1939: Paper And Pulp Industry

Domestic Production and Consumption of Paper.

In 1939, both the consumption and production of paper in the United States broke all existing previous records. Preliminary estimates indicate that domestic production reached a total of nearly 13,500,000 tons, and that consumption, computed by adding imports to production and subtracting exports, was approximately equal to the previous all-time record of 16,000,000 tons established in 1937.

Domestic production of paper in 1939 broke the peak record of 1929 for the fourth consecutive year.

It is apparent from analysis of these data that the greatest expansion of production is occurring in a group of grades which is generally classified as mechanical papers, i.e., papers that are used in a mechanical or physical manner as for wrapping other commodities and as for boxes, cartons, and various industrial uses. The papers which are used principally for cultural purposes, such as printing and writing, are not increasing either in production or consumption as rapidly as are the mechanical papers. In these grades, the per capita consumption records that were established in the late 1920's have not been generally exceeded.

The underlying reason for such a rapid expansion in the use of paper during a period when most other commodities did not reach former levels is due principally to the efforts of paper manufacturers to serve a greater variety of uses. This means on the one hand the creation of new uses, a continuous process which is becoming more and more intense. On the other hand, it means substitution for other commodities which are perhaps either more expensive or less suitable than paper.

Paper Prices.

Coincident with the expansion of use, consumer costs of paper have dropped more rapidly than in the case of most other commodities.

What has occurred in the prices of the various grades of paper is indicated by the records of the Bureau of the Census which in the biennial years show both production and f.o.b. mill value of production. It is clear from an examination of these data that the average value of all paper has been affected not only by the greater proportion of low cost paper and paperboard that now enters the total, but also by substantial reduction in the f.o.b. mill value of each specific grade.

Regional Shifts in Production.

The reduction in cost of the finished product has come about through increased efficiencies in manufacture, by speeding up machine operations, and by regional reallocation of large sections of the industry. Within recent years most expansion that has occurred coincident with the increased demand has taken place in new regions, in the South and in the Pacific Northwest. In both regions supplies of wood suitable for the manufacture of certain kinds of paper were amply available. They could not be used for other purposes and their initial costs for use in the manufacture of pulp and paper were relatively low.

These regional shifts in production obviously created difficult competitive conditions for the older mills, which in some cases were not as efficiently organized and which were dependent upon a more competitive pulpwood market. The effect, however, was not so evident in reduced production in the older regions, but in the shifting of machine capacity to higher grades and to kinds of paper which do not compete directly with the mass production grades. This constituted an underlying urge for the development of new paper uses.

Effect of War on Wood Pulp Imports.

The outstanding factor in the industry in 1939 was the influence of the European War upon the procurement of wood pulp for conversion into paper within the United States, and the effect of war conditions upon the paper market.

Three-fourths of the importations come from Northern and Central European producing countries. This pulp, together with that received from Canadian manufacturers and that sold by domestic pulp producers, is used by a large class of paper mills which produce no wood pulp. More than three-fourths of the wood pulp required by this class of mills is imported. Although the quantity of imports has increased over a long period of years, its importance from the point of view of total consumption has not kept pace with the development of self-contained manufacture in the new producing regions.

The present European war began with submarine attacks, mine laying and aerial bombing. Most of the pulp imported into the United States comes from Finland and from eastern ports of Sweden, which upon leaving the Baltic Sea must pass through the closely guarded entrance. The Allied blockade immediately affected shipments of pulp from Germany and other Central European producing countries. The invasion of Finland by Russia, which necessitated complete mobilization of Finland, seriously affected mill operation. Subsequent blockade by Russia prevented exportation. It is probable that as much as one-third of the normal world shipments of wood pulp will be affected by the war.

Also affected immediately by the war was the cost of shipping, as cargo and insurance rates soared. These costs were generally passed on to the pulp purchaser, which meant a substantial increase in the cost of wood pulp delivered in the United States.

Increase in Orders and Stocks.

These conditions which were generally known by paper consumers, augmented by the fear of price increases as a result of the war, encouraged the placing of orders immediately upon declaration of war. The volume of orders for future shipment which was built up exceeded any previous record. It enabled the industry to operate throughout the last third of the year at practical operating capacity.

In spite of the huge increase in orders, price movements were confined largely to those grades of paper in which costs were immediately affected and in which prevailing prices prior to the declaration of war were at exceedingly low and unprofitable levels. The average increase amounted to approximately 8 per cent, which failed to bring the prices to the 1937 range.

There is no way of measuring month-to-month consumption of paper. It is generally recognized that during the last third of the year consumption did not keep abreast of production. The result was an increase in stocks in the hands of wholesalers and consumers. It is difficult at the present time to foresee the effect of these greater stocks upon future operations. Much of the increase in stocks, it is reported, was necessary as an incident to the greater volume of sale. Also, much of the stocking occurred beyond the producer, the fabricator and the merchant in the form of used paper as, for instance, in packaged food products which themselves were being stocked. Whether these stocks prove to be embarrassing, subsequently depends to a large extent upon the nature of future demand.

The demand for paper because of its widely diversified use is closely related to general business activities in the United States. The trend movements are parallel; but, because of the constantly greater use of paper, its trend is following a much more steeply tilted upward course than that of general business.

Labor Conditions and Earnings.

In 1939 labor relationships in the industry were unusually stable, although in some few cases hourly wage rates were somewhat lower than the peak records of 1937. Annual wage earnings, however, were greater because of the high production levels. At the end of the year the industry was employing more workmen than ever before in its history, and, in spite of the fact that production per man-hour and per machine-hour had increased substantially as a result of the greater demand, preliminary estimates of payrolls for the year indicate that a new all-time record will be established.

Expansion, Operation and Income.

The expansion of capacity in 1939 was chiefly confined to improvements in existing mills and the addition of some five new paper machines. Although three new mills were in the course of construction during the year, no other construction projects were actually undertaken.

The increased production activity during the last third of the year offset the generally unprofitable levels of operation that existed during the first two-thirds of the year. During this period production continued at a relatively high rate of operation, but because of the new capacity that had been added to the industry in the previous years, operating rates as a whole were not high enough to be profitable at existing price levels. Competition for existing volume was most intent and price concessions were numerous. Until the European War began costs of manufacture were upon practically the same level as that of 1938. Profits were, therefore, confined principally to those companies that were fortunate enough to obtain a sufficient volume of production, and whose costs of manufacture were exceptionally low.

The increase in volume during the last third of the year gave an opportunity to many other companies to operate more profitably, and preliminary financial reports indicate that for the year as a whole the industry will have met its dividend and interest payments and added a small amount to surplus. The profit per unit of sale, however, and also per unit of invested capital, will be substantially lower than in other years of peak volume production. This is merely a continuation of a long-time trend in the industry. It is due to the fact that new production capacity has been added more rapidly than the expanding consumption of paper has required.

Production and Consumption Abroad.

Recent statistics of paper and wood pulp production in other countries are not available in complete form. Records of more important producing and consuming countries indicate that the world industry is expanding but not as rapidly as is that of the United States. The pattern of expansion is quite similar also, beginning with the cultural grades and later shifting to the mechanical grades as general business and industry expand.

Of course, the European War will have a far-reaching effect upon world paper consumption, probably more serious in other countries than in the United States. Already drastic curtailment programs are under way in the more important European consuming countries, especially in publications which require cultural grades. In other countries the influence is likely to react through the price increases incident to foreign trade under war conditions, for many countries are dependent upon imports for wood pulp if not for a large share of their paper requirements.

A war of long duration might have considerable influence upon the pattern of the American industry. This would naturally depend upon the availability of wood pulp, especially the large part of which is normally drawn from European producing countries. Much of this tonnage could be replaced by domestic production of substitute pulps or of pulps composed of new kinds of fiber. Expansion of domestic manufacture during the war might be fully justified. Question arises, however, as to the chances of survival following the war when export shipments from European producers again enter the world markets and probably under more advantageous conditions of cost and international finance than American producers could hope to attain. This becomes particularly serious in pulp manufacture for the investments involved are extremely large and amortization must be drawn out over a long period of years. See also CHEMISTRY.