Coated Paper Controversy: Paper Case Cuts Both Ways

LATE LAST September, NewPage Corp., Sappi Fine Paper
 North America and Appleton Coated LLC, along with the United Steel Workers (USW), filed a petition with the Department of Commerce (DOC) and the International Trade Commission (ITC) charging Indonesia and China with illegal subsidies and dumping during 2008 and 2009, which subsequently caused "material injury" to the U.S. paper industry.

The petition relates to "certain coated paper," i.e., coated paper "suitable for high-quality print graphics using sheetfed presses," whether containing groundwood fiber or not. If the petitioners are successful, the government will impose duties on these imports.

The issue becomes emotional. Certainly, individuals whose business is affected either favorably or unfavorably by the imports have strong opinions. Others I've spoken with, including economists and other industry people representing printers, merchants and mills, have also expressed strong opinions on both sides. Some feel strongly that there should be unrestricted free trade, and that tariffs in general are disruptive. Conversely, others feel that we have lost our manufacturing base to subsidized imports, and want a level playing field. Major trade associations, including Printing Industries of America (PIA), NPTA and AF&PA, have all remained neutral, basically saying that they support free and fair trade.

Countervailing duties (CVD) are the remedy for exports to the United States that have benefitted from illegal subsidies. In this case, the petitioners claim that the subsidies include preferential lending and tax credits, as well as input subsidies concerning the cost of timber, papermaking chemicals, land and electricity. The petitioners also claim that China's currency is undervalued, which also provides a subsidy.

On March 2, the DOC announced a preliminary finding that subsidies have occurred, and ordered U.S. customs to collect duties ranging from 3.92 percent to 17.48 percent, pending final determinations.

Anti-dumping duties (ADD) are the remedy for dumping, which is defined as selling at less than fair value (LTFV). This normally means that a company is selling in the U.S. at a price below the price it sells at in its home market, but can also mean selling below cost or selling below the price it sells at in other export markets. It is up to the DOC to determine if dumping has occurred. On April 29, the DOC was scheduled to announce preliminary findings on anti-dumping.

If the DOC findings are positive, the final step is that the ITC determines whether the imports from these mills cause "material injury" to the U.S. industry, and this may well be the critical question. Indeed, in a similar case filed in 2006 on coated freesheet, the ITC made a final determination that there was no material injury, largely because the imports were predominately in the form of sheets, while the domestic industry produces 80 percent rolls.

This case has been defined differently: it is about sheets only, and includes paper containing groundwood or mechanical pulp, largely because—while the prior case was under investigation—the Asian mills added just enough mechanical pulp so that the shipment to the United States would not be classified as coated freesheet.

The petitioners contend that the first case should have been upheld, but failed because the rolls vs. sheets issue obscured the real degree of injury to the U.S. industry. The respondents (the Asian mills) contend that this is essentially the same case, arguing that rolls and sheets are not different industries, that the facts are the same as in the prior case and, because the case had no merit before, it has no merit now.

The respondents have also accused the petitioners of hypocrisy in bringing such a case because they were benefiting from subsidies themselves. "It's not only ludicrous, it defies sanity," according to Terry Hunley, acting president of APP (Asia Pulp and Paper) North America.

The case is complex, and may well hang on any of a number of technicalities such as the specific grades involved, the time period involved and the definition of "material injury." The facts are such that it is possible to present strong arguments for either side, and the parties to this case have done so.

The testimony, briefs and interviews concerning this case argue in great detail about the technicalities, and also address a number of broader issues, including the volume of imports and impact on the U.S. industry in terms of price, volume and market share, as well as the downstream impact on print and print jobs.

It is noteworthy that, in the prior case, the DOC confirmed the allegations of dumping and subsidies, and that the DOC has found in this case that APP benefitted from countervailable subsidies. Daniel Porter, partner of the law firm Winston & Strawn, says that APP is vigorously contesting these allegations before the DOC. "It is not appropriate to assume that the Commerce Department's final determination will affirm these preliminary findings given that the Commerce Department is still compiling data and conducting its analysis," he notes.

Nevertheless, it does seem that this case will rest on the "injury" issue, as did the prior case.

Analyzing the Numbers

The data appear to support the respondents' claim that there was no injury. As Figure 2 above shows, imports from China did surge in the first six months of 2009, and U.S. shipments did decline sharply at the same time. But, the respondents argue that the growth in Chinese imports reflected a return to normal and, in fact, came at the expense of imports from other countries. Indeed, as the table shows, U.S. shipments as a share of U.S. consumption were very stable (highlighted in bold).

However, the petitioners interpret this differently. "In actuality, other importers withdrew from the U.S. market, at least in part, in lieu of competing with Chinese and Indonesian producers whose prices are artificially and ruinously low due to unfair government subsidies, dumping and currency manipulation," explains John Cappy, president and CEO of Appleton Coated.

"The huge jump in market share of the Chinese and Indonesian producers could only occur because of pervasive and severe underselling by producers in these countries.

"Moreover, in its preliminary determination, the Commission specifically rejected the respondents' arguments that there could be no injury as a result of Chinese and Indonesian imports because U.S. producers didn't lose market share," he adds. "Specifically, they said, 'it appears that domestic producers lowered prices to maintain share in the face of low-priced subject imports, particularly in interim 2009.'"

Cappy also points out that the industry's financial picture deteriorated substantially in the first half of 2009, a measure of injury, as documented in the ITC publications.

All of this is true, but the respondents counter that the decline in price and the industry's worsened financial position are due to the economic downturn and not to imports, and certainly those factors are at least partly responsible. The respondents also contend that the lower prices are a direct result of the black liquor subsidies that U.S. mills received during 2009.

Black Liquor Debate

The alternative fuel mixture credit, commonly called the "black liquor subsidy," was an unintended consequence of an attempt by the U.S. government to promote the use of biofuels. According to a popular blog, "The Dead Tree Edition," this resulted in $6.5 billion of tax credits in 2009 to pulp producers and integrated paper and paperboard mills in the U.S., essentially for burning black liquor, a byproduct of the pulping process that the mills have always burned for fuel.

"The Dead Tree Edition" reports that NewPage received $304 million in credits, but still lost $308 million, while Sappi received $136 million in credits, but lost $251 million. Appleton Coated is non-integrated and received no black liquor credits.

The petitioners argue that the black liquor subsidy is not relevant to the case: it was temporary and has ended. The respondents in the case argue otherwise. In testimony before the ITC, APP's Hunley said, "Earlier this year, NewPage used its U.S. government subsidies to take our largest single customer, Unisource, representing half of our business, away from us. Half of our U.S. volume evaporated in that decision."

The respondents further argue that the lower prices in 2009 were a result of the black liquor subsidies, citing statements by NewPage in its SEC filings and, in its 2009 Annual Report, NewPage does say that the black liquor subsidies were passed on to customers: "We believe the decline resulted primarily from the benefits of the alternative fuel mixture credit being passed on to customers, the negative effects of imports of coated paper from China and Indonesia, which we believe are being sold in our markets at artificially low prices and lower demand..." However, it is not clear whether the subsidies themselves caused the lower prices, or whether the competitive nature of the marketplace caused the lower prices.

APP set up a Website, www.saveprinterjobs.com, claiming that "a tariff on imported coated paper will disrupt paper supplies, reduce the number of available paper supplier options and eventually cost U.S. printer jobs because some publishers will be forced to seek cheaper printing solutions in Canada or Mexico—or forego printing some products all together."

They quote Thomas Prusa, Ph.D., a professor of economics at Rutgers University and an expert in international trade—though not necessarily pulp and paper—who said, "market-distorting protective actions such as tariffs destroy 10 to 20 times as many jobs as they create, most often because the jobs move outside the United States."

In a subsequent interview, Prusa explained to me that downstream job loss resulting from protectionist tariffs is usually somewhat less than the 10 to 20 times cited by APP, but occasionally the lost jobs are even greater. He also pointed out that he does not consider related job losses; i.e., when a mill closes, very often the entire town suffers, and job losses far exceed those lost in the mill. Still, if more jobs are lost than are saved by tariffs, even if only one or two times as many, it can hardly be a good thing.

But will this apply in this case? Michael Makin, CEO of Printing Industries of America (PIA), says that there is no question that paper is one of the more significant resources that printers use, and that "it is not inconceivable job losses would result if paper prices across the board are higher." But he also adds, "I'm not sure you can draw a direct correlation. There are only two countries involved, and printers have many sources." PIA has remained neutral in this case because some of its members support, while others oppose, the duties.

Margie Dana, Print Buyers International, agrees that "an increase in the cost of printing eventually leads to less printing," but isn't sure the relationship is a direct one.

Economist John Maine, vice president for RISI, and Ron Davis, Ph.D, chief economist for PIA, both believe there is little direct relationship between print cost and print volume. The forces that drive print buyers to move to electronic media include cost, of course, but the cost of paper is a small part of the equation. Personalization, traceability and instantaneous deliverability across the globe are larger factors that drive electronic communications. There is also some concern that large printers might move work to Canada or Mexico, but Maine advises, "I have gotten feedback from all of the major printers on this, and the response is universal—they will not move jobs to either Mexico or Canada because of the tariff on Asian paper."

Material Injury

The case will likely turn on whether the U.S. industry "is materially injured or threatened with material injury by reason of LTFV and subsidized imports of certain coated paper from China and Indonesia." The statute defines "material injury" as "harm which is not inconsequential, immaterial or unimportant."

That definition doesn't seem to help much, and an ITC staffer noted that the commissioners essentially make a subjective judgment and can consider any factors they deem relevant. Their final decision will be documented and explained.

But what's fair? What's best for the U.S. economy? What should happen? What will happen?

In the end, the laws, which mirror the laws of the World Trade Organization, will determine the outcome. I do not like the idea that this case, like the prior case, may hinge on technicalities relating to an artificially selected time table and which items are included or excluded from the scope. But the law, imperfect though it may be, is the only tool we have to balance the issues of free and fair trade.

Taking the broader view, we can see in Figure 3 that from 2001 to 2006, imports of coated paper from China rose from virtually nothing to more than 300,000 tons, roughly 14 percent of the U.S. market, but were fairly stable after 2006. If those imports were subsidized, then that was when the initial injury occurred and, if so, it continues today.

But that's history, and may not be what this case is about. For now, the two sides will have to fight it out as the case is defined.

UPDATE: As PI went to press, on April 29, the DOC announced anti-dumping duties of 30.8 to 89.7 percent on imports of coated paper from China, and 10.6 percent on imports from Indonesia. PI

About the Author
Jack Miller is founder and principal consultant at Market-Intell LLC, offering market intelligence in paper, print and packaging. Most recently, he was senior consultant, North America, with Pira International. Miller was former director of market intelligence with Domtar, among other positions. Contact jack.miller@market-intell.com.