Sunday, November 22, 2009

Wisconsin Congressman Tries To Extend Black-Liquor Credits

It's a simple piece of legislation you could call the Publication-Paper Manufacturers Protection Act. Or perhaps the Bankrupt The Canadian Pulp Industry Amendment.

At barely 100 words, Rep. Steve Kagen's recently introduced bill never mentions pulp, paper, or black liquor. But, if enacted, H.R. 4066 would indefinitely continue the black-liquor credits that have been worth billions of dollars this year to U.S. pulp mills. Kagen, a Democrat, represents a section of northeastern Wisconsin dotted with such mill towns as Green Bay and Appleton.

At least 32 companies operate kraft pulp mills in the United States and are probably receiving more than $2 billion per quarter in "alternative fuel mixture" credits for powering their mills with a mix of diesel fuel and black liquor, a pulp byproduct. The companies sell the pulp to other manufacturers, often overseas, or use the pulp to make such products as copier paper, packaging materials, and high-quality publication papers.

The credits have been a nice boost to the bottom line for some of the companies. For others, they have been a lifeline -- especially for makers of coated paper and other publication grades, which have been hit especially hard by declining prices and demand this year

The stock of Verso Paper, the country's #2 coated manufacturer, is so beaten down that it would have been cheaper for the federal government to buy the company outright rather than to pay it the black-liquor credits it has earned so far this year. Privately held, and heavily leveraged, NewPage, the #1 coated maker, seems to be in an even more precarious state.

Today's prices are below the cash costs of many U.S. mills, NewPage executives say. They say that if the black-liquor credits expire, as scheduled, at the end of this year, some mills will either have to raise prices or shut down. Some market observers think the consequences would be even more severe -- bankruptcy reorganization for one or more U.S. companies.

But extending the black-liquor program would be devastating for many Canadian manufacturers, which sell much of their product in the U.S. without benefit of a $200-per-ton government subsidy. Fraser Papers blames the program for driving it into bankruptcy reorganization, and such companies as Tembec and Catalyst Paper are struggling to stay afloat while competing against the subsidized products.

A permanent U.S. program would either force Canada to answer with its own subsidies or to watch its pulp industry die. (Canada's answer to the U.S. subsidies so far is a less generous program that helps pay for capital investments.)

Kagen's bill is likely to face opposition from those who say the government's alternative-fuels efforts are supposed to encourage the development of new bio-fuels, not to reward companies for merely doing what has been standard practice at pulp mills worldwide for decades.

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