SIC 2621 Paper Mills

SIC 2621

This category covers establishments primarily engaged in manufacturing paper from wood pulp, wastepaper, and other fiber pulp. In addition, these establishments also may manufacture converted paper products. Establishments primarily engaged in integrated pulping and papermaking are included in this industry if they primarily ship paper or paper products.

NAICS CODE(S)

322121

Paper (except Newsprint) Mills

322122

Newsprint Mills

INDUSTRY SNAPSHOT

The United States produces more paper and paperboard than any country in the world. It has maintained this position by consistently producing about one-third of total world production, far more than any other country. Historically, domestic U.S. paper and paperboard mills have produced about 90 percent of the paper consumed in the United States. Taken as a whole, the U.S. pulp, paper, and converted paper products industry is among the largest U.S. manufacturing industries in dollar sales. Domestic paper and newsprint mills shipped $50.3 billion worth of products in 2005, according to the U.S. Census Bureau. While imports account for about 10 to 12 percent of the paper consumed each year in the United States, domestic manufacturers dominate most segments of the industry.

Although paper mills are separate from pulp mills in the Standard Industrial Classification System, in reality the two are directly connected. About 70 percent of all paper is produced at mills that are "integrated" with a pulp mill at the same site, both of which are typically owned by the same company. Most high volume "commodity" paper and paperboard grades—such as newsprint, uncoated free sheet, and linerboard—are produced in this fashion. Some smaller paper mills producing specialty grades may not be connected with a pulp mill. They procure pulp from other mills owned by the same company or buy "market pulp" produced by other companies.

Converters of paper products, which are often owned by paper companies, add value to paper and distribute their products to consumers and industrial users. This sector is more widely distributed and includes firms that are directly integrated with paper manufacturers, as well as firms that purchase paper, paperboard, and plastic film from manufacturers. Converters transform these materials into thousands of different finished products. Most converters are fully independent operations. However, the converters that are directly owned by or connected to paper and board manufacturers tend to be very large and account for a disproportionate percentage of total industry sales.

While papermaking is an energy intensive industry—among the largest U.S. industrial consumers of energy—the pulp and paper industry itself produces more than 50 percent of the energy it uses through cogeneration and burning of waste fuels, such as bark and spent pulping chemicals.

ORGANIZATION AND STRUCTURE

Papermaking starts where the pulping process leaves off. The first step in papermaking is piping the pulp to the headbox of the paper machine. At this point the pulp—now called the furnish—is 99 percent water and 1 percent fiber. At the headbox, the pulp is laid onto a large mesh belt made of plastic, which is called a wire or a forming fabric. This wire can be as wide as 33 feet. As the water drains out, the fibers bond to each other and form a strong web. This web is taken off the wire by a series of rolls and put into a press section, where more water is squeezed or vacuumed out of the web. Then the web enters a long series of dryer rolls that are heated by steam. As the web comes in contact with these rolls, the water flashes off. By the time it leaves the dryers, the web is 3 to 4 percent water. After the paper is wound on a reel at the end of the paper machine, many things can happen, depending on the grade. It can be slit and shipped as a large roll or converted into paper products at the same location.

Paper mills are organized by the type of paper they produce. For example, some paper mills produce only printing and writing paper, while others produce newsprint. Many paper mills produce "white" paper, in which brown wood pulp is bleached to remove color and other impurities. Many paperboard mills, which are discussed in SIC 2631: Paperboard Mills, manufacture unbleached "brown grades" of paperboard, some of which are used for making corrugated shipping containers. However, some paperboard mills produce "white" products, such as the bleached paperboard used to make folding cartons for products such as breakfast cereal boxes. Some paper mills produce unbleached brown paper for products such as grocery sacks.

Financial Structure

The paper industry is the most capital intensive of all basic U.S. manufacturing industries, requiring nearly continuous major investments for plant and equipment. According to one ranking, the pulp and paper industry is twice as capital intensive as any other major U.S. industry. This situation has led major paper companies to invest in enormous, high-speed machines that can use economies of scale to produce paper at the lowest possible cost.

The late 1980s and early to mid-1990s were roller coaster years for the U.S. paper industry. After paper companies enjoyed record profits in the late 1980s, the early 1990s saw a dramatic drop in paper prices and very difficult financial circumstances for many paper companies. Prices for most paper products started to drop in mid-1989 and remained low well into the 1990s. Despite low prices being paid for paper, many paper companies had embarked on major capital projects to build new paper machines and expand existing units. The twin conditions of new capacity coming on line and soft demand conspired to keep prices low, even when demand began to recover in 1992 and 1993.

However, the spring of 1994 saw the beginning of one of the sharpest run-ups in paper prices ever. Supplies tightened, prices rose, and customers began stocking unusually large amounts of inventory in anticipation of future price increases. The result was that average prices for all paper and paperboard rose 8 percent in 1994 and a whopping 41 percent in 1995. However, the boom in paper prices was destined to be one of the shortest on record. Customers began to take stock out of inventory in the fall of 1995 and prices began falling again. By mid-1996, prices of some grades had fallen by a third. Prices for paper stabilized in late 1996 and stayed basically in the same low range until mid-1999, when prices began to creep upward. They fell again during the early 2000s, amid weak demand. However, some industry analysts indicated that conditions were improving in early 2003, as prices were recovering gradually.

This business cycle has plagued the paper industry for years. Plans for big greenfield (new) mills and machine additions are usually made in the middle of an economic recovery, when paper company profits are rising. These projects involve complicated engineering and take about three to four years to complete. In other words, new or expanded mills tend to come on line in the middle of a recession, which is what happened in the early 1990s. Also, since paper is a largely nonperishable product, both mills and customers can stock large amounts of paper in inventory. As a result, inventory adjustments can produce large swings in paper pricing.

With a burst of new mills and paper machines in the early 1990s, the mid-1990s saw relatively low growth in papermaking capacity. After increasing capacity at a 2.6 percent average annual rate from 1986 to 1995 and by 3.5 percent in 1996, paper and paperboard companies added just 2.8 percent capacity in 1997. In the early 2000s capacity fell drastically, dropping from 103.9 million tons in 2000 to 101.6 million tons in 2001. In 2002 capacity dropped 1.0 percent, to 100.5 million tons.

Large capital investments have created high fixed costs for paper companies. The expense of building and maintaining plants and equipment have become a much greater percentage of a paper company's total costs, while labor has become a lower percentage of costs. Because huge, automated mills need fewer people to run them, many in the industry assumed that paper companies could not adjust to lower demand by laying people off and taking capacity out for short periods. However, while that assumption appeared to be true during the paper industry's recession in the early 1990s, the industry used a completely different approach when prices began dropping in the mid-1990s. Beginning in 1996, many U.S. paper companies—particularly newsprint producers and linerboard...

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