Domtar prepared to cut paper production

MONTREAL —After six months of successful integration with U.S. forestry giant Weyerhaeuser, Domtar Corp. is prepared to take downtime or close some of its most costly mills over the next two years to adjust to lower market demand, company officials said yesterday.
“We intend to rationalize the most expensive capacity as the market demands dictate,” Marvin Cooper, the company’s chief operating officer, told analysts at a meeting in Kingsport, Tenn.

Lack of order downtime and rationalization has reduced annualized production by nearly six percent to 4.96 million tons.
Another 425,000 tons of capacity are expected to be removed by 2009 if demand decreases by 3.5 percent-four percent this year and by up to two percent in 2008.
“We’re not going to close anything just for the fun of it,” Cooper said, declining to identify mills that could be targeted.
“We’re going to closely monitor our order book, we’re going to monitor our cost position, and we’re going to take the downtime or the closures in high cost facilities,” he stressed.
The company also plans to take advantage of increasing use of fibre at mills, known as creep, as an opportunity to close less-efficient operations.
“As we improve on the the creep side, we will close down the less-efficient machines so that we can be very strong on keeping on lowering our cost curve,” said CEO Raymond Royer.
Since 1999, North American production of uncoated freesheet paper has decreased about 13 percent to 13.7 million tons. The average annualized rate of production decline is about 1.7 per cent.
While that rate is expected to continue, Domtar believes it can benefit by seizing on an environment that provides an opportunity for more stable pricing.
Customer data suggests the declines experienced in the first half of the year partially will offset in the second half, said Dick Thomas, senior vice-president of sales.
So far this year, demand is down by 5.1 percent.
“In the end, we believe that 2007, while it will go in the books as a low trend year, we don’t think it will be down as much as the first half of the year indicates,” said Thomas.
“Aggressive” decisions to boost prices and eliminate significant discounting contributed to a volume decrease immediately after its merger with Weyerhaeuser closed March 7.
“We felt that was the right thing to do and, in fact, we felt it was imperative given our position in the industry,” Thomas told analysts. “Today, six months into the game, we feel the market has adjusted very well to the posture we took.”
On the Toronto Stock Exchange, Domtar shares lost 38 cents, or 4.38 percent, in trading yesterday.