Paper Tariffs — Will Commerce Be Swayed?

Rising postal rates. Ever-increasing energy prices. Add the cost of obtaining coated free sheet (CFS) paper to the list of runaway costs being experienced by the printing industry.

After socking China and Indonesia with 20-plus percent countervailing duties (CVD) and assessing a smaller tariff (1.76 percent) on South Korea in late March, the U.S. Department of Commerce stood poised to release its final ruling this month, though the ultimate word on the CVDs could come later in 2007. Barring an 11th hour reversal by Commerce, the U.S. paper manufacturing sector’s gain will be the U.S. printer’s loss.

Hardest hit will be West Coast printers, where up to 90 percent of the CFS market is supplied with Asian paper, according to John Maine, vice president of RISI, which publishes titles in the pulp and paper industry. Maine notes that Chinese and Indonesian suppliers shipped 360,000 tons of CFS to the United States in 2006, and believes that volume could drop off by 50,000 to 100,000 tons should the tariffs remain unchanged.

More CFS Price Increases

While Korea will help fill the void left by the reduced volume, Maine cautions that a second price increase in 2007 for CFS was imminent, which will boost prices by about 5 percent—this in addition to the $20 transaction fee instituted with the February price increase. The potential also exists that an anti-dumping duty (ADD), slated to be announced at the end of last month, had the potential to impact the Korean suppliers more so than the CVDs.

Fortunately for printers, Maine says there are “buffering factors” that could help prevent prices from escalating too sharply.

“The Chinese government reinstated the export tax rebate, or in some cases, completely eliminated the value-added tax that was partially rebated,” he notes. “Korean and European suppliers will fill in some of the supply gap. And North American producers will shift capacity to sheets, when possible, and will eliminate dabbling in the uncoated offset market if free sheet becomes tight.”

U.S. printers and foreign paper suppliers find themselves in the odd position of fighting for the same cause. Michael Makin, president and CEO of PIA/GATF, sent a letter opposing the CVDs to members of Congress, stressing that given the uptick in postal rates and energy costs, the printing industry could hardly reconcile the 5 percent rise in paper costs. Further, Makin pointed out that Canadian printers—out of arm’s reach from the impact of CVDs while firmly within the NAFTA free trade zone (not to mention just a geographically short distance away)—could have a devastating impact from a competitive standpoint.

As of press time, parties supporting the reduction and/or elimination of the CVDs were hitting the lobbying pavement. Julie Busbee, director of government affairs for PIA/GATF, acknowledged that the tariff rates could actually end up being higher, but said that her organization is doing everything in its power to have the CVDs set aside.

“What you have is two sides saying that the methodologies used to set the rates were incorrect, and here’s what they should be,” Busbee says. “We don’t know what Commerce will decide in the end, and anyone who tries to say what will happen is only guessing. We’re just doing all the leg work to ensure they’re as low as possible.”

Consumers Hurt Most

Ultimately, the people who will be hurt most by the CVDs are consumers, contends Tom Vendetti, president of China Paper Holdings, an international paper sourcing firm. The large-scale consolidation of the paper industry is leaving few choices for purchasers and, with the tariffs invariably prompting foreign sources to look elsewhere, supplies will continue to dwindle and prices will continue their upward trend.

“We’ve talked to paper buyers all over the country, and they’re all very nervous about consolidation. They welcomed options coming from offshore,” Vendetti says. “Now...paper buyers are subject to the whims of the U.S. paper industry, which is clearly making an effort to increase prices across the board.”

Some have speculated that the CFS paper industry became a litmus test to help squelch a U.S. trade deficit with China that reached $232.5 billion in 2006. Sectors such as steel, electronics and garments, to name a few, stand to benefit greatly in a big-picture initiative to close the deficit.

“It’s protectionism, and it’s going to hurt the U.S. economy,” Vendetti predicts.

He is also concerned that without a united front opposing the CVDs, Commerce’s decision could be a gateway to similar fates for uncoated and specialty papers. “This kind of move ultimately hurts the American consumer, and that’s what we’re trying to prevent.”

Despite the seemingly regional impact of the CFS tariffs, such duties can have a domino effect on all paper. Bob Lindgren, president of the PIA of Southern California (PIASC), points to the global impact from the early 2006 mill strike in Finland.

What has provided a notable advantage, particularly for the Chinese, is their modern, efficient mills with newer paper machines, Lindgren notes. That provides a significant edge against competition that sometimes uses 40-year-old technology.

Foot-Shooting Impact

What Lindgren finds most galling about the CVDs is the foot-shooting impact on U.S. businesses in terms of competing with international printers, such as China and the aforementioned Canada. “We just handed them an additional, significant competitive advantage. If anybody thinks that’s a clever idea, they’re crazier than bed bugs. All for the benefit of one lousy petitioner (NewPage).”

Lindgren feels it is pointless to lobby the Commerce Department at this juncture, and believes the best chance for overturning the CVDs is to make members of Congress understand how deeply the printing industry will be impacted by the loss of competitive sources. In turn, Congress can impress this upon the Bush Administration and effect a change in the executive branch’s position. Suffice to say, there has been a level of disconnect on the executive/legislative front on broader matters this year, making prospects for a short-term about-face somewhat daunting.

Complicating matters further, the chairman of Cerberus Capital Management—the private equity investment firm that counts NewPage among its holdings—is John W. Snow, Secretary of the Treasury from 2003 to 2006. There has been no evidence, though, to suggest that Snow’s connection to Dayton, OH-based NewPage provided any special consideration in Commerce finding in favor of the petition.

The game of political football is difficult, Lindgren says, factoring in that the administration has put a face on its trade deficit in the form of China.

“It’s an uphill battle,” Lindgren says. “This bias against China is a problem. And, it’s not that the U.S. interests are furthered by this petition—far from it. The damage that’s being done is extremely real. The stupidity of this process is extremely real. What we’ve got to deal with is the political and emotional background of an anti-China backlash. It’s a lot to overcome.” PI