Unintended Consequences Prove Profitable for Paper Industry

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Researched by Industrial Info Resources (Sugar Land, Texas)--Pulp and paper companies in the U.S. stand to receive billions from the government, not in the form of stimulus money or tax credits, but rather direct cash payments that have nothing to do with any current legislation. In fact, this recent windfall to paper companies is a result of the 2005 Transportation Bill that contains a provision that was designed to encourage the use of alternative fuels in vehicles and includes a credit of $0.50 per gallon for the use of fuel mixtures that combine alternative fuel with a taxable fuel such as diesel or gasoline. The provision that allows for the fuel subsidy is effective until the end of 2009.

From the onset of the bill's passing, much of the focus on alternative fuels was geared toward ethanol and biomass. A large number of mills fuel their power boilers with biomass in the form of woodwaste and forest residue. Burning black liquor as a part of the kraft pulping process has been a standard practice in the industry for decades, but only recently, towards the end of 2008, did forest products company started blending black liquor and diesel and applying for certification of eligibility for the incentive payments. Industry giants International Paper Company (NYSE:IP) (Memphis, Tennessee), Weyerhaeuser Company (NYSE:WY) (Federal Way, Washington), privately held Georgia-Pacific LLC (Atlanta, Georgia) and a few others may have received a total of more than $500 million in payments. With more than 60 kraft pulp mills in the country and close to 100 black liquor recovery boilers in operation, the potential of cash payments to companies could reach approximately $10 billion, with as much as $3 billion going to International Paper alone. Estimates place the value of the incentive payment at $230 per ton of kraft pulp produced.

Forest products companies have been hit with heavy losses during the economic downturn and capital expenditures are at record lows. For many companies, this recent injection of cash may only serve to lessen the impact of those losses, without necessarily translating into an increase in project spending beyond the current trend. The expectation is that more companies will begin to blend their fuels or increase the amount of "alternative" fuel. Doing so will probably require only minor equipment modifications or capital investments, if any.

Incidentally, Industrial Info has seen a recent spike in boiler and power projects at forest products plants that include several biomass boilers--not related to the alternative fuel tax credit. Expenditures tied to these projects are estimated to be about $600 million and are scheduled over the next eighteen months.

Industrial Info Resources (IIR) is a marketing information service specializing in industrial process, energy and financial related markets with products and services ranging from industry news, analytics, forecasting, plant and project databases, as well as multimedia services.