Subsidies, Lawyers and all that

The US Department of Commerce has determined that Canadian super-calendered paper imports are "unfairly subsidized" and is applying a duty of 20.33% to paper from the Port Hawkesbury mill, and lesser rates to paper from three other mills. The decision is subject to various review processes, but takes effect immediately in the sense that the duty must be paid and held in trust, pending a final decision.

The full report is available at http://enforcement.trade.gov/download/factsheets/factsheet-canada-supercalendered-paper-cvd-prelim-072815.pdf

The Department of Commerce says that it analyzed the situation at two mills, Port Hawkesbury Paper LP of Nova Scotia and Resolute FP Canada Inc., and estimated that a duty of 20.33% was appropriate for Port Hawkesbury super-calendered products and 2.04% for the Resolute SC paper. These two companies and the individual mills involved are in very different situations, both financially and geographically, yet all other SC paper from Canada is judged to be subsidised by the average of the above two mills, and duty applied accordingly.

There is no information provided by Commerce on how the analysis was conducted, although one official reported that they had received over 30,000 pages of documents on the issue. If this information was printed in the numbers of copies common in the legal/bureaucratic world, it will have done a lot to help some lucky US fine paper mill.

I shudder to think of the associated legal bills, particularly those paid by the taxpayers.

The amount of duty at stake is about $100 million per year, which is presumably equivalent to the estimated "unfair subsides". If the situation lasts a few years, the total subsidy would be in the ballpark of $500 million. This is small change relative to the $25 billion or so of taxpayer's money that the US pulp and paper industry received in the infamous biofuel subsidy program that was distorted to include black liquor.

I will not compete with the crowd of Canadian and US lobbyists and lawyers by attempting to analyze the true balance of the subsidy situation, but I have to wonder how anyone can make an honest, rational analysis of what is fair in such a complex issue.

It is easy to understand why top management in any company pursues all the avenues available to maximize revenue. It is their fiduciary duty to the shareholders, and also their moral duty to keep their own mills and companies profitable to protect employees. The fact that such revenue is to the detriment of some other employees and/or shareholders is part of our competitive system.

Subsidies, international disputes, customs and like taxes on imports have always been a part of business, but they seem to become more significant and more complex as time goes on.

Unfortunately, in the final analysis, none of these disputes produces anything of value. They only shift the profits and losses around, between mills, companies and countries. They divert resources and brains away from producing useful goods and services, or solving the many social and health problems of our civilisation.

As our political/commercial systems become more complex, and political campaigns become longer and more expensive, we have to worry about competition from emerging economies with simpler structures. When I have worked on projects in South America, the local complexities seem much simpler, although the environmental regulations are generally more stringent that we are used to in North American and the trade unions are often more demanding.

Stora Enso recently announced that their Montes del Plata mill in Uruguay (a joint venture with Arauco of Chile) now has an average production rate of 3,700 tons per day of bleached kraft pulp, and has exceeded 4,000 tons on some days. When I worked on the environmental approvals for the plant a few years ago, the procedure was much shorter and simpler than any I had experienced in Canada or the US, although the Uruguayan regulations were much more stringent, and the scale of the project, physically and financially, was enormous.

Montes Del Plata uses state-of-the-art technology, which has resulted in very low operating costs, partly because of low-cost wood, but more because of very efficient design. Burning only its own waste, including black liquor, the mill generates 165 MW of electricity, and uses only 90 MW, equivalent to only 600 kWh/ton pulp. The balance of 75MW is sold to the local electricity grid. I do not know what the selling price is, but since it is competing with power generated from burning oil, it is probably producing significant income relative to the normal profit margin on market pulp.

This contrast between the SC paper issue and the success of the Montes del Plata mill raises the question about whether our corporate brains would not be better employed in developing new, state-of-the-art projects, perhaps overseas, perhaps at home, than fighting about which old, somewhat obsolescent mill will survive in a chronically declining market for printing papers.

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