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Story Publication logo December 9, 2012

Paper Cuts: Wisconsin's Place in Paper Industry Under Siege

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Faced with the devastating twin threats of digital and China, can a critical Wisconsin industry...

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A stand of aspen trees towers in the Chequamegon-Nicolet National Forest in northern Wisconsin. Image by Mike De Sisti. USA, 2012.

CHEQUAMEGON-NICOLET NATIONAL FOREST, Wisconsin--In the deep quiet of the northern Wisconsin woods, a ripsaw shriek brings a 50-year-old maple crashing to the ground.

The John Deere harvester needs less than a minute to de-branch it and saw it into perfect 8-foot sections, then moves on to the next tree, its trunk marked with spray paint as ready to cut. A skidder maneuvers in from behind, loading the wood onto a nearby truck.

The scene that plays out on this August morning is nearly as old as the state itself.

The wood will be hauled to the nearby mill to be chipped and cooked into pulp. The pulp will become paper, rolls and rolls of paper, in the finest of grades. The mill will support hundreds of families, sustain the town and help drive Wisconsin's ink-on-paper economy.

But that economy is failing.

In the age of Google and the iPad, change in America's papermaking heartland is swift, turbulent and perhaps irreversible.

In Wisconsin, mills that produce publishing-grade paper have been closing at an average of one a year since 2006. Each shutdown means a loss of 300 to 600 jobs, in turn draining hundreds of millions of dollars from the region and creating an economic drag that rivals the days of automaker shutdowns in Michigan.

An industry that thrived for generations on a tight, homegrown loop - from the forest to the mill to the printer and often back to the mill for recycling - finds itself at the mercy of Wall Street hedge funds and equally unforgiving global economic and political forces.

Investors see a bleak bottom line, a world in which paper is losing its value to laptops and tablets; they aim to squeeze out profit while they can. China, meanwhile, is pouring government money into new mega-mills and machines, betting it can win by flooding the world market with low-cost paper.

Mill workers in Wisconsin, the nation's top papermaking state, have fought off the digital threat for years. The threat posed by China is just now becoming clear.

All of that can be forgotten in the forest, where on some days the only company for Phil Thums and Mike Ziembo are the deer that watch with wide eyes and the wolves that linger in the shadows.

"You have to love to do this," said Thums, a third-generation logger, sitting in the cab of his harvester.

The hours are sunrise until sundown, often six days a week. Nights are spent in a trailer parked in the woods. Like other loggers, Thums owns his own equipment, so there are machinery and maintenance payments on top of the 50 gallons of diesel per day. On days off, he'll head home to an 8-year-old daughter who admonishes her daddy to stop cutting down trees.

By this day's end, the two will have taken down more than 150 trees, enough for four truckloads, all headed to the mill about 45 minutes away in Park Falls, population 2,462.

Of the state's 13 remaining mills that make publishing-grade paper - the others make paper towels, tissue and packaging - Flambeau River Papers LLC has one distinct advantage:

His name is William "Butch" Johnson.

Modern paper baron

In many ways, Johnson is the modern equivalent of the paper barons of yesteryear, the Brokaws and Meads and Bergstroms, the ones whose wealth endowed university buildings, community auditoriums and the local YMCA.

Johnson is 62, tall, imposing and gravelly-voiced. When he walks into a restaurant, he's greeted like a big-city mayor. He's active in statewide politics, Republican mainly. He is a logger by trade, like his father before him.

"I'm not a papermaker," Johnson said. "I'm trying to become one."

Founded in 1895, the paper mill grew up with Park Falls, becoming so connected to the town that losing one would doom the other. Employing 538 at its peak in the late 1990s, the mill produced paper for church hymnals, Little Golden Books, and later Salman Rushdie novels and first-edition Harry Potters.

In 2006, the mill - then owned by Ohio-based Smart Papers LLC - became an early casualty of the digital era. Johnson's logging company was its sole pulp supplier and at the time of bankruptcy had a year's worth of timber, valued at $12 million, "racked and stacked" in the mill's woodyards.

Johnson grew up in Park Falls. His classrooms at St. Anthony's grade school looked out at the mill. And now some 300 workers - his old school pals, the town's mayor - were laid off. "For sale" signs popped up on virtually every block without any real hope of buyers.

"I was looking for someone else, an investor, to buy the paper mill," said Johnson, who simply wanted to keep his main customer in business. "But no buyers came forward, only liquidators."

Banks saw too much risk to get involved. The mill's newest paper machine dated to the 1960s, and two smaller ones - built in 1903 and 1910 - were still in daily operation. The state offered a $4 million package of special loans and credits to anyone willing to take on the challenge.

So Butch became the buyer.

He named the new operation Flambeau River Papers, hired back the workers and began $25 million in overdue investments. Politicians, from the governor on down, hailed him as a visionary, a hero.

"He's the godfather of wood in Wisconsin; he's powerful, he's respected," said Steve Petersen, superintendent of the nearby Northern Highland American Legion State Forest. "When he speaks, people listen."

In a speech a few years later, Johnson quipped about the dizzying pace of events.

On an exhausted evening after he closed the deal, he asked his wife: "Honey, in your wildest dreams, did you ever see me owning a paper mill?" Pat Johnson needed only a moment.

"Butch, dear, I'm sorry," she said, "but you are not in my wildest dreams."

Wheat to wood

The story of Wisconsin's pulp and paper industry is one of adaptation and survival.

It was built in the 1850s out of old flour mills, re-purposed when wheat farming migrated to the Great Plains states. In the 1870s, when rag-based paper gave way to hardwood-based grades, the railroads were just reaching the state's remote settlements, nestled amid massive stands of maples, oaks, birch, elm and aspen.

In 1882, the Appleton Pulp and Paper Co. built the world's first hydroelectric power plant on the Fox River, harnessing energy from the torrents of water already used to make pulp slurry. When production of newsprint shifted to Canada with the end of trade tariffs that had propped up that industry here, state mills simply focused on books. The native hardwoods were ideal for the publishing grades.

That created a sister industry - commercial printing - as well as firms that manufactured massive papermaking machines, such as Beloit Corp.

In 1935, Consolidated Papers Inc. built the first high-speed machine that made coated paper, fueling the rise of glossy magazines and shiny catalogs. Wisconsin mills gave the world carbonless paper and pioneered strides in recycling.

But the most important innovation might be the most obvious.

By the 1920s, the clear-cutting of the state's forests - for paper, but also for construction - threatened the industry's very existence. Led by Consolidated, mill owners began investing in nurseries and timberlands. Loggers were instructed to plant more than they cut and to thin only the mature trees, the "allowable, sustainable cut."

Trees became a crop.

"Papermakers are the farmers of northern Wisconsin," said Randy Stoeckel, general manager of Johnson's mill in Park Falls. "They have the same work ethic that farmers have - only farmers do yearly crops, and we do 40-year crops."

Wisconsin today has more forest cover than it did throughout the last century, even as forests elsewhere in the world are receding, in part due to what's happening in China. And those in the paper industry cite an inherent "greenness" in what they do: The more paper society consumes, the greater the acreage of trees the mills can sustain.

"Nature balances things by itself," said Doug Dugal of Menasha, a retired faculty member at the Institute for Paper Chemistry. "When the carbon dioxide levels go up, trees grow faster to compensate."

All this gave the state a natural economic advantage - but one only as strong as the demand for paper.

Paper use's peak

At the start of the digital age, when computers moved from the workplace to the home, the demand for paper actually rose. People would simply hit "print" and carry their work with them.

With every major technology change, from laptops to Windows 95 to AOL, industry leaders in Wisconsin worried about their future. But after each recession, not only did the industry come back, it enjoyed even greater demand than before.

"We used to joke that this paperless society is pretty good for business," said Ed Wilusz, a veteran lobbyist who recently retired from the Wisconsin Paper Council.

But things changed quickly. In 2006, Butch Johnson took over the Park Falls mill.

That same year, the mill in Neenah - in the heart of the state's "Paper Valley" - was closed.

The next year, it was Port Edwards.

A few months later, Kimberly.

"Many on my board thought Butch was nuts," said Jeff Landin, president of the Wisconsin Paper Council.

To be sure, from a pure business calculus, the decision didn't make much sense.

The industry was clearly fading. As a stand-alone mill, Park Falls did not have the global scale of the Kimberly-Clark Corp., which long ago had sold its publishing-grade mills and shifted to consumer paper products such as tissue and disposable diapers - a sector immune, so far, from Apple. Even schools in the Fox River Valley, home to some of the nation's largest printers of textbooks, were making the shift to digital ones.

Johnson gives his chest a fist thump: "We went a little bit more with our heart than other people probably would do."

Soon after the purchase, Johnson began replacing parts in the old machines and automated the No. 3 machine, the newest one, from the 1960s. He upgraded the de-inkers that pulp recycled paper. More state money came for a biofuels venture aimed at powering the mill and cutting electricity costs.

There are 325 jobs, up from 285 at the time of the shutdown. The head count is higher when the woodyards and other operations are included. Payroll is at $22 million a year, up from $17 million.

A look behind the numbers shows the mill's deeper value to the region.

It provides a living for dozens of loggers. It helps secure the property values that fund the schools, the snowplows, the street repairs. Its workers frequent the restaurants, banks and gas stations.

Since the mill reopened, it has paid out $17 million in health insurance premiums, boosting the town's 25-bed hospital. The mill is so tied to Park Falls' water and sewerage system that when Johnson figured he could save $500,000 a year by relying on the mill's own water treatment plant, it brought the mayor and entire Common Council to his office. They reminded him the water utility had been built for the mill in the first place.

Margins are thin; making payroll can be tight.

"You don't sleep every night," Johnson said.

For policy-makers in Madison, maintaining the paper industry is about more than nostalgia. Some 12,500 are employed in all the state's mills and pulping operations and nearly 30,000 in the industry overall, according to the U.S. Census Bureau. Another 23,900 work on the printing side.

In all, the Park Falls mill has received $14 million from the state.

The improvements mean the mill can make paper of higher quality - and do it with higher output and more efficiency - than at any time in its history.

Inside the mill, steam hisses and water splashes. The three machines crowd the brick-and-girder interior, which is loud and humid. Their shadows give way to an open space at the spooling end of the machines, where the scene each day matches those of earlier generations.

Paper is wound onto big rolls, which are guided to overhead cranes. The rolls will be loaded on trucks and hauled to nearby printing plants, which will add ink and images, turning the paper into a product with an age-old appeal.

In August 2011, when the mill celebrated five years of survival, it felt a bit like the Fourth of July in Park Falls. At the mill, a loading dock was turned into a stage. Hundreds listened as politicians praised it all - Johnson, the mill, Park Falls - as an enduring American success story.

In a conservative GOP stronghold, the crowd reserved its heartiest ovation for former Gov. Jim Doyle, the Democrat who helped Johnson rescue the mill.

Changing hands

In 2000, Consolidated Papers - the forestry pioneer, the inventor of coated paper - sold its six Wisconsin mills to Finland-based Stora Enso Oyj, an international papermaking operation . It was the first major foreign owner of a state mill, which prompted worries over decisions on Wisconsin jobs being made in Helsinki, not Wisconsin Rapids.

Today a primary concern is Wall Street, where there is almost no interest in the Wisconsin model of papermaking.

Consider those same Consolidated mills, which were founded and for generations run locally by the Mead family. Seven years after the mills were sold for $4.4 billion to Stora Enso, they changed hands again, this time to Cerberus Capital Management LP, one of the world's largest private-equity firms.

The sale price: $2.5 billion, a loss of 43% in value.

Private-equity firms buy stakes in companies to resell them with a higher price tag - either by growing them, restructuring them or shrinking them. Cerberus, which regards itself as a specialist in salvaging "distressed securities and assets," instantly became the largest maker of glossy coated paper in North America, with Wisconsin as its main production center.

The firm re-christened its new company NewPage Corp.

By 2010, NewPage had closed three of the six mills. A year later, it declared bankruptcy, some $3 billion in debt.

Its bankruptcy filing included this explanation: "The company's current capital structure was put in place during a different time with different assumptions."

Meanwhile, Starboard Value LP, a Manhattan-based hedge fund, had acquired a 7.5% stake in Wausau Paper Corp. and took aim at the company's mill in Brokaw and its 450 jobs, criticizing the merit of $110 million in machine upgrades since 2005 for a "dismal" division that "continues to struggle."

Instead of high-quality printing paper in Wisconsin, Starboard urged expansion into mills in Kentucky and Ohio that make paper towels for public restrooms.

By the end of 2011, Wausau Paper relented.

The mill was closed.

"The phrase that comes to mind is creative destruction," said George Mead, whose grandfather founded Consolidated. Mead made the decision to sell to Stora Enso. "There was a time for the paper industry. And there is a time for the iPad. And that's the way the world is going.

"I enjoy having a book in my hand and haven't gotten used to the idea of turning a page by scraping my finger on a pane of glass," he said. "That's me, though. I'm 85.

"I'm a Luddite."

The trend lines are undeniable.

The leading pulp and paper industry research group, RISI, projects 200 million e-readers and tablet computers to be in use in North America by 2015. For glossy magazine paper, the best-case scenario is a 20% drop in demand in the next 15 years.

Earlier this year, there was a momentary bright spot in demand for the 129-year-old mill in Nekoosa, owned by Domtar Corp. It had to run extra shifts to produce enough paper for a new bestseller.

The book: The 630-page biography of Apple founder Steve Jobs.

Struggling to go on

In Park Falls, the machines continue to churn and rumble.

When other mills close, Butch Johnson casts about for new business, a niche, anything to stay competitive.

Local ownership means local decisions, often tough ones. More than once, Johnson has put his retirement assets at risk for the mill. He has paid back $2.5 million of the original $4 million state loan, but has fallen nearly $500,000 behind on payments.

The planned biofuels project, the one that aimed to make the mill energy self-sufficient, the one that attracted a separate $3 million state loan and $2 million grant, was abandoned in August. Most of the loan is unlikely to be paid back.

Johnson uses email, of course, but his messages carry a signature that extols the value of forests and the industry's millions of family-supporting jobs. The signature begins this way: "Notice: It's OK to print this email."

"We're fighting the odds, but nothing wrong with that," Johnson said. "We feel a lot of pride in what we've been able to do while others have just thrown in the towel."

Unfortunately, Johnson has even more to worry about than the digital disruption of his industry, his way of life.

It started quietly at first. There was an increase in demand for recycled paper. There were rumors of Wisconsin wood being shipped overseas instead of to the local mills.

Sue Seib first noticed the new threat when she worked at Wisconsin Paper, a wholesale distributor. The firm had begun buying paper on behalf of cost-conscious printers from an unlikely source: China.

"What amazed us," she said, "was that you could buy paper from a Chinese manufacturer, pay the shipping from China and all the way across the U.S. to Wisconsin, and it was less expensive than buying paper from a Wisconsin manufacturer."

From small engines to kitchen appliances, Wisconsin had grown accustomed to low-cost competition from China. But this one made little sense at all.

By all accounts, China has a severe shortage of trees.






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