Northern-Nekoosa is the leading supplier in the writing paper
sector, particularly in forms bond, although it has only a 4.4% share of the total printing/writing
paper market.
The supply is considerably more concentrated on the West Coast than elsewhere with Boise
Cascade, Crown Zellerbach, Georgia-Pacific, Simpson Lee, and Weyerhaeuser providing all of
the market requirements except for some specialty grades which are shipped in from the East.
There are also concentrations of supply in the North Central and Northeastern regions, but the
suppliers there do not appear to be enjoying any significant monopolistic advantages since the
papers are shipped long distances between regions in the large eastern and central markets.
57
-------
TABLE 111-23
CONCENTRATION OF U.S. PRINTING AND WRITING PAPER SUPPLIERS. 1975
Company
International Paper
Champion
Mead
Great Northern-Nekoosa
Scott
Westvaco
Hammermill
Boise Cascade
Top Eight Companies
Other Suppliers (About
% of
U.S. Capacity
9.6
6.1
6.0
4.4
4.1
4.1
4.0
3.8
42.1
63 Companies) 57.9
Number of
Mills1
8
4
4
6
4
3
6+
4
TOTAL 100.0
Partial ownership of mill indicated by +.
SOURCE: Lockwood's Directory of the Paper and Allied Trades, 1975.
Arthur D. Little, Inc., estimates.
58
-------
4. Prices
As was the case with most other paper products, printing and writing paper prices rose
rapidly after price controls were lifted in March 1974. Throughout most of the 1960's, however,
prices were very stable in spite of several significant cycles in the supply/demand balance. This
pattern probably was caused by the entry of new producers attracted by the relatively high
growth of this sector coupled with productivity improvements which held costs in line. The rapid
price increases in 1973-74, were caused by a very tight supply/demand balance coupled with
rapidly rising costs, particularly the cost of bleached chemical pulp for nonintegrated mills.
However, producers that were not integrated to pulp production were barely able to maintain
their profit margins because market pulp prices rose faster than the prices they obtained for their
end products. Producers that were integrated to pulp, however, were able to improve profit
margins significantly. Figure III-7 shows the trend in printing/writing paper prices versus capac-
ity utilization since 1967.
5. Import/Export Balance
U.S. imports and exports of printing and writing papers are small and nearly in balance. In
1973, for example, imports amounted to 180,000 tons and exports to 229,000 tons. Imports and
exports are low principally because these grades carry a relatively high import duty in the United
States and in most other countries. The U.S. import duty on coated papers is so high that there
have been no imports of this grade since before 1960.
6. Price Impacts
The printing/writing papers sector is comprised of many products. The long-run price
impact was estimated using two major product categories book paper and bond paper that
would have representative impacts. The estimated long-term impact will be a 6.3% increase ($28
per ton) over the price of book paper and bond paper that would prevail in the absence of the
studied regulations. The existing printing/writing paper industry requires an increase of $25 per
ton, which is equivalent to 4.2% of the 1975 composite price for the sector (Table 111-24).
Consumers will face price increases in books and magazines as a result of price increases in
printing/writing papers. The price of a $0.75 magazine could increase by 1.2% ($0.09) as a result
of the studied environmental regulations.
7. Output Impacts
The price elasticity of demand estimated for printing/writing papers is 0.26. This means
that a long-run price increase of 6.3% will be accompanied by a demand reduction of 1.6%.
8. Supply/Demand Balance
Printing/writing papers are one of the high-growth sectors of the pulp and paper industry.
According to the demand forecast based upon the Chase Econometrics CEQ scenario, there will
be tight capacity during the 1980's (Figure III-8). If demand grows at the upper bound of the
forecast, some capacity pressure could occur in 1977. If a recession fails to materialize in 1978,
tight capacity could occur beginning in 1980 even with moderate growth in demand. Some mills
will shut down as a result of water effluent regulations, amounting to 2.2% of 1977 capacity and
3.9' < (cumulative) of 1983 capacity.
59
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FIGURE 111-7
PRINTING AND WRITING PAPER
MARKET PRICE
VERSUS CAPACITY UTILIZATION
500-
400
$/Ton
300 -
Capacity Utilization
Current Dollar Price
Constant Dollar Price
1.0
- .9
- .8
200-
100 -T
1967 1968 1969 1970 1V71 1972 1973 1974
60
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TABLE II1-24
EFFECT OF ENVIRONMENTAL REGULATIONS ON PRINTING AND WRITING PAPER PRICES
Existing Industry Long-Run Price Effect
Environmental Regulation
EPA WATER
1977
1983
NSPS
FEDERAL AIR
SIPS
NSPS
Investment Required
$/Millions
595
363
193
Necessary
$/Ton
12.79
7.50
3.09
_
Price Increase $/Ton % Baseline Price"
% 1975 Price1
2.2
1.2
21 4.7
0.5 3 0.7
__ _ _
OSHA NOISE
TOTAL
101
1,252
1.60
24.98
0.3
4.2%
28
0.9
6.3%
1975 Price: $591
2
Baseline Price: Book Paper and Bond Paper Composite = $445.
SOURCE: Arthur D. Little, Inc., estimates.
-------
FIGURE 111-8
PRINTING AND WRITING PAPERS
FORECAST OF DEMAND AND CAPACITY UTILIZATION
- Range of
.Demand Forecas:
16000-T
15000-t
14000-
13000-
TONS
DEMANDED*
12000
(000)
11000-
10000-
9000
DEMAND
No Recession / / /
J 1 1 1 1 1 1
1 1 L.
I ' I
75 76 77 78 79 80 81 82 83
CAPACITY UTILIZATION
No Recession
CAPACITY
UTILIZED
100.0
90.0--
80.0--
70.0-
60.0--
*Total U.S. Consumption
75 76 77 78 79 80 81 82 83
High Growth
Medium Growth
Low Growth
-------
G. BLEACHED BOARD
1. Product Description
Bleached board and bristols were combined in the economic analysis because while they are
sold to totally different markets, they are produced in the same mills, in some cases by inter-
changeable machines. Thus, the capacity utilization rates of the suppliers reflect the demand
levels of both products.
Bleached paperboard, often referred to as SBS (solid bleached sulfate), is by far the larger-
volume and faster-growing product with about four million tons produced in 1974. It is used
almost entirely to produce folding cartons and paper cups, plates and trays. SBS is produced
from a combination of fully bleached hardwood and softwood pulps made by the sulfate or kraft
process. Most of this board is coated with clay pigment and/or polyethylene film to enhance its
printing characteristics and/or barrier properties.
Bleached bristols production amounted to about 1.1 million tons in 1973 and 1974. Principal
applications are tabulating and index cards, file folders and tags. Unlike SBS, these products are
usually made from semibleached pulp and are not coated. Demand for bristols has been essen-
tially static since 1969 primarily because of declining use of tabulating cards as business ma-
chines are designed for greater use of tape input/output and larger internal memory banks.
Therefore, the discussion will focus on the larger and faster growing markets for bleached board.
2. Demand
Boxboard applications are by far the largest and most pivotal markets for bleached board;
hence, the discussion of demand characteristics focuses on this market. Boxboard encompasses
all paperboard materials used to produce folding cartons, milk cartons, cups/plates/trays, set-up
boxes and related products. Materials from two other industry product sectors compete with SBS
in many of these applications: recycled paperboard and unbleached kraft. Boxboard accounted
for nearly 30% of all paperboard production and about 15% of total paper and paperboard
production in 1973. Table 111-25 shows that SBS and recycled board are by far the most
important grades, with about 95% of total 1973 boxboard production.
Recycled paperboard is generally made from mixed grades of wastepaper. The folding type
is usually pigment-coated or lined with bleached or deinked pulp to improve its appearance and
printing characteristics. The set-up or nonfolding type, which is heavier and stiffer, is sometimes
coated or made with a white liner, but usually employs a coated-paper outer liner. Its principal
applications are shoe boxes, department store boxes, and hardware boxes.
Boxboard demand, as measured by apparent domestic consumption, was about 8.2 million
tons in 1973. Total demand increased at the rate of about 1% per year from 1968 to 1973. SBS
consumption increased at the rate of about 3% per year, while consumption of recycled
paperboard declined at the rate of about 2.1% per year during this period. SBS gained market
share at the expense of recycled board primarily because its performance/cost relationship has
been superior to that of recycled board in many applications where they compete directly. Most of
this direct competition occurs in folding carton applications, which accounted for about 55% of
total boxboard production in 1973.
63
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TABLE 111-25
U.S. BOXBOARD PRODUCTION J3Y_ }IAJOR GRADES AND USES, 1973
Solid Bleached Paperboard
Folding Carton
Milk Carton and Food Service
Linerboard
Exports
Total Bleached Paperboard
Thousand Tons
1728
1594
128
134
280
3864
20
19
2
2
_3_
46
Recycled Paperboard
Folding Carton
Set-Up
Other
Total Recycled Board
2522
465
1191
30
5
14
4178 4y
Unbleached Kraft Paperboard
Folding Carton
455
TOTAL BOXBOARD
8497
100
SOURCE: API,Statistics of Paper and Paperboard, 1974
64
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Table 111-26 shows a breakdown of 1974 folding carton shipments by major end use. Food
packaging, both dry and wet, is the largest folding carton application. SBS dominates in
applications where:
Cleanliness is important e.g., wet/moist/oily food packaging. (The U.S. Food
and Drug Administration has prohibited use of recycled board in direct contact
with wet foods.)
Aesthetics are important e.g., high value added drug/cosmetic packaging where
high quality printing is desired and the higher cost of SBS can be absorbed more
easily.
A high strength/weight relationship is important e.g., beverage carriers (al-
though coated unbleached kraft board is also strong in this application).
Recycled paperboard dominates in applications where:
An inner lining is used e.g., dry cereal/crackers packaging.
Economics is the dominant criterion for the carton stock used e.g., lower value-
added packaging for soap, detergents and paper goods.
Competition from nonpaper products has also been important in most bleached board
applications. Plastics have made a significant penetration into boxboard markets. Frozen food
cartons are being threatened by plastic bags; milk cartons are being displaced by blow-molded
high density polyethylene milk bottles; and paper cups/plates/trays are facing significant com-
petition from polystyrene containers.
In spite of the intense intra- and inter-industry competition which bleached board faces, its
price elasticity of demand is the lowest of the paper industry product sectors. The econometric
analysis used in this study indicates a coefficient of 0.18 over the period 1960-1974. This low price
sensitivity is probably due mainly to the fact that the prices of all competing materials moved in
the same direction at about the same rate. Thus, the cross-elasticity of demand was insignificant
over this period. In addition, packaging materials no longer are discretionary consumption items
but are fundamental to the entire U.S. distribution system.
3. Supply
Bleached board capacity was about 3.4 million tons in 1973 and the sector achieved an
annual operating rate of 98%. Operating rates in this sector traditionally have been higher than
that of any other paper industry sector, generally fluctuating between 90% and 100% of capacity.
The bleached board producers apparently appraise their practical maximum capacity more
realistically than producers in other sectors. Another factor which smooths year-to-year fluctua-
tions in operating rate is that many producers use their paperboard machines to produce market
pulp when bleached board demand is weak, thus shifting their capacity to another product sector.
There are about 20 SBS board producers in the United States, of which the eight largest
accounted for approximately 67% of 1975 U.S. bleached paperboard capacity (Table 111-27).
Thus, bleached paperboard is a relatively concentrated market sector.
65
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TABLE 111-26
FOLDING CARTON END-USES, 1974
% of Total Tons
% of Total Dollars
Food-Dry
Food-Wet
Soap
Paper Goods
Beverage Carriers
Hardware
Biscuits & Crackers
Candy
Retail & Laundry
Medicinal
Perishable Bakery
Tobacco
Textiles
Cosmetics
Other
20.4
13.8
8.6
6.1
8.1
5.7
6.1
4.6
4.8
5.0
3.6
3.1
2.8
2.3
5.0
15.1
15.1
6.9
6.1
6.7
8.2
4.0
4.6
4.1
6.9
4.6
2.4
2.9
4.6
7.8
100
100
SOURCE : Paperboard Packaging Council
66
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TABLE III-27'
CONCENTRATION OF BLEACHED PAPERBOARD AND BRISTOLS. 1975
Producer
International Paper
Westvaco
Eastex
Federal Paperboard
Potlatch
Weyerhaeuser
Continental Can
Champion
Top 8 Companies
Other Suppliers (About
% of U.S. Total
25.1
7.5
7.0
6.9
5.4
5.3
5.0
4.9
67.1
18 Companies) 32.9
Number of Mills
6
1
1
1
1
2
1
1
TOTAL 100.0
SOURCES: Lockwood's Directory of the Paper and Allied Trades, 1975.
Arthur D. Little, Inc., estimates.
67
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All of the leading producers of bleached paperboard are integrated to on-site pulp produc-
tion, and control a significant portion of the woodlands that support their pulp mills. Most are
integrated forward to the production of folding cartons, ^ilk cartons, or other end products. Most
of the bleached paperboard mills are located near their fiber resources in the South and in the
West.
4. Prices
Table 111-28 shows that the price differential between bleached paperboard and recycled
paperboard has been increasing since 1973. In 1973, the differential between solid bleached and
recycled paperboard was $58/ton compared with $70/ton by late 1974. However, most of the
apparent increase was caused by a trend to reduce the weight of bleached board to make it more
competitive by offering a greater area yield per ton. Since the strength and stiffness character-
istics of SBS are superior to those of recycled board at a given caliper level, a higher-caliper
recycled board must typically be used to provide performance similar to that of SBS. Thus, prices
for a given application must be compared on an area basis to truly reflect the economic
competitiveness of recycled boxboard versus SBS board. This factor plus printability advantages
means that the current price differential reflects a competitive equilibrium between SBS and
recycled paperboard.
Competition from recycled paperboard and plastics, however, apparently limited the price
increase that the bleached board producers could obtain. In 1975, solid bleached board sold at
only $15 per ton more than bleached softwood pulp, although it cost considerably more to
produce. Nevertheless, most producers refrained from shifting their machines to market pulp
because they believed the resulting addition to pulp supply would undermine prices and thus
"ruin" the market.
Figure III-9 shows the bleached board and bristols price trend versus capacity utilization
since 1960. Both current and real prices trended downward until 1972. Prices rose sharply in 1973-
1974, but not as much as those of many other paper products. Price movements have not been
sensitive to changes in capacity utilization. This insensitivity can probably be explained by the
moderate concentration of the bleached board sector coupled with the need to maintain a
price/performance equilibrium with competing products.
5. Import/Export Balance
Imports of bleached paperboard are insignificant. Some bleached paperboard (about 7f/V> of
1973 production) is exported to markets where U.S. producers are competitive by virtue of their
large scale and relatively low cost of fiber resources.
6. Price Effects
As indicated in Table 111-29, there will be a long-term price increase oi'8% in bleached board
because of the studied environmental regulations. The existing industry requires a 5'/'o increase
over 1985 market prices to recover the incremental cost of compliance with the studied
regulations.
The effect of this price increase upon the end consumer will be small. The 8% long-term
price impact translates into an 0.4% increase in the price of a half gallon of milk sold in an SBS
carton.
68
-------
TABLE III-28
BLEACHED PAPERBOARD AND RECYCLED BOXBOARD PRICE TRENDS
(Dollars per Ton)
Bleached Recycled Boxboard
Year Paperboard (20-Point Clay-Coated)
1973 January 210 152
1974 January 250 190
March 280 220
May 280 230
September 320 260
October 350 260
November . 350 280
1975 January 350 280
SOURCE: H.C. Wainwright and Company, industry price surveys.
69
-------
FIGURE 111-9
BLEACHED BOARDS AND BRISTOLS
MARKET PR ICE
VERSUS CAPACITY UTILIZATION
300-
$/Ton
200-
100 -
Current Dollar Price.
:.T.-£onstant Dollar Price --
I T j i j j j j j i i j i i i
1960 1961 1962 1963 1964 1965 1966 1967 1963 1969 1970 1971 1972 1973
70
-------
TABLE III-29
EFFECT OF ENVIRONMENTAL REGULATIONS
Environmental
Regulations
EPA Water
1977
1983
NSPS
Federal Air
SIPS
NSPS
ON SBS BOARD PRICES
Existing Industry
Investment Necessary
Required Price Increase , Long-Run Price Effect
$ millions $/Ton % 1975 Price $/Ton % Baseline Price
$174 $8.08 2.3%
141 6.11 1.7
24.0 ' 6.6%
102 2.79 .08
3.0 0.8
OSHA Noise
19
.67
0.2
2.0
0.6
Total
$436
$17.65
1975 Price = $353
2
Baseline Price =- $362
New Capacity Differential = 2.5%
SOURCE: Arthur D. Little, Inc., estimates.
5.0%
$29.0
8.0%
-------
7. Output Effects
The price elasticity of demand measured for bleached board is quite low (0.18), and, as a
result, the impact of a price increase upon demand is small. The long-term price increase of 8%
will reduce demand by 1.4%. The price increase required by existing industry (5.0%) will reduce
demand by 0.9%.
The elasticity of demand estimated in the econometric model could be understated because
of the pricing behavior of bleached board producers during the late sixties and seventies, when
prices for SBS board were about the same as those for bleached market pulp. Producers appear to
have held prices down to prevent greater inroads by plastic substitutes. If, unlike the period 1968-
1974, the studied environmental regulations cause the price of SBS board to increase faster than
prices of substitutes, the reduction in demand could be greater, and capacity utilization rates will
fall.
8. Projected Supply/Demand Balance
High operating rates are forecasted for the bleached board product sector for much of the
1976 to 1983 period (Figure 111-10). This sector has traditionally operated at higher capacity
utilization rates than the industry, in part because of the more realistic definition of maximum
capacity by bleached board mills. Some capacity pressure could appear as early as 1977. If the
1978 recession forecast by Chase Econometrics fails to materialize, a tight capacity situation will
exist by 1980.
No mill shutdowns will result in this product sector from environmental regulations. The
main reason that expansion may not occur in this sector in response to high operating rates is
uncertainty over the price of plastic substitutes.
H. TISSUE
1. Product Description
The tissue sector of the pulp and paper industry comprises both sanitary and nonsanitary
grades of tissue paper that are sold to consumer and industrial market sectors. Sanitary tissue
grades include bathroom and facial tissue, napkins, towels, and wipers. Nonsanitary tissue grades
include waxing, wrapping, and cellulose wadding tissues. The so-called thin papers, such as
carbonizing tissue, are not included in the tissue market. They are included in the print-
ing/writing and related papers sector, with which they are more closely related from a market
point of view.
Table 111-30 shows that the sanitary tissue segment accounted for about 94% of total 1974
tissue production. Table 111-31 shows that consumer tissue accounted for about 70% of total
sanitary tissue production in 1974.
All of the above tissue grades are usually made from a combination of various bleached
pulps, including sulfite and kraft (both softwood and hardwood), small amounts of groundwood
pulp, and deinked or high-grade wastepaper.
72
-------
FIGURE 111-10
BLEACHED BOARD AND BRISTOLS
FORECAST OF DEMAND AND CAPACITY UTILIZATION
7000-'
6500-'
TONS
DEMANDED* 6000
(000)
5500- -
5000- -
4500- -
DEMAND
CAPACITY 100-°"
UTILIZED
90.0--
80.0--
70.0--
60.0--
t't
No 1978 Recession
75 76 77 78 79 80 81 82 83
CAPACITY UTILIZATION
Range of
Demand Forecast
No 1978 Recession
High Growth
Medium Growth
Low Growth
4-
75 76 77 78 79 80 81 82 83
:ion
......- ^v^l derived from the econometric model in cc
Econometrics forecast of economic indicators for Ct.q.
Total U.S. Consumption
SOURCE: Demand level derived from the econometric model in conjunction with Chase
73
-------
TABLE 111-30
1974 TISSUE PRODUCTION
BY PRODUCT
Sanitary Thousand Tons % of Total
Bathroom. Tissue 1474 36
Towels ' 1332 33
Napkins " 439 11
Facial Tissue 355 9
Wipers 43 1
Other Sanitary 176 -_4_
Total Sanitary Tissue 3819 ' . _94_
Non-Sanitary '.
Wrapping '66 1.5
Waxing 52 1.3
Industrial Cellulose Wadding 32 0.7
Miscellaneous Tissue 108 _?__?_
Total Non-Sanitarv Tissue 258 6
SOURCE: American Paper lustitur
Total 1974 Tissue Production 4077 100
74
-------
TABLE III-31
1974 SANITARY TISSUE SHIPMENTS
CONSUMER VS. I NT)USTRIAL M\:
-------
In the future, the demand for tissue products is expected to relate more closely to such
factors as consumer disposable income and population growth (since tissue displacement of
reusable fabrics has subsided). As such, the tissue market will probably grow more slowly than
real GNP through 1983. However, the consumer segment of the tissue industry will continue to be
more recession-proof and less subject to cyclical swings in consumption levels than the pulp and
paper industry or the economy as a whole.
Consumer tissue is the paper industry's principal consumer product. Tissue producers rely
heavily on consumer marketing/advertising/promotion to sell their product in consumer markets.
Consumer sanitary tissue is usually sold on a direct basis from the paper producer/converter to
the grocery chain store. Both brand name and private label products follow this pattern.
Industrial sanitary tissue is typically distributed through paper merchants or industrial
maintenance supply houses. From this distribution level, the product is ultimately purchased by
the major fast food chains, as well as by hotels, restaurants, and institutional end-users.
Because of the product's high bulk, it is very expensive to ship tissue over long distances.
Thus, tissue normally is distributed on a regional basis, usually within 300 miles of converting
locations (which are themselves typically located next to paper mills and near population
centers).
Other than going back to reusable cloth fabrics, there are no economical substitutes for
sanitary tissue products. However, it is possible that continued escalation of tissue prices may
cause some consumers to economize on tissue use and possibly shift back to some extent to
reusable cloth products. In the nonsanitary tissue area, waxing tissue has been and continues to
be replaced by plastic film and foil materials, primarily because of the latter's superior perform-
ance characteristics.
The price elasticity of demand for tissue calculated by the econometric analysis in this
study was 0.45 or about average for the bleached paper sectors. This moderately low coefficient is
not surprising in light of tissue's essential uses, fairly low cost, and lack of significant substitutes.
3. Supply
U.S. tissue capacity was 4.3 million tons in 1974. Unlike most paper industry sectors, tissue
production is spread evenly throughout the country (mostly near major metropolitan areas), as
opposed to being centered near the primary fiber resource areas of the South and West.
The four largest tissue producers are Scott, Procter and Gamble, Kimberly Clark, and
American Can (Table 111-32). These four producers accounted for about 56'/c of total U.S. tissue
productive capacity in 1975. Thus, this market sector is relatively concentrated compared to
other paper industry sectors.
In addition to having substantial financial resources, the leading tissue producers are
largely vertically integrated. The major tissue producers: (1) are integrated to pulp on a company
76
-------
TABLE 111-32
CONCENTRATION OF TISSUE SUPPLIERS, 1975
% U.S. Capacity
24.1
e 12.8
9.9
9.0
6.7
6.6
6.0
2.5
Number of Mills
8
5
5
4
6
1
5
2
Scott
Procter and Gamble
Kimberly Clark
American Can
Crown Zellerbach
Fort Howard
Georgia-Pacific
Brown
Top Eight Companies 77.6
Other Suppliers (About 43 Companies) 24.9
TOTAL 100.0
SOURCES: Lockwood's Directory of the Paper and Allied Trades, 1975.
Arthur D. Little, Inc., estimates.
77
-------
basis, although not necessarily on a mill-site basis,1 (2) control a significant portion of the
woodlands that support their pulp mills; and (3) are fully integrated on-site to tissue converting.
The practice of these industry leaders implies that substantial vertical integration is an impor-
tant component for success.
4. Prices
Most tissue paper producers convert their product at the site where the tissue paper is
made.2 The amount of tissue paper sold in the form of jumbo rolls (unconverted) is very small.
Thus, the most meaningful tissue prices are converted product prices.
Figure III-11 shows the trend in tissue prices and capacity utilization since 1963. This figure
shows that like most other paper markets, the tissue paper prices increased relatively little during
most of the 1960's. In 1973, however, a fairly tight supply/demand balance, coupled with rising
costs, began to generate significant price escalations although not nearly as high as those in other
paper industry sectors. Between November 1973 and October 1974, average sanitary tissue prices
increased by about 30%. Note that the price series do not reflect promotional discounts granted
the retailers particularly during weak markets and this masks the correlation with capacity
utilization. (Tissue is the only product sector that does not reflect discounts in its market price.)
When discussing tissue prices, it is important to understand that there is significant product
differentiation in terms of quality and brand name identification in the consumer market sector.
Brand name tissue products, which rely strongly on consumer advertising for product differen-
tiation are priced higher than private-label tissue products. Also, tissue grades that utilize a large
proportion of deinked wastepaper are generally priced below products made largely from chem-
ical wood pulp fiber. This reflects a somewhat lower consumer acceptance for tissue made from
the typical wastepaper furnish, apparently because of the product's slightly off-white color. In the
industrial market sector, there is far less product differentiation and price is viewed as a key
determinant of a successful marketing program.
5. Import/Export Balance
There have been no significant imports of any tissue materials to the United States in the
last 10 years, and exports have been less than 1% of total U.S. production over this period.
Prevailing tariffs plus high transportation costs for bulky tissue products explain this low level of
international trade.
6. Price Impacts
Of all the products studied, tissue had the highest price per ton in 1975, at $760 per ton.
Principally because of its high unit value, the tissue sector will incur the smallest relative price
impact as a result of the environmental regulations studied. The long-term price increase of $31
per ton is only 4.1% higher than the long-term price that would prevail without the studied
regulations. The existing industry requires a price increase of about $29 per ton to cover the
incremental cost of compliance with the studied environmental regulations (Table HI-33).
1. More than half of the output of this industry comes from tissue mills not integrated on-site to pulp.
2. In this case, converting refers to the functions of printing, die cutting, rewinding, folding/interleaving, and final
packaging.
78
-------
$/Ton
FIGURE 111-11
TISSUE MARKET PRICE
VERSUS CAPACITY UTILIZATION
Tissue
L .9
j
,*_1~ Capacity Utilization
.8
- Current Dollar Price
Constant Dollar Price
-1.0
1963 1964 1963 1956 .1.96? 1968.1969 1970 1971 1972 1973 1974
79
-------
OO
o
TABLE 111-33
EFFECT OF ENVIRONMENTAL REGULATIONS ON TISSUE PRICES
Environmental Regulation
EPA WATER
1977
1983
FEDERAL AIR
SIPS
NSPS
OSHA NOISE
TOTAL
Existing Industry
Investment Required Necessary
$ Millions $/Ton
268 15.30
155 8.82
68 2.57
48 2.12
539 28.81
Price Increase..
% 1975 Price
o
2.0
1.1
0.3
0.3
3.7
Long-Run Price Effect
$/Ton % Baseline Price
22 2.9
3 0.4
6 0.8
31 4.1
1975 Price: $769
'Baseline Price: $754
SOURCE: Arthur D. Little, Inc., estimates.
-------
Since tissue is consumed as a final product and the converting operations are done on-site,
the price impacts estimated also represent the ultimate relative price impact the consumer will
face. In the long run, the consumer will therefore incur a 4.1% increase in the price of tissue.
7. Output Effects
The price elasticity of demand for tissue estimated by the econometric model is 0.45. This
means that the price increase due to the studied environmental regulations of 4.1% will be
accompanied by a 1.8% reduction in demand compared to the demand level that would have been
obtained without a price increase.
8. Supply/Demand Balance
The forecast demand for tissue will result in average to low capacity utilization rates for the
studied period (Figure 111-12). Some price pressure may occur in 1983 because of estimated mill
shutdowns, which are equivalent to 147,000 tons or 3.3% of 1975 capacity.
I. NEWSPRINT AND UNCOATED GROUNDWOOD PAPER
1. Product Description
These products were grouped in this analysis because they both utilize a substantial
proportion (usually greater than 50%) of groundwood pulp in their fiber make-up, and they are
often produced in the same mill. Other common characteristics are that both products are
uncoated and are used in printing applications that do not require long storage or reuse since the
groundwood pulp discolors when exposed to ultraviolet light. Thus, they are used for products
such as newspapers (the dominant application), telephone directories, some mail order catalogs,
and other printed articles that are generally discarded within one year.
Newsprint is by far the largest major grade in this category, with a total U.S. consumption
of about 11 million tons in 1974. It is generally made from a pulp furnish consisting of about 80%
unbleached groundwood and 20% semibleached kraft or unbleached sulfite pulp (West Coast
groundwood pulp is often lightly bleached). Three U.S. newsprint mills produce newsprint
entirely from waste newspapers; as a result of their successful market penetration, this recycling
trend is likely to grow in areas with high population and wastepaper densities.
Uncoated groundwood paper is generally made from a furnish consisting of 30-50% of
bleached chemical pulp and 50-70% of bleached groundwood pulp. Its principal applications are
for telephone directories, catalogs, paperback books, low-priced magazines, comic books, and
general commercial printing.
2. Demand
U.S. newsprint consumption has increased at an average rate of 2.6%/year since 1964. This
puts it in one of the slower growth categories in the paper industry. Relatively rapid growth in the
suburbs has compensated for the demise of the large metropolitan dailies and the relatively slow
growth of all metropolitan newspapers. Consumption is highly related to growth in GNP because
advertising space is the key determinant of newspaper size or lineage and therefore significantly
affects newsprint" consumption. Newspaper advertising has faced stiff competition from radio and
particularly TV advertising media; thus, newsprint competes indirectly with these alternative
methods of advertising.
81
-------
FIGURE 111-12
TISSUE
FORECAST OF DEMAND AND CAPACITY UTILIZATION
5500--
TONS
DEMANDED* 5000--
(000)
4500- -
4000- -
3500-
DEMAND
Range of
Demand Forecast
i i i
I J I . ' I
75 76 77 78 79 80 81 82 83
CAPACITY UTILIZATION
CAPACITY
UTILIZED
100.0--
90.0--
80.0-
70.0--
60.0--
High Growth
Medium Growth
* ** Low Growth
i i i
75 76 77 78 79 80 8.1 82 83
*Total U.S. Consumption
82
-------
Recently, a few new applications for groundwood papers have begun to develop in areas
where no more than short-term use is required. The increasing price differential between ground-
wood and groundwood-free papers which occurred in 1974 increased the incentive to shift to
groundwood. One such comparatively new application is in business forms where, in 1976,
approximately 80,000 tons of newsprint and uncoated groundwood paper was substituted for the
traditional forms bond paper which is made from 100% bleached chemical pulps.
U.S. consumption of uncoated groundwood papers grew at the average rate of 2.9% per year
(1970-1976) making it a somewhat higher growth area than newsprint. However, uncoated
groundwood papers have been replaced by coated papers in catalogs and magazines, and their
consumption has also suffered from the demise of low-cost pulp magazines and comic books. The
major recent growth areas have been business forms and advertising printing. Demand appears to
be bolstered by the fact that the price differential below groundwood-free printing papers
widened appreciably during 1974. In January 1975, for example, there was a $205/ton differential
between No. 3 uncoated offset book paper and catalog-grade groundwood paper, whereas a year
earlier the differential was about $100/ton. This development should increase the use of uncoated
groundwood paper in a number of commercial printing applications.
The price elasticity of demand for newsprint, as computed in this study, ranges from a
relatively high 0.85 when measured by U.S. production to a relatively low 0.22 when measured by
U.S. consumption (although the latter coefficient is not statistically significant). The most likely
explanation for this pattern is that competition between U.S. and Canadian newsprint mills
introduces substantial cross-elasticity.
3. Supply
Canadian newsprint mills play a pivotal role in supplying U.S. needs and, hence, are a key
factor in the industry's competitive structure. Canada has become the world's largest newsprint
producer by virtue of the suitability and relatively low cost of its pulpwood supply. Furthermore,
there usually are no duties on newsprint, which enhances Canada's exports. In 1974, Canadian
mills supplied about 70% of U.S. newsprint consumption and U.S. mills supplied the remaining
30%.
Table 111-34 lists the capacity of the major North American newsprint suppliers. This does
not necessarily reflect their share of the U.S. market since many of the Canadian producers have
substantial overseas exports. The recent acquisition of the Price Company by Abitibi Paper
Company has given it a dominant 17% share of North American capacity. International Paper,
with a 10% share, traditionally was the major supplier.
North American newsprint supply is relatively concentrated. The top 14 firms have nearly
an 80% share of the total North American capacity and about an equal total share of the North
American market, while the top five producers have about a 50% share.
Table 111-35 lists the capacity of the major U.S. uncoated groundwood paper producers.
Imports of groundwood paper from Canada or elsewhere are not significant (117,000 tons in 1974);
an import duty, coupled with the freight advantage enjoyed by U.S. producers in shipping this
product, makes it difficult for nondomestic suppliers to compete.
83
-------
TABLE III-34
CONCENTRATION OF NORTH AMERICAN NEWSPRINT SUPPLIERS, 1975
% of Number ,...
Company North American Capacity of Mills
Abitibi-Price 17.0 11+
International Paper 9.9 3
MacMillan-Bloedel 9.7 3
Consolidated Bathurst 7.4 5
Bowaters 7.4 5
Ontario Paper 5.2 2
Kimberly-Clark 4.2 1+
Boise Cascade 3.7 2+
Top Eight Companies 64.5
Other Suppliers (6 Companies) 35.5
Total 100.0
Partial ownership in a mill indicated by +
SOURCE: "Newsprint Statistics", American Newspaper Publishers Assn.
April 12, 1974
84
-------
TABLE 111-35
CONCENTRATION OF UNCOATED GROUNDWOOD PAPER SUPPLIERS, 1975
% U.S. Total No. of Mills
Great Northern-Nekoosa 27.4 2
Bowaters 16.8 1
St. Regis . 12.4 2
Fraser 8.6 1
Appleton 5.7 1
Crown Zellerbach 5.3 2
Georgia Pacific 4.7 1
Kennebec River 3.9 1
Top Eight Companies 84.8
Other Suppliers (about
12 Companies) 15.2
Total 100
SOURCE: - Lockwood's Directory of the Paper and Allied Trades, 1975.
-Arthur D. Little, Inc., estimates.
85
-------
Traditionally, the uncoated groundwood paper market has been viewed as an alternative
use for old newsprint machines that are no longer competitive in the newsprint market. This is
the route of entry used by all current suppliers. Recently, however, Great Northern-Nekoosa and
Eraser Paper have installed new machines to increase their market share. These two companies,
along with Bowater and St. Regis, are the major U.S. producers.
4. Prices
Newsprint prices traditionally have risen in gradual steps and have declined infrequently
even though U.S. operating rates have fluctuated sharply. One explanatory factor is that fluctua-
tions in world operating rates were not as severe as in the United States and prices behaved
accordingly because of the substantial amount of newsprint trade between countries. Another
factor is the relatively high market concentration and price leadership exhibited by six of the
major North American producers.
Figure III-12A, however, shows that U.S. prices increased significantly beginning at the end
of 1973 and rose rapidly after U.S. price controls were fully lifted in June 1974. The increases, led
by Canadian firms trying to bolster their low profitability, were still not as high as in most other
produce sectors, another indicator of an oligopolistic market. The western U.S. market, where
newsprint traditionally sold below eastern prices, established a price premium in 1974; this was
made possible both by tight market conditions and the fact that two producers dominate the
western market.
A similar trend of price escalation took place for uncoated groundwood paper. As discussed
earlier, groundwood-free printing and writing paper prices increased even more rapidly than
those of the uncoated groundwood grades. This rapid increase indicates that uncoated ground-
wood prices relate more closely to newsprint prices, with which they are usually associated from a
supply standpoint. The resulting wider price differential between the groundwood and non-
groundwood grades makes the former more price competitive and should stimulate its demand.
5. Import/Export Balance
As mentioned previously, newsprint is the largest-volume paper product imported by the
United States. In 1974, U.S. publishers imported 7.4 million tons, worth about $1.5 billion,
almost all of it from Canada. The United States is a relatively small newsprint exporter with a
1974 volume of about 190,000 tons, worth $55 million. Most U.S. newsprint mills are more
concerned about capturing a greater share of their own market than with vying with the
Canadians in third markets.
An import duty plus a freight rate advantage for U.S. mills has kept imports of uncoated
groundwood paper to a minimum. In 1974, reported imports were about 117,000 tons, but
additional amounts were imported under a "newsprint" designation to avoid the duty. Exports
were small, about 53,000 tons.
6. Price Impacts
Newsprint prices will increase by 5.7%, or $16 per ton in the long run as a result of the
studied regulations (Table 111-36). The existing industry requires a price increase of 1.1% or
$20.33 per ton over the 1975 price of $265 to recover the incremental cost of compliance with the
studied regulations. The reason for the apparent disparity between the price increase required by
86
-------
300
$/Ton
200
100
o :
FIGURE III-12A
NEWSPRINT MARKET PRICE
VERSUS CAPACITY UTILIZATION
U.S. Producers Only
Current Dollar Price
1.1
.. 1.0
0.9
Capacity
Utiliza-
tion
0.8
0.7
| T Constant Dollar Price
':'-' --H? J u...:u. I
-^
___.:..
i-- i
(1938 Dol]
1.
: t'i !
:.
ars)
I !
' 1 '
" i
; i
' ' t
i-U '.
1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974
87
-------
TABLE III-36
oo
oo
Environmental
Regulation
EPA Water
1977
1983
NSPS
Federal Air
SIPS
NSPS
OSHA Noise
Total
EFFECT OF ENVIRONMENTAL REGULATIONS ON NEWSPRINT PRICES
Existing Indus try
Investment Necessary
Required Price Increase 1 Long-Term Price Increase-
$ Millions $/Ton % 1975 Price $/Ton % Baseline Price"
e
162 $10.67 4.0%
91 5.99 2.3
$12 4.3%
54 2.31 0.9
~ 1 0.3
29 1.33 0.5 3 1.1
$336 $20.30 7.7% $16 5.7%
1975 Price $265
2
Baseline Price $280
New Capacity Differential 6%
SOURCE: Arthur D. Little, Inc., estimates.
-------
existing industry and the long-run increase is that the latter impact is based upon a new mill
integrated to semi-bleached kraft pulp whereas a substantial portion of the existing industry
employs sulfite, pulp, the effluent of which is more costly to control.
Increases in the price of newsprint will ultimately be reflected in newsprint prices. The long-
run price increase of 5.7% will result in a 2.7% increase in newspaper prices (0.5
-------
FIGURE 111-13
FORECAST OF NEWSPRINT CONSUMPTION
AND CAPACITY UTILIZATION
14,000-
12,000-
000
tons*
10,000-
8,000-
*
U.S. Consumption
Range
of
Demand
Forecast
78 79 80 8
1828384
Capacity Utilization
100
Operating Q
Rate
Without
Recession
With
Recession
76 77 78 79 80 81 82 83 84
30 lb. basis weight
90
-------
The special industrial paper sector comprises a variety of paper and paperboard grades
designed for such specialized end uses as abrasive paper, absorbent paper, cable wrapping paper,
electrical insulation, vulcanized fiber, and resin impregnating stock. These are for the most part
highly technical products sold under exacting specifications to industrial users. They are made
from a variety of fibers including bleached kraft and sulfite pulps, unbleached kraft pulp,
wastepaper, and cotton.
Wet machine board includes binder board, shoe board (e.g., counterboard, heel board,
innersoles, etc.), automotive panel board, chair seat backing, coaster board, luggage board, panel
board, and table-top board. This material is formed on cylinder board machines much like
recycled paperboard. However, unlike most other paper and paperboard products which are dried
by being passed around heated drums, wet machine board is air dried after the paper is formed
and dewatered. Its fiber furnish consists almost entirely of wastepaper, supplemented in some.
cases by nonwood fibers such as cotton.
Molded pulp products include bituminous fiber pipe, egg cartons, packaging trays (for
meats, produce, and food), molded pulp plates and dishes, and various other molded pulp and
paper-mache articles. These products are categorized under the Department of Commerce's SIC
2646, which is part of the converted paper products sector. However, the water effluent problems
of these mills are closer to those of paper mills than of converting plants. Pulp molding differs
from papermaking in that it employs batch rather than continuous operations and much lower
water volumes in the pulp molding and pressing operation. While the producers of molded pulp
are fairly well represented in the API, their production statistics are not reported by that
organization except for the relatively limited data published in the annual Census of
Manufactures.
Molded pulp products use wastepaper predominantly (56%) but also consume a substantial
amount of bleached and unbleached wood pulp (44%). Wastepaper is used primarily to make egg
cartons, while virgin wood pulp is employed for trays and plates.
2. Demand
Since special industrial paper is used in an extremely wide variety of technical and
industrial applications, demand correlates well with the industrial production index. From 1964
to 1974, demand grew at an average rate of 4.4% per year. Although there are few direct substitute
materials, a number of the end products, such as decorative laminates and luggage, compete with
substitute products made from other materials.
Wet machine board demand has remained essentially static since 1964, although there have
been year-to-year fluctuations as a result of changes in overall economic activity. For example,
because so much of the product goes into shoe innersoles, total demand is influenced by dis-
posable personal income. Since it has many industrial applications, demand for wet machine
board also correlates with the industrial output. Over the past 10-12 years, however, demand for
wet machine board has remained static because of significant product substitutions. Most
important has been the substitution of vinyl plastics in shoe innersoles, and, to a lesser extent, in
automotive paneling and luggage.
91
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Molded pulp demand is linked almost entirely to consumer disposable income with the
exception of the component used for bituminous fiber pipe. The Department of Commerce data
on production, imports and exports, is very sketchy and neither the API nor other trade associ-
ations collect statistics on this industry sector. The Department of Commerce data indicates that
production has been essentially static for the total industry since 1964. Significant product
substitutions have occurred in several molded pulp sectors, particularly in egg cartons and meat
trays, which have been displaced by foamed polystyrene plastic.
3. Supply
Most special industrial paper is produced in the Northeast (57%), the South (22%), and the
North Central (19%) regions. In 1974, 77% of U.S. capacity was held by 71 mills not integrated to
pulp, while 13 integrated mills made up the remaining 23% of capacity. Table III-36A indicates
that the supply of special industrial paper is not particularly concentrated, with the top eight
producers accounting for 42% of total capacity and the top two producers for 16.5%.
Wet machine board is produced primarily in the Northeast, which accounts for about 80% of
the U.S. capacity. The balance comes from the North Central (18%) and Southern (12%) regions.
Table 111-37 shows that wet machine board capacity is very concentrated at the top; the largest
two producers account for over 55% of the total U.S. capacity.
The molded pulp sector is also heavily concentrated at the top; the two largest producers
operate 11 of the 26 U.S. molded pulp mills (Table 111-38). Capacity statistics seldom are
reported for any of these mills. However, the two largest producers probably have more than 50%
of U.S. capacity. The balance is fragmented among 13 producers.
Molded pulp production is distributed fairly evenly over the major U.S. regional sub-
divisions. Of the 26 molded pulp mills, nine are located in the Northeast, seven in the North
Central, six in the West, and four in the South. The evenness if caused primarily by the fact that
the various molded pulp products require either virgin wood pulp or wastepaper raw materials.
4. Prices
Because of their low volume and fragmented applications, no published price series were
found for the specialty paper sectors. Future studies that wish to analyze this sector econo-
metrically will have to resort to producer surveys not only for price information, but also for
molded pulp production and/or shipment data.
In view of the industrial orientation and specialized nature of the grades included, it is
reasonable to assume that this sector's rate of price increase since 1971 has approximated the
paper industry average. Special industrial paper prices probably rose fastest (close to the rate for
printing/writing papers) while wet machine board prices probably have experienced the smallest
increase since 1971.
5. Import/Export Trends
Special industrial paper is the only component in the specialty paper sector with significant
trade (mainly exports). In 1974, exports of special industrial paper reached a high of 117,000 tons,
or 20% of production, while imports were 2,000 tons, or 0.5% of consumption. U.S. technical
know-how in achieving required product properties, coupled with large mills (relative to those in
Europe and Canada) is probably the main reason for this favorable trade balance.
92
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TABLE III-36A
CONCENTRATION OF U. S. SPECIAL INDUSTRIAL PAPER SUPPLIERS. 1975
% of Number of
Company U.S. Total Mills
Brown 9.4 2
Union Camp 7.1 1
Scott . 4.7 1
St. Regis 4.5 2
Hollingsworth & Vose 4.5 4
Riegel 4.1 4
Knowlton Brothers 4.0 2
James River 3.8 2
Top eight companies 42.1
Other suppliers (about
43 companies) 57.9
Total 100.0
Sources: Lockwood's Director of the Paper and Allied Trades, 1975
Arthur D. Little, Inc., estimates.
93
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- TABLE III-37
CONCENTRATION OF U.S. WET MACHINE BOARD SUPPLIERS, 1975
U.S. NUMBER
COMPANY % TOTAL OF MILLS
Davey 33.8 3
Texon 22.1 2
Colonial Fibre 17.6 3
Spaulding Fibre 4.4 2
George Jenkins 3.7 1
Shryock Brothers 3.7 1
Rogers Corporation 1.5 1
Milton Leatherboard 1.5 1
Top Eight Companies 88.3 14
Other Suppliers (3 Companies) 11. 7 3_
Total 100.0 17
Sources: Lockwood's Directory of the Paper and Allied
Trades, 1975
Arthur D. Little, Inc. Estimates
94
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TABLE III-38
CONCENTRATION OF U. S. MOLDED PULP SUPPLIERS, 1975
Company Number of Mills
Diamond International 6
Keyes Fiber 5
Packaging Corp. of America 2
Formar Containers 2
Fiber Form 1
General Molding Corp. 1
Henry Molded Products 1
Kerding Inc. ' 1
Lass Pulp Molding 1
Molded Container 1
Old Towne Pulp Products 1
Packaging Co. of California 1
Pennsylvania Egg Carton 1
Tekmold, Inc. 1
Woodstream Corp. 1
(1) Based primarily on number of mills since capacity figures
are not publicly available for much of this sector
Source: Lockwood's Director of the Paper and Allied Trades, 1975.
95
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U.S. trade in wet machine board is much more modest in absolute terms, but not in relative
terms. In 1974, exports were about 11,300 tons (9% of production) while imports totaled 5,900 tons
(5% of consumption). The predominant use of wastepaper raw material limits any trade advan-
tage among the industrialized countries where the product is both produced and consumed.
However, the United States accounts for nearly all of North and South America's capacity and
hence is the dominant supplier for both continents.
There are no published statistics on molded pulp imports or exports. This is a relatively low-
value product which faces high duties in most countries. Therefore, it is unlikely that its imports
or exports are significant.
96
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APPENDIX
PRODUCT SECTOR
PRICE SERIES AND ECONOMETRIC EQUATIONS
97
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PRODUCT SECTOR PRICE SERIES
(dollars per ton)
BLEACHED DISSOLVING
Year MARKET PULP PULP TISSUE SBS BOARD
1968 134 176 422 178
1969 139 182 447 183
1970 162 195 467 187
1971 152 203 . 489 187
1972 163 - 208 495 195
1973 193 207 507 226
1974 295 300 638 293
1975 351 398 769 353
PRINTING & UNBLEACHED
NEWSPRINT WRITING KRAFT PAPER
1968 142 299 128
1969 147 309 143
1970 152 308 . 158
1971 157 304 147
197?. 165 318 163
1973 175 373 177
1974 210 515 211
1975 260 591 263
CONTAINERBOARD
UNBLEACHED RECYCLED
KRAFT BOARD NSSC BOARD
1968 107 101 123
1969 117 110 122
1970 120 112 124
1971 119 113 124
1972 126 119 129
1973 142 136 150
1974 180 169 206
1975 195 193 215
99
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ECONOMETRIC MODELS
1. FORMULATION OF MODELS
To identify the potential impacts of Federal pollution control requirements, the economic
relationships described so far were combined into a model which included:
Industry supply functions.
Market demand functions.
Initially, capacity growth functions were estimated but the equations were not reliable. An-
nounced industry commitments for net capacity expansion as published by the API were com-
bined with simple extrapolation for the years 1980 through 1983 to examine capacity pressures.
Demand equations and supply equations were specified for many of the product sectors
studied in this report. The demand equation included a macro-economic variable to represent the
income effect, the transaction price of the product and for those sectors with substitute products
(bleached board and unbleached kraft paper), the price of the predominant plastic substitute,
which was incorporated in the form of a ratio to the price of the product. Due to the fact that the
price of substitute products has moved with the prices of paper goods in the studied period
(multi-colinearity) and perhaps the use of aggregate product group price data, the elasticity of
substitution could not be measured for these products.
For some of the product sectors and for the industry aggregate equation, the specified supply
equation did not explain a large percentage of the movement in prices. Prices of paper products
correlated best with the price of energy. For many of the low-valued product sectors, capacity
utilization rates were inversely related with price a statistical oddity rather than a real
phenomenon.
2. STATISTICAL TECHNIQUE
In product sectors where variable cost explained price movements in a consistent fashion,
the two-stage least squares statistical technique was used to estimate the parameters of the
demand equation. In other sectors, ordinary least squares, with a lagged price term, was used to
estimate the parameters of the demand equation. The equations for the individual product
sectors are part of Volume II, while equations for the aggregate of all paper and paperboard are at
the end of this Appendix.
3. ERROR IN VARIABLES
The product sector groupings used in this report were based upon similarity of process and
market. In aggregating across products in a product group, some of the effects may have been
obscured. Also, on the supply side, wood, labor and energy prices were paper industry aggregates
and not specific to individual products.
Although an effort was made to use consistent data throughout the historic period, changes
in the base capacity and products classified in one grade versus another may have introduced
error to the data base.
100
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4. LIMITATIONS OF ECONOMETRIC ANALYSIS
The econometric equations were used to estimate future demand for paper products
(through 1983) and the reduction in demand that will occur as a result of price increases. Based
upon the differences between Equation 1 and Equation 2, the underlying structure of the demand
for paper products could still be changing; the full effects of the price increases of 1973-74 may not
be yet fully reflected in the marketplace. The impact of this is that the forecast demand levels
may be too high.
An upper and lower boundary forecast was made to indicate the expected variation from the
forecast due to the equation. Additional differences from the forecast can arise from changes in
the underlying demand structure for paper and paperboard and errors in the Chase Econometric
forecast.
5. PRODUCT SECTOR EQUATIONS
The econometric equations for the product sectors appear on the following pages. They
represent the demand equation actually used in the analysis and to forecast output growth and
elasticity of demand.
101
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SECTOR: BLEACHED HOARD
BRISTOLS
DEMAND EQUATION:
Quantity = 172.49 - 1,54 PRICE -i- .1.5939 GNP
t-2
Right Hand
Variable
-A,
PRICE
GNP t_2
Constant
Estimated
Coefficient
-1.54077
1.59392
172.491
R* = .7626
Durbin Watson (adj. for 0 gaps) = 1.5609
F-Statistic (2, 29) = 46.5765
Time Period: 1967-1974
Method: 2-Stage Least Squares
SUPPLY EQUATION:
Price =2.11 LABOR +.66 FJLP - 1.4999
Right Hand
Variable
LABOR
PULP
Estimated
Coefficient
2.11
.66
(% idle capacity) -1 4999
C
R2 w .7611
Durbin Watson (adj. for 0 gaps) = 1.2464
Time Period: 1967-1974
Method: Ordinary Least Squares
T-Statistic
-1.92972..
9.57283
1.23087
Standard Error = 4.44%
Mean Value of 4 = 1,134
T-Statistic
12.5007
15.1013
-.0357
Standard Error = 4.73%
Mean Value of Y = 145.84
102
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SECTOR: TOTAL BLEACHED PULP
CONSUMPTION - -2.59011 MARKET PRICE + 5.70859GNP
+ 169.998 WAGE PRICE FREEZE
Right Hand
Variable
MARKET PRICE
GNP. 0
Estimated
Coefficient
-2.59011
5.70859
T-Statistic
2.26267
28.1319
WAGE PRICE FREEZE 169.998 3.04338
- ' . -- -
o
2
R = .9429 Standard Error =3.8%
Durbin Watson = 1.3270 Mean Value of Y == 3760.05
Time Period = 1964 - 1974, quarterly
Method: Two-Stage Least Squares
SUPPLY EQUATION;
PRICE - 3.36258 WOOD + 5.50454 (LABOR -1- ENERGY)
-178.635 %IDLE CAPACITY
Right Hand Estimated
Variable Coefficient T-Statistic
WOOD 3.36258 6.52964
LABOR + ENERGY 5.50454 7.89451
% IDLE CAPACITY -178.635 3.01970
R2 = .5275 Mean of Y - 123.47
Durbin Watson (adj. for 0 gaps) = .3714
Time Period: 1964-1974
Standard Error - IQ.87/,
Method: Ordinary Least Squares
103
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SECTOR: . DISSOLVING PULP
DEMAND EQUATION:
PRODUCTION - 371.385 - 1.31388 PRICE
t-2
Right Hand
Variable
Constant
HOUSEHOLDS
+ 3.6981 HOUSEHOLDS
Estimated
Coefficient
371.335
-1.31388
3.69810
T-Statistic
2,62175 -..
2.18955
3.39564
R = .5152
Durbin Watson (adj. for 0 gaps) = 1.2720
F-Statistic (2,41) = 2.15533
Time Period: 1964-1974, quarterly
Method: Ordinary Least Squares
Standard Error = 5.93%
Mean of Y = 405.977
104
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SECTOR: NEWSPRINT CONSUMPTION
DEMAND EQUATION:
PRODUCTION - 2761.53 - 13.07 PRICE _4 + 13.13 IIP
Right Hand
Variable
Constant
Price .
Estimated
Coefficient
2761.53
-13.07
T-Statistic
5.62
4.03
IIP 13.13
R2 - .39
Durbin Watson (adj. for 0 gaps) = 1.61
F-Statistic (2,41) - 9.1
Time Period: 1968-1976, quarterly
Method: Ordinary Least Squares
3.11
Mean of Y - 2655
Standard Error = 7.20/
' O
105
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Product Sector: NSSC Corrugating MejiinU
CONSUMPTION =< b + b Price + b0 GNP
o o 2 .
Variable
Constant (b )
Price
GNP
Value of
Coefficient
-484.50
-3.251
2.214
t-statistic
4.63
3.67
14.085
Statistics
R2 = .88
Durbin Watson = 1.248
Number of Observations = 32
F-Statistic (2, 29) = 108.2
Standard Error: 3.9
Mean of Y: 934
Time Period: 1968-1975^ quarterly
Method: Two-Stage Least Squares
PRICE = C + C (labor + energy + wood) + C_[^(labor + energy + wood)]
O I £ \j
Value of
Variable
Constant (C )
Labor + Energy +
Wood
Production
Capacity
(Labor +
Statistics
Coefficient
18.09
2.64
Energy + Wood) -1.61
R = .78
Durbin Watson = .93
Number of Observations = 32
F-Statistic = 52.57
t-statistic
2.12
10.22
8.22
Standard Error: 5.0
Mean of Y: 88
Time Period: 1968-75, quarterly
Method: Ordinary Least Squares
106
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SECTOR: PRINTING & WRITING
DEMAND EQUATION;
QUANTITY
-440.5 - 3.35267 PRICE + 32.6263 IIP
t-2
Right Hand
Variable
PRICE
IIPt-2
Constant
.8975
Estimated
Coefficient
-3.35291
32.6262
-440.528
Standard Error
T-Statistic
3.6946
14.2989
2.163
= 3.76%
R
Durbin Watson (adj. for 0 gaps) = 1.0938
Time Period: 1967-1974 Mean of Y - 2336.41
Method: Two Stage Least Squares
"10
SUPPLY EQUATION;
PRICE - 3.984 LABOR + (.111 x 10 -")
+ .942 PULP
10
2°
Right Hand
Variable
LABOR
1
( ~c ) x 10
PULP
Estimated
Coefficient
3.427
.518 x 10~10
1.11098
T-Statistic
8.98940
3.32091
11.2001
R = .7559 Standard Error: 5.89%
Durbin Watson (adj. for 0 gaps) = 1.2200
Time Period: 1967-1974 Mean Value of Y: 243.631
Method: Ordinary Least Squares
107
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Product Sector:
CONSUMPTION,.-
RECYCLED BOARD
bo - .bx Pricet_2
'Index of Industrial Production +
« Paper Operating Rate
Value of
Variable
Constant (b )
o
Coefficient
Price
t-2
t-statistic
481.66
-6.50
6.97
1253.08
.82*
2.59
2.94
2.39
Index of Industrial
Production
Paper Operating Rate
'Not statistically significant or different from zero.
Statistics
R2 = .75
Durbin Watson = 1.15
Number of Observations: 30
F-Statistic (3, 36) = 25.58
Standard Error: 5.2%
Mean of Y: 1802
Time Period: 1968-1975, quarterly
Method: Ordinary Least Squares
108
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SECTOR; TISSUE
DEMAND EQUATION:
Quantity = 712.256 - 1.68946 PRICE + 1.48279 PERSONAL CONSUMPTION
t-2
Right Hand
Variable
PRICE
PERSONAL CONSUMPTION
Constant
R2 = .8555
t-2
Estimated
CoefficJent
-1.68946
1.48279
712.256
Standard Error =
Durbin Watson = 1.3100 Mean Value Y
F Statistic (2,33) = 97.7072
Time Period: 1966-1974, quarterly
Method: Two-Stage Least Squares
3.65%
908.472
SUPPLY EQUATION:
Price = 1.15026* PRICE 4- 5.55377
- 148.522 ((C - Q)/C)
LABOR
Right Hand
Variable
PRICE PULP
PRICE LABOR
C - Q/C (% idle capacity
R2 = .4776
Durbin Watson = 1.7022
T-Statistic
''5:03400
12.4979
5.87949
Estimated
Coefficient
1.15026
5.55477
-l':8.522
Standard Error = 5.25%
Mean Value Y = 302.958
T-Statisti-c
10.6108
14.4451
1.84829
Time Period: 1966-1974, quarterly
Method: Ordinary Least Squares
109
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Product Sector: UNBLEACHED KRAFT bOARD
CONSUMPTION =
bQ -
PRICE + b2 GNP
Variable
Constant (b )
o
PRICE
t-1
GNP.
Value of
Coefficient
-1551.29
-12.24
6.64
t-statistic
3.61
3.59
11.71
Statistics
R2 = 83
Durbin Watson =1.07
Number of Observations = 32
F-Statistic (2, 29) = 69.03
Standard Error: 5.9%
Mean of Y: 2425
Tii.ie Period: 1969-1975, quarterly
Method: Ordinary least squares
110
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Product Sector: UNBLEACHED KRAFT PAl'ER (Equation 1: Without substitution)
CONSUMPTION a - a. Price . + a.' GNP
t o 1 t-1 2 t
Variable
Constant (a )
o
Price
GNP
t-1
Value of .
Coefficient
937.5
-5. AS
0.80
t-statistic
7.62
6.85
5.58
Statistics
R2 = 66
Durbin Watson = 1.63
Number of Observations = 35
F-Statistic (2. 32) = 31.37
Standard Error: 4.7%
Mean of Y: 924.7
Time Period: 1967-1975, quarterly
Method: Ordinary Least Squares
111
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Product Sector:
CONSUMPTION - I
UNBLEACHED KRAFT i'.-.PER (Equation 2: with substitution)
, , Price
Variable
Constant (b )
o
Price
t-2
Price
t-2
"t-2
Substitution Price
Substitution Price
f b. GNP
4
Value of
Coefficient
1114.20
-6.39
58.2659*
t-2
t-statistic
8.05
7.59
1.53*
GNP 0.583 2.44
*Not statistically different from zero at 95% confidence interval
Statistics
R2 = .75
Durbin Watson =1.32
Number of Observations = 30
F-Statistic (3, 26) = 25.9
Standard Error: 4.0%
Mean of Y: 934.4
Time Period: 1968-1975, quarterly
Method: Ordinary Least Squares
112
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