Catalyst Paper: Beaten to a pulp but still standing

Richmond company turns page on new chapter as it emerges from creditor protection

Catalyst's Powell River mill churning out paper for a shrinking market

The year just ended was a good one for most of B.C.'s forest industries. The lumber sector entered a "supercycle" created by increasing demand in the U.S., a shrinking timber supply and subsequent increasing lumber prices.

But B.C.'s other forest industries – pulp and paper mills – had a tougher go of it, and none had it as tough as Catalyst Paper Corp. (TSX:CYT), which makes newsprint and specialty paper.

Struggling under an $800 million debt and falling demand for newsprint, the Richmond-based paper maker was forced into creditor protection and liquidation of some of its assets.

"We'd like not to repeat 2012," Catalyst CEO Kevin Clarke told Business in Vancouver.

On January 7, it turned the page on a new chapter by relisting on the TSX under a new stock symbol: CYT. Owners of Catalyst's old stock were left empty-handed.

While under creditor protection, Catalyst was forced to sell its 50% share of Powell River Energy – a co-generation plant attached to its Powell River pulp mill. It also sold its Snowflake newsprint recycling plant in Arizona for $13.8 million, resulting in 300 job losses in the U.S.

In addition, the company is still looking for a buyer for its idled Elk Falls mill in Campbell River after an $8.6 million earlier purchase offer fell through.

"We have a lot of interest in the site, and I feel pretty comfortable we will find a logical and legitimate buyer," Clarke said.

The one asset Catalyst managed to hang onto was its workforce. There have been no job losses at its pulp and paper mills in Crofton, Port Alberni and Powell River during a court-ordered consolidation.

"We've hired over 200 employees, and at no time did we lose any customers," Clarke added. "Actually, we gained market share in every one of the markets where we were looking to gain share."

Many of the new hires were to replace workers who retired.

In addition to selling off assets, Catalyst worked with its unionized workforce to get concessions on a new five-year contract, and focused on developing new products and customers – including making paper for book publishers – while moving into a new market: Latin America.

"We were a substantial supplier for the Fifty Shades of Grey, which was our entry into the book business," Clarke said. "Not a bad way to enter it."

But as the global demand for newsprint continues to decline, Clarke fully expects his company will continue to face stiff competition.

"This is a harsh business. It continues to be challenging from a worldwide standpoint of paper and pulp. We've got to innovate and take advantage of our opportunities in markets where we haven't been, like the book market."

As it continues to consolidate, the company hopes to reduce its debt to about $250 million.

Industry analysts are cautiously optimistic about Catalyst's future.

Kevin Bromley, PwC forest, paper and packaging analyst, said, "They are considerably debt-lighter, so going forward they'll save a significant amount of money on interest costs, and they've also renegotiated their labour contract.

"They'll have lowered costs going forward, which bodes well for their continued existence – albeit their product mix with the newsprint side is still troubling."

The news on newsprint

 

While lumber, pulp and paper prices fluctuate with economic cycles and demand, any improvements in newsprint prices lately are more the result of consolidation within the industry than increased demand, which has been falling steadily for more than a decade.

In 2000, the North American demand for newsprint was around 13,000 tonnes. It has steadily dropped to 5,500 tonnes in 2010, according to the Pulp and Paper Products Council.

Newsprint prices have been holding steady lately, in part due to some consolidation within the sector, which is expected to continue into 2013. Domtar (Canada) Paper Inc. (TSX:UFX), for example, announced last month that it will permanently close one pulp machine at its Kamloops plant by the end of March, putting 125 employees out of work.

As for the rest of B.C.'s pulp and paper industry, things are starting to look up. Pulp prices fell throughout the latter half of 2012 but are believed to have bottomed.

"The market should gradually stabilize and improve over the next six to 12 months," PwC's Kevin Bromley said.

Not surprisingly, integrated companies with lumber and pulp operations have fared better than stand-alone pulp and paper makers, as increasing lumber prices helped shore up losses on the pulp side.

Canfor Corp. (TSX:CFP), for example, reported third-quarter net income of $22.2 million in 2012, whereas Canfor Pulp Products Inc. (TSX:CFX) incurred a $4.6 million earnings loss.

"It's a cyclical industry and it will rebound," said Levi Sampson, president of Harmac Pacific pulp mill in Nanaimo and one of this year's Business in Vancouver Forty under 40 winners. "We're looking forward, hopefully, to a better 2013."

Harmac makes NBSK (northern bleached softwood kraft) for a variety of products – paper, tissue, diapers, etc.

Like a number of other mill operators, Harmac is planning to increase its revenue stream by getting into co-generation this summer.

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