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International Paper

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The forest, paper, and packaging (FP&P) industry, although global in presence, continues to operate at a regional level, based on the availability of raw materials and demand of the current markets. This represents a challenge, since the major producers around the world are influenced by different dynamics.

According to the World Trade Organization (WTO), the paper industry accounts for 2% of the world's commerce, and the demand increases every day. In the U.S; paper accounts for 40% of all community waste and the paper industry is the 3rd largest user of energy (EPA, 2010).

Despite technological advances, paper remains as the main form of communication among people globally, especially in the academic field. But it also has an infinite number of industrial uses, like packaging all kinds of products for shipping, and in the health care industry.

In the North America region, modest growth in 2012 is expected. However, a handful of well managed producers have continued to focus on operational efficiencies and cost containment while building strong cash reserves on their balance sheet. These companies are positioned to make bold moves into adjacent products, new emerging markets, or further their market share through acquisition. They are better able to address the growing challenge of securing limited natural resources and the uncertainty of government regulation.

The History of Paper

The first paper-like substance was invented by the Egyptians over 6,000 years ago. Papyrus, which is the root of our English word paper, was made by weaving reeds or other fibrous plants together and pounding them into a flat sheet. The Greeks and the Romans also used this technique, although some Ancient Greek paper makers were the first to create a kind of parchment paper made out of animal skins. Chances are, Aristotle, Socrates and other Greek philosophers originally wrote their books on the skins of dead cows.

But paper as we know it wasn't made until 105 AD, when a Chinese court official named Ts'ai Lun mixed mulberry bark and hemp with water and scraps of cotton and linen cloth (i.e. rags). This concoction was mashed into a pulp and pressed into mats that were left in the sun to dry. Rags were the basis for paper for the next 1700 years.

As the Chinese culture flourished and expanded to the edges of the Asian continent, paper went along with it, first to Korea and Japan and then to the Arab world which included Egypt and Morocco. Yet, it wasn't until 1009 AD that Papermaking reached Europe by way of Spain, where the first European paper mill was set up by Arabs in Xativa, near the Mediterranean port city of Valencia.

After that, the Italians and the French became notable paper makers and dominated the paper industry in Europe from 1250 to 1470 AD. After the invention of the moveable type printing press in 1453 by the German inventor Johannes Gutenberg and the subsequent boom in literacy rates in the 16th century, paper for books grew in demand. Paper mills began opening all over the European continent and eventually reached the new world where the first American paper mill opened in Philadelphia in 1690. That increase in demand and the upsurge in papermaking began to tax the raw materials used to make paper (which was still largely made with rags) and manufacturers began searching for alternatives. It wasn't until 1843 that ground-wood (or pulp) harvested from trees became the papermakers material of choice.

Modern Paper Industry

Having come a long way from using rags and mulberry bark, papermaking has become a sophisticated science. Once a tree is cut down, it goes to a mill where it is debarked and then chipped into tiny fragments by a series of whirling blades. These fragments are then "cooked" in a vat with water and several chemicals, including caustic soda and sodium sulfate, to make slurry material known as pulp. In the final stages, additives such as starch, China clay, talc and calcium carbonate are added to the pulp to improve the strength and brightness of the paper. Then the pulp is bleached to a white color using water and chlorine before being pressed into rolls and dried.

Paper Industry & the Seven Components of the Macro-Environment

General Economic Conditions

The current economic situation is not as bad as it was in 2008 when paper companies were not prepared for the downturn in the market. There are still uncertain times ahead, but well-run companies have made the necessary adjustments to face the market challenges. The uncertainty comes from the general market conditions and trends in different areas across the globe.

The U.S. pulp industry is now relatively consolidated with the top five companies in the U.S. accounting for 60% of revenue share in 2009 (PricewaterhouseCoopers, 2010). The industry has become a vertical market with certain companies specializing in certain types of paper; and some smaller companies have been able to compete effectively by specializing and reducing costs by locating mills close to timber and customer supplies.

Among the challenges that will need to be overcome for paper products to have a long, successful life cycle in the current market is the widening gap between the bigger and smaller producer. This could have a material impact on the global dynamics of the industry. Certainly, many companies have felt the impacts from macroeconomic conditions in 2011, but the severity of the response will vary greatly by region, and will result in a divergence on the recovery curve.

In North America, the gap between strong and weak companies is significant. Those that exhibited discipline in their cost cutting, built a strong balance sheet, and secured raw materials have an optimistic outlook for 2012. Those unable to accomplish this will struggle in 2012 and beyond. The demand outlook is not strong enough to return any North American company to prosperity so without financial strength, options are limited. Limited scale or high operating costs often result in higher production levels than market demand, which causes the larger producers to take unplanned downtime to balance supply. Those facing these challenges may seek mergers with producers in a more secure position or become targets of acquisition.

China is also emerging as both, a major producer and consumer of paper. But although the paper market has been heavily subsidized, by a subsidy that helped triple production, China's paper consumption is going faster than its growth in production, which presents export opportunities for other countries.

Michael Armstrong, VP of PricewaterhouseCoopers, predicted in 2011 that "pulp demand should grow steadily



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