He said the $90 million price tag for preparing the machine to run again is "very cost effective" for 360,000 tons/yr of additional production at the Oklahoma mill, which he said "has the lowest fixed cost per ton of any facility at IP." The machine, which previously made semichemical medium, has been down since late 2008.
IP will partly offset he additional new capacity by shifting production at the company's 400,000 tons/yr Cayuga mill in Newport, IN, entirely to recycled paper for gypsum wallboard, Faraci noted. Until the recent shift, the former Temple-Inland (TIN) mill made about 50% recycled containerboard and 50% gypsum facing paper.
Faraci said IP will have no difficulty absorbing the indicated 160,000 tons/yr of net additional containerboard capacity next year for reasons discussed earlier during its recent second quarter earnings call.
Off-take agreement to end.IP's three-year off-take agreement to buy containerboard from three mills IP divested in mid-2012 to get Justice Department approval of its acquisition of Temple-Inland will end next year, Faraci noted. The off-take agreement with New-Indy and Hood Containerboard started at 900,000 tons the first year but is scheduled to drop to "zero" in mid-2015.
The three mills primarily make corrugating medium, a grade which IP is low on in its mill system. Hood Container's mill at New Johnsonville, TN, has capacity to produce 345,000 tons/yr of semichemical medium, while New-Indy's Ontario, CA mill makes 337,000 tons/yr of recycled linerboard and medium and its Port Hueneme, CA, Oxnard mill makes 218,000 tons/yr of recycled medium, according to RISI Mill Intelligence.
More tons to offshore box plants.In addition, IP can supply more containerboard from its US mills to its box plants in Europe, Brazil and Asia which are currently purchasing more than one million tons of containerboard from third-party suppliers.
"We've got options for virgin linerboard others don't have because of our box plant system around the world," he noted. "Next year we anticipate just the European business will buy 40,000 to 50,000 tons of virgin linerboard from our US mill system."
'Fewer, bigger, better mills.'Finally, restarting the Valliant machine fits in with the company's philosophy of running "fewer, bigger, and better mills" in its industrial packaging division, Faraci said.
The mill would become the biggest in IP's system with total capacity of around 1.7 million tons/yr, with reactivation of the machine at 360,000 tons/year of capacity. The mill currently has capacity to produce 935,000 tons/yr of kraft linerboard on PM 1 and 425,000 tons/yr of semichemical medium on PM 2, according to RISI Mill Intelligence.
At the time of its closure in 2008, the No. 3 Valliant mill was making 430,000 tons of semichemical medium, according to later American Forest & Paper Assn (AF&PA) capacity surveys.
The reason for the discrepancy over capacity was not immediately clear, but Faraci could have been talking about the machine's initial production rather than its potential capacity, or the No. 3 machine could be focused more in the future on producing lighter basis weights.
The 268 in. trim KMW machine was installed in 1983 is one of the newer PMs in the company's mill system. It reportedly swung between producing virgin linerboard and medium with high recycled fiber content. Faraci did not specifically mention which grade No. 3 would produce in the future.
Box demand 'more of the same.'After the presentation, Faraci was asked about current box demand by UBS analyst Gail Glazerman.
"North America feels like more of the same," Faraci said. "It doesn't feel like an economy growing at 4%." He said this was true of all three of the company's major markets -- industrial packaging, uncoated free sheet, and consumer packaging.
He said the US economy is "still well below potential," while Europe has "gotten better, but not that much better." He said Brazil has "clearly slowed down" and emerging markets like China and India are "still growing but slowing significantly." Russia's economy was slowing even before the Ukraine crisis.
"Even in that environment, IP is going to be a cash flow machine," he noted, with 2015 results likely to be better than in 2014.
Glazerman asked why Valliant's No. 3 machine was being restarted when "demand is slow and a lot of supply is coming into the market?"
"If we don't need the capacity, we may run Valliant and not run something else," Faraci said. "We're not going to produce more than we need" to supply IP's own box plants, independent converters, and offshore plants and third-party customers. He noted that virgin kraft linerboard demand outside North America is growing at a 3-4% annual rate and IP participates "strategically not just on a spot basis."