State of Wisconsin Department of Administration Division

This report is the property of the State of Wisconsin, Wisconsin Department of Administration, Division of Energy, and was funded through the Wisconsin Focus on Energy Program.

State of Wisconsin Department of Administration Division of Energy Business Programs: Market Assessment

Commercial and Industrial Equipment Supply Chains: An assessment of the pulp and paper industry August 2003

Contractor: Energy Center of Wisconsin with Quantum Consulting

Report

227-1

Commercial and Industrial Equipment Supply Chains

An assessment of the pulp and paper industry

August 2003

Project managed by Bobbi Tannenbaum and Ingo Bensch, Energy Center of Wisconsin

Prepared by Quantum Consulting

Berkeley, California

Prepared for

Energy Center of Wisconsin

595 Science Drive Madison, WI 53711-1076

Phone: 608.238.4601 Fax: 608.238.8733

Email: [email protected] www.ecw.org

Copyright © 2003 State of Wisconsin All rights reserved

This document was prepared as an account of work sponsored by Focus on Energy. Neither Focus on Energy, participants in ECW, the organization(s) listed herein, nor any person on behalf of any of the organizations mentioned herein:

(a) makes any warranty, expressed or implied, with respect to the use of any information, apparatus, method, or process disclosed in this document or that such use may not infringe privately owned rights; or

(b) assumes any liability with respect to the use of, or damages resulting from the use of, any information, apparatus, method, or process disclosed in this document.

This report is the property of the State of Wisconsin, Wisconsin Department of Administration, Division of Energy, and was funded through the Focus on Energy program.

Contact

Ingo Bensch

608.238.8276 x145

[email protected]

i Pulp and Paper Industry Assessment

TABLE OF CONTENTS

Section Page

ES EXECUTIVE SUMMARY ES-1

1 INTRODUCTION 1-1

1.1 Objectives and Scope 1-1

1.2 Overview of Approach 1-1

2 WISCONSIN PULP AND PAPER INDUSTRY OVERVIEW 2-1

2.1 The Importance of the Pulp and Paper Industry in Wisconsin 2-1

2.2 Pulp and Paper Industry Outlook in Wisconsin 2-1

2.3 Production Process 2-2

2.4 Energy Efficiency Accomplishments and Opportunities 2-4

3 MARKET ACTORS, SIZE, PRODUCT FLOW, AND KEY STRUCTURES

3-1

3.1 Key Actors and Services 3-1

3.2 Market Size, Trends, and Composition 3-4

3.3 Wisconsin Pulp and Paper Equipment Product Flows 3-7

3.4 Equipment and System Descriptions 3-8

3.5 Market Events and Bid Structure 3-9

3.6 Equipment Selection Influence 3-11

4 KEY BUSINESS DRIVERS, PRACTICES, AND INFORMATION SOURCES

4-1

4.1 Drivers and Practices 4-1

5 ROLE OF ENERGY EFFICIENCY, PERCEIVED OBSTACLES, AND SUPPLIER PROGRAM SUGGESTIONS

5-1

5.1 Role of Energy Efficiency 5-1

5.2 Perceived Obstacles to Energy Efficiency and Suggested Solutions

5-2

5.3 Implications for Program Design 5-5

6 CONCLUSIONS 6-1

ii Pulp and Paper Industry Assessment

LIST OF EXHIBITS

Exhibit Page

ES-1 Replacements, Redesigns, and New Construction ES-2

1-1 Breakdown of Pulp and Paper Industry Interviews 1-2

2-1 Annual Energy Consumption for the Wisconsin Forest Products Industry

2-3

3-1 Pulp and Paper Industry Capital Expenditures 3-5

3-2 Forest Products Industry Regulatory Influences 3-6

3-3 Pulp and Paper Equipment Product Flow 3-7

3-4 Percent of Pulp and Paper Business by Industrial Process 3-8

3-5 Replacements, Redesigns, and New Construction 3-9

4-1 Distinguishing Business and Pulp and Paper Equipment Features (Self-Reports)

4-2

ES-1 Pulp and Paper Industry Assessment

EXECUTIVE SUMMARY

This report presents results of research conducted on the supply side of the market for pulp and paper equipment in Wisconsin, with the goal of providing a better understanding of supply chain structures; product flows; and market actor practices, attitudes and information sources with regard to energy efficiency. This report addresses pulp and paper equipment only; several other types of equipment used by the pulp and paper industry as well as other manufacturing industries – i.e., pumps, compressors, and boilers – are addressed in a separate cross-cutting report.

The forest products industry accounts for 30 percent of electric and 18 percent of natural gas usage by Wisconsin’s industrial customers, making it the largest end-user industry in the state. Wisconsin pulp and paper mills and converters in 2000 generated over $13.9 billion in revenues and employed over 7 percent of the state’s total workforce.

MARKET SIZE

The pulp and paper machinery and equipment market is supplied by several dozen multinational manufacturers of integrated systems, as well as numerous suppliers of motors, compressors, boilers, and other related equipment. According to the U.S. Department of Commerce (DOC) 1997 Census of Manufacturers, Wisconsin was home to 48 of the country’s 365 establishments manufacturing paper industry machinery, and accounted for $1.14 billion (33 percent) of the national industry’s $3.4 billion value of shipments.

The downturn in the U.S. economy combined with ongoing overseas competition has created a wave of consolidations and plants closings in the pulp and paper industry. These economic pressures have led to cost-reduction measures, consolidation of mills, and reduced capital spending.

WISCONSIN PULP AND PAPER EQUIPMENT PRODUCT FLOWS

Manufacturers of equipment for the pulp and paper industry appear to be the most important market actors, playing major roles not only in equipment sales, but also in design and installation. Most sales are made through the manufacturers’ own sales force and through their manufacturers representatives; a few sales are made through design engineers.

Design services are also most often provided by manufacturers, who say they design over two-thirds of the systems they install. Design firms account for the remaining 30 percent of designs, mostly on plan-and-specification contracts where they are hired by the mill owners, but sometimes through design-build contracts where either designers or a large construction company have responsibility for both designing and providing the equipment.

With regard to installation, the manufacturers we interviewed reported that they install an average of 44 percent of the equipment they sell. Even when they don’t do the actual installation, manufacturers will often send engineers to supervise the installation and start-up of new equipment. In addition to contractors, who account for 35 percent of installation,


installation services are sometime provided by design-build engineering firms. Approximately 18 percent of installations are handled by the owner’s in-house staff.

The relative importance of new construction/plant expansion, redesigns, and replacement sales in the pulp and paper equipment market is shown in Exhibit ES-1

Exhibit ES-1 Replacements, Redesigns, and New Construction

Manufacturers Designers(n=10) (n=10)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Replacements Planned redesignsof existing systems

New construction/plant expansion

The decline in pulp and paper industry capital spending has limited new construction or plant expansion activity, so that direct replacements and redesigns of existing processes account for most of the business of both manufacturers and designers.

KEY DRIVERS FOR EQUIPMENT SELECTION

Drivers of equipment investment include the need to improve quality, manage a large work force, plan and manage maintenance, and move from commodity to specialty products. Other drivers cited by supply-side players include:

• Regulatory issues, especially air emission and water discharge requirements, drive the majority of capital expenditures in the pulp and paper industry.


• All sources suggest that the current economic slowdown, overseas competition (driven in part by low labor costs) and recent consolidation in the industry are all adversely affecting capital investments for new equipment.

• According to manufacturers and designers, the need for increased productivity is driving the development of paper making equipment that operates at higher speeds. Wider machine widths are also a trend that affects paper machine production.

• Supply-side actors suggest that machines are being refurbished rather than replaced, as mills strive to reduce operating costs while maintaining a reasonable level of competitiveness.

• Many equipment components, including pumps, fans and blowers, require relatively frequent replacement due to the corrosiveness of the pulp and paper manufacturing processes and other factors that make this industry particularly hard on equipment.

ROLE OF ENERGY EFFICIENCY

Energy efficiency is important to both suppliers and their customers, but is of secondary importance relative to concerns relating directly to the production process, such as reliability and product quality. Moreover, the ability of suppliers to offer energy efficient solutions is directly affected both by the state of the paper industry and by regulatory pressures.

• Overcapacity and poor returns on investment in the paper industry are restricting capital flow into the paper industry generally and limiting opportunities for investment, including incremental spending for energy efficiency. Increasingly stringent payback requirements mean two year paybacks are often seen as too long.

• Energy efficiency and regulatory compliance can be at odds, with respondents noting that some energy efficiency projects are blocked because process modifications would trigger an extensive regulatory review.

OBSTACLES TO EQUIPMENT EFFICIENCY AND SUGGESTED SOLUTIONS

Overcapacity not only limits the paper industry’s ability to invest, it means production lines must be consolidated, encouraging plant managers to redeploy existing machinery rather than invest in new equipment. In addition, several respondents expressed concern about the longer-term viability of the Wisconsin paper industry, citing the generally higher wages and tighter regulatory climate in Wisconsin relative to southern states and overseas economies.

While the overall climate is not seen as conducive to energy efficiency initiatives, designers and manufacturers believe that a combination of information and incentives might help overcome barriers to energy efficiency once the economic outlook improves. They offered the following solutions:

• Pilot plants where suppliers or others offer to share part of the cost in order to demonstrate a new technology.

• Either a shared savings approach or a performance guarantee that savings from new equipment would more than offset the added cost.


• Information for suppliers about the range of utility and other programs available to help offset the cost of energy efficiency improvements.

SUGGESTIONS AND CONSIDERATIONS

Our results indicate that the best opportunities for efficiency improvements in the pulp and paper industry appear to lie in process optimization in the context of the consolidation and equipment overhaul that characterize the current market.

• Manufacturers are increasingly involved in equipment repair and renovation rather than new product sales. Incorporating energy efficiency into repair and refurbishing projects could both advance energy efficiency and assist equipment manufacturers in their efforts to reposition themselves as suppliers of a broader range of services to pulp and paper mills.

• Since designers already provide process optimization services, a combination of information and incentives could make energy efficiency a more explicit focus of these optimization activities.

Program approaches should be framed in the context of the high-priority issues faced by the paper industry and its suppliers: namely, competitive pressure and regulatory concerns.

• Competitive pressures shorten planning horizons and limit the ability of plants to devote capital to non-core investments such as energy efficiency. Efficiency initiatives should therefore focus on measures or actions that 1) improve product quality or other key aspects of the production process, and 2) have relatively lower capital requirements.

• Regulatory barriers to energy efficiency could be addressed by working directly with regulators and suppliers to identify an agreed-upon list of measures that can be pursued without triggering extensive regulatory review.

Supply side actors place a high priority on being able to provide their customers/clients with documented proof of savings from a given technology in the same application or under the same conditions found in their plant. Demonstration projects were mentioned several times as a potential tool for disseminating information and raising awareness.

Program planners should consider taking advantage of the pulp and paper industry’s international connections. Foreign-based suppliers and end-users of pulp and paper equipment often operate in economies where energy costs are higher and planning perspectives longer than in the U.S., causing them to place greater emphasis on energy efficiency. Efforts to build on work done in Europe could, for example, take the form of pilot projects demonstrating the cost-effectiveness of techniques that have proved successful overseas.

Suppliers (as well as their customers) value the availability of rebates or other incentives. Incentives address the first cost issue raised by so many of the manufacturers and designers interviewed, and have the additional value of demonstrating the funding source’s commitment to the specific measure and to the pulp and paper industry overall.

An approach based on audit and optimization of production processes similar to that employed by the Industrial Assessment Center program may be appropriate for the Wisconsin pulp and paper industry. Rather than focusing exclusively on energy, the IAC


program approaches energy efficiency in the context of the overall production process, evaluating medium sized industrial plants for a variety of process upgrades and waste reduction opportunities.

1-1 Pulp and Paper Industry Assessment

1. INTRODUCTION

1.1 OBJECTIVES AND SCOPE

The overall goal of this project is to help improve the Wisconsin Focus on Energy business programs by providing a better understanding of supply chain market structure and product flows; market actor roles; key business drivers and market actor practices; the role of energy efficiency; and market barriers. The project scope is limited to the supply-side of selected nonresidential markets. The in-scope technology markets for the overall project are HVAC, compressed air, pumps, and industrial boilers. There are two industry segments being characterized as well: food and pulp and paper. In this report, we present results from the pulp processing and paper manufacturing equipment supply-side characterization. The results of related research covering boilers, pumps, and compressed air systems are cited when appropriate.

The report summarizes findings developed from interviews with members of the pulp processing and paper manufacturing equipment supply chain, industry observers, and review of the pulp and paper industry literature.

Research issues included in this study are: (1) the relationships among supply chain actors and their relative importance to equipment selection and system specification, (2) identification of key business practices for product development, marketing, service and the extent to which energy efficiency is part of those practices, (3) assessment of the attitudes and perceptions of supply chain actors regarding the relative importance assigned to energy efficiency by their customers (either end-users or downstream suppliers), (4) investigation of suppliers’ perceptions of the barriers to energy efficiency in pulp and paper processing systems, and (5) recommendations for further influencing the supply chain to increase the penetration of energy efficient products and services.

1.2 OVERVIEW OF APPROACH

The primary research conducted for this pulp and paper equipment supply-side market characterization consisted of in-depth interviews with industry experts, manufacturers, and designers. A careful review of the available literature also was conducted at the beginning of the project to develop a storyboard for the assessment and formulate research topics. Next, interviews were conducted, broken down as shown in Exhibit 1-1. Interviews were conducted in the fall of 2002 and spring of 2003, and focused on those suppliers who work specifically with pulp and paper equipment, but in some cases included those who provide related equipment widely used in the pulp and paper industry.


Exhibit 1-1 Breakdown of Pulp and Paper Industry Interviews

Market Actor Interviews

Industry Experts 4

Manufacturers 10

Designers 10

Total 24

The interviews were conducted in a step-wise fashion, beginning with the industry associations to refine the Project Team’s understanding of the pulp and paper industry structure, and then moving through to the manufacturer and design engineer interviews. Survey results were then analyzed and integrated across market actors to produce an overall supply-side characterization for Wisconsin’s pulp and paper machinery and equipment market.

The interviews completed are very detailed, and explore at great length the attitudes, beliefs, and constraints that drive market events in the equipment supply chain that feeds the pulp and paper industry. An emphasis is placed on the examination of energy efficiency opportunities and the identification of barriers that may impede energy efficient product selection or system optimization.


2. WISCONSIN PULP AND PAPER INDUSTRY OVERVIEW

The paper manufacturing industry, NAICS Code 322 (formerly SIC 26) accounted for shipments valued at $156 billion in 2001.1 Pulp and paper manufacturing is the largest sector within the forest products industry, which also includes timber producers (loggers and transporters), sawmills, and businesses producing lumber, furniture and related products.

2.1 THE IMPORTANCE OF THE PULP AND PAPER INDUSTRY IN WISCONSIN

Wisconsin pulp and paper mills and converters in 2000 generated over $13.9 billion in revenues and spent some $653 million on capital investments2 (up from $619 million in 1997) – most of it for machinery and equipment rather than buildings. Both the national industry and Wisconsin’s have been undergoing painful restructuring, although Wisconsin mills have been somewhat less affected than the rest of the country because of the state’s more diverse product mix.

Ranking as the state’s top manufacturing industry, Wisconsin’s paper products industry employs 42,000, representing 7.3 percent of the state’s total manufacturing workforce. According to the Wisconsin Roadmap for the Pulp and Paper Industry (Wisconsin Roadmap), pulp and paper manufacturing account for about 60 percent of these workers; 40 percent are in converting operations that transform paper into a wide variety of paper products.

Wisconsin has led the nation in papermaking for over 43 years. The state produces more than 4.9 million tons of paper and over one million tons of paperboard annually. There are 6 pulp and 45 paper or paperboard mills in the state, as well as 204 paper converters and 254 paper manufacturers.

2.2 PULP AND PAPER INDUSTRY OUTLOOK IN WISCONSIN

Nationally, there continues to be consolidation in the industry. In 1979, the U.S. had 8 of the top 10 paper companies. By 2000 the number of U.S. companies in the top 10 had fallen to 5 with only 3 of the 1979 U.S. firms (International Paper, Georgia-Pacific, and Weyerhauser) still on the list. $255 billion in mergers and acquisitions from 1990 through 2001 eliminated half of the top 20 companies of 1979. Even so, the pulp and paper industry is still relatively fragmented, with the top 5 firms controlling only about 17 percent of the world’s production capacity3.

Historically, the North American industry has expanded after the peaks in pricing and profitability that characterized the paper cycle. Excess capacity was then pushed onto international markets. However, in the mid 1990s, a combination of a strong dollar, maturing

1 U.S. Census Bureau, 2001 Annual Survey of Manufacturers.

2 U.S. Census Bureau, Annual Survey of Manufacturers, Geographic Area Statistics 2000.

3 “Global Industry Changes/Update – Poised for Better Times?, Jaakko Poyri Consulting, American Paper Machinery Association Fall 2002 Meeting


domestic demand, poor returns, unifying European markets and aggressive industry growth in developing regions like Asia & Latin America made this strategy no longer effective. The result has been persistent over-capacity, sustained weak pricing, low profitability, and capital spending oriented to mergers and acquisitions rather than increased capacity. While the restructured North American paper industry had been poised for greater profitability going into 2000, the subsequent 2001/2002 recession undermined this position.

According to a representative of the Center for Paper Business and Industry Studies, ”The future of the U.S. pulp and paper industry is a point of extensive debate within management circles. Some believe the industry has begun a long-term decline and will follow in the path of U.S. steel and textiles; others believe it will restructure and reassert itself.“ He explains that, “like a lot of basic industries, they’ve gotten themselves, through shortsightedness and bad management, into a situation where their prices don’t cover their total cost of doing business....For the present, the U.S. industry is plagued with over-capacity, weak pricing, poor cash flows & poor returns. Capacity actually contracted in 2001 and 2002.”

A paper presented at the September 2002 meeting of the American Paper Machinery Association (APMA) documents that contraction. According to the Jaakko Poyry consulting and engineering firm, “over the last five years the North American pulp and paper industry has shut down over 250 paper machines and pulp dryers, with a total capacity of approximately 16 million metric tons.“ In 2001 alone more than 105 North American mills were closed, with an additional 40-plus mills that were expected to close in 2002 and 2003.

Despite this bleak situation, the spokesman for the Center for Paper Business and Industry Studies sees the industry improving starting in 2003, as “rebounding U.S. pulp & paper demand, closure of unviable facilities, a weaker U.S. dollar, and improving overall economic conditions,” help bring improvement. He expects that the U.S. industry’s capacity will begin to grow again through productivity improvements and equipment upgrades and replacements, with the net effect being that industry investment should increase beginning in 2004.

Wisconsin has been somewhat isolated from the most extreme effects of the current downturn, according to a spokesman for the Wisconsin Paper Council (WPC). “My assessment is that the people who are really getting hammered are the ones who sell commodity products, whether in basic tissue, copy paper, and certainly pulp and newsprint. In Wisconsin we shook that out of the market over a decade ago. We had to become more niche-market oriented, and we now have a more diverse product mix.” Still, he says, investments by the industry in Wisconsin are strongly influenced by national trends. “When you have excess capacity and a situation where returns on capital are less than the cost of capital, nobody has money or financing for expansion. Nobody makes money, nobody expands.”

2.3 PRODUCTION PROCESSES

According to the Phase 1 Report of the Major Markets Supply Channel Study (ECW, 2002), the forest products industry in Wisconsin accounts for 30 percent of the state’s industrial electric use and 18 percent of natural gas use. Exhibit 2-1 presents those statistics for the forest products industry and highlights its energy-intensive nature, particularly for paper production. The Wisconsin Roadmap (ECW, 2001) states that the pulp and paper industry accounts for about


three-quarters of the activity in the forest products sector and that the total energy costs for pulp and paper are the largest of any Wisconsin industry at $335 million in 1997.

Exhibit 2-1 Annual Energy Consumption for the Wisconsin Forest Products Industry

Energy Use Energy Use per Employee End-User Category Electric

(GWh) Electric

(1012 Btu) Natural Gas

(1012 Btu) Electric (MWh)

Natural Gas(106 Btu)

Forest Products Industry 5,495 18.7 31.5 70.0 401 All Industries 18,384 63 179 34.1 332

Source: Wisconsin Focus on Energy Statewide Evaluation, Major Markets Supply Channel Study: Phase I Evaluation Report, Summer 2002. Data are projections for calendar year 1999 developed by PSC staff.

A Northwest Energy Efficiency Alliance Report (2000) provides additional detail on energy use in the pulp and paper industry, including process descriptions presented below. The report notes that pumps, fans, blowers and conveyors represent about 75 percent of paper production electric energy consumption, including 33 percent for pumps (mostly centrifugal); 22 percent for fans and blowers, and about 20 percent conveyor systems. Natural gas consumption primarily serves boilers for the drying processes involved in papermaking.

Data available from the Energy Information Administration’s 1998 Manufacturers Energy Consumption Survey (MECS) bears this out, indicating that over 80 percent of electric use in the pulp and paper industries is accounted for by process machine drive systems, over 70 percent of natural gas is used for indirect process heating using boilers, and most of the remainder is used for direct process heating applications.

The production of paper products from raw materials is a multi-step process consisting of pulping and paper processing at the most granular level. The pulping process is used to reduce raw wood products into basic cellulose fibers, the building blocks of wood and the raw material feeding the paper production process. The process also breaks down and removes lignen, the binding agent that holds cellulose fibers together in wood.

The energy intensive pulp production process has two distinct variations—chemical and mechanical—that yield different grades of pulp for use in different paper products. In addition to being more energy intensive, the mechanical process leaves more lignen at the end of the pulping process than the chemical process, which leads to lower quality paper that is sensitive to light and degrades more rapidly. In contrast, paper produced by chemical pulping is nearly free of lignen, and thus retains its whiteness and strength; on the other hand, the fiber yield is much lower, at about 50-60 percent versus about 90 percent for mechanical pulp.

Pulp can also be produced using recycled paper as the feedstock material, which involves screening, cleaning and de-inking a paper-water slurry. Much less energy is required to break down recycled paper to form pulp than to start from a virgin wood source.

The production of paper from pulp involves spraying watered pulp onto a large plastic screen, allowing the water to drain, and then pressing the pulp fibers into paper between heated rollers to dry and smooth it. The paper itself is not always the final product, often undergoing further conversion into, for example, paperboard and packaging products like cardboard boxes.


2.4 ENERGY EFFICIENCY ACCOMPLISHMENTS AND OPPORTUNITIES

Because of its energy intensity the pulp and paper industry has been extremely active in energy conservation, with a 30 percent decrease in the amount of energy needed to produce a ton of paper over the past 30 years, according to the Wisconsin Paper Council. Despite these gains, it is widely recognized that significant opportunities for improved energy efficiency remain.

Within Wisconsin, the pulp and paper industry has been identified as one of the state’s economically critical industry sectors to be included in the Industries of the Future (IOF) program, with the goal to improve the competitiveness of Wisconsin industry by accelerating the adoption of energy-efficient, environmentally-friendly technologies. The Wisconsin IOF program for the pulp and paper industry, which builds on the national Agenda 2020 program initiated by DOE and the American Forest and Paper Association (AFPA), follows an “industry roadmap” developed by industry, trade associations, universities, investors and government partners. The roadmap, released in 2001 after several roundtable sessions in 2000, describes current industry needs, identifies potential solutions and offers guidance for pursuing partnerships. Although the Wisconsin roadmap parallels the national Agenda 2020 roadmap, it also identifies unique needs of the Wisconsin industry.

At a roundtable held in October 2000, 39 Wisconsin papermakers, researchers, and other interested parties identified common needs and goals to remain competitive and viable into the year 2020. The resulting Wisconsin Paper Industry Roadmap lists industry needs and identifies activities to address those needs. Some of the highest priorities identified by roundtable participants involve improving the energy efficiency of the processes themselves, specifically:

• Improvements in water removal technology

• More efficient paper drying

• New pulping and bleaching technology

• Improved and energy efficient processes for mechanical pulping

• Efficient energy utilization in refining of chemical pulps

• In-system energy and raw material recovery

• Combustion processes that produce lower emissions with higher heat transfer efficiency

• A standardized benchmark database to review the energy efficiency of processes.

In addition to the IOF roadmap, there has been extensive research in pulp and paper energy efficiency done by independent research groups, universities equipment manufacturers. As noted in the Phase 1 research report from this study (Xenergy, 2002),”the next step is making the connections for end-users rather than assuming they will draw logical cost/benefit assumptions based on system details they may not have the time or capacity to digest.”


3. MARKET ACTORS, SIZE, PRODUCT FLOW, AND KEY STRUCTURES

In this section we summarize the market structure, market size, product flow, and other key market characteristics to provide a context for understanding and utilizing the subsequent findings on attitudes, practices, key business drivers, the role of energy efficiency, and market obstacles. The following aspects of the pulp and paper equipment markets are discussed:

• Role of market actors and services offered

• Pulp and paper equipment market size and product flow through the supply chain

• Relative importance of market events (such as new construction, plant expansion, and planned or emergency replacement) and bid structure

• Importance of market actors and end-users (and their representatives) in pulp and paper industry decision-making.

3.1 KEY ACTORS AND SERVICES

The focus of this report is on companies that design and manufacture papermaking machinery and related equipment, and that deliver those goods to the pulp and paper industry. Cross-cutting equipment used by the pulp and paper industry as well as other industries (i.e., pumps, compressors, and boilers) is addressed in a separate report.

The pulp and paper machinery and equipment market is supplied by several dozen multinational manufacturers of integrated systems, as well as numerous suppliers of motors, compressors, boilers, and other related equipment. According to the Wisconsin Roadmap, about 6,000 people in Wisconsin work for papermaking equipment manufacturers, whose sales are estimated at more than $800 million annually. Most of these local manufactures serve national and even global markets, but their proximity to Wisconsin end-users appears to give them an edge in supplying the local pulp and paper industry, with which they have long-standing ties.

All but one of the manufacturers interviewed for this study have been in business for at least 30 years, with three stating they have been in business for more than 100 years. As a result, these firms are known and trusted by Wisconsin-based pulp and paper producers they serve. In addition to providing an array of machines and tools used in the pulp and paper manufacturing process, all but two mentioned in unaided responses that they also provide design, installation and maintenance services to pulp and paper manufacturers.

Our interviews of manufacturers sought out those with offices in Wisconsin, which includes most of the industry’s major players. All but one of the manufacturers interviewed have a strong presence in the state, with over 75 percent of their U.S. employees based in Wisconsin, although some have many more workers at overseas plants. These companies specialize in the production of machines and tools for the pulp and paper industry, indicating on average that 99 percent of their sales in the Wisconsin market are to pulp and paper processing plants. Only three out of ten manufacturers reported making equipment for any industry other than pulp and paper in Wisconsin.


Today, many manufacturers that provide equipment to the pulp and paper industry are providing value added services rather than new machinery. For example, manufacturers noted an emphasis today on keeping existing machinery running or converting existing machines to produce a variation in product. The value-added approach also emphasizes optimization of an existing system in an attempt to minimize the cost of production and retain competitiveness.

The poor economic condition of the pulp and paper industry, driven in part by overseas competition, has affected the market in several significant ways. Tremendous economic pressures have led to cost-reduction measures, including shutdown and consolidation of mills. In response, many manufacturers are squeezing the maximum sales possible from the pulp and paper industry they serve, re-inventing themselves in many instances by providing services to improve competitiveness.

When asked about technical trends shaping the market for pulp and paper equipment, most manufacturers mentioned cost reduction/efficiency as a driving force in recent investments, including those having to do with drying—the most energy intensive part of the paper production process. For all trends, the primary focus is reducing the cost per unit of output—either by cutting costs or by increasing production without increasing costs. Quality improvement was also mentioned, though less often.

Sales, Distribution, and Manufacturer Services

There are few distributors of pulp and paper equipment, because products are often custom or specialized machines that would be too expensive to stock. Instead, sales are often made directly to the pulp and paper plant by manufacturers who provide a full range of design and installation services. Pulp and paper equipment is normally sold directly to the facility or plant owner using an internal sales force in excess of 70 percent of the time. Over 20 percent of the time equipment is sold through manufacturers representatives, and in a small fraction of jobs consulting (design build) engineers buy the equipment directly on behalf of the mill owners.

Six of the ten manufacturers that were interviewed provide installation services. When asked what percentage of the systems they sell and also install, responses were mixed, with three installing 90 to 100 percent of the time and the other three less than 30 percent of the time. Regarding jobs that are installed by someone else, this involves a contractor about 75 percent of the time and customer maintenance and operations staff in the remaining cases.

Six out of the ten manufacturers interviewed also indicated that they provide maintenance services, although the percentage of the pulp and paper systems that they sell and maintain is very low on average, with only one respondent claiming that they maintain 90 percent of the systems that they sell. Maintenance provided by equipment manufacturers does not normally include ongoing testing for system efficiency, with only one respondent indicating that this is part of the maintenance services they provide. When asked who else provides maintenance services, respondents indicated that the mills themselves have maintenance staff and that there are also companies that provide maintenance services to industry in general.

Design and Related Services

Manufacturers appear to play a greater role in design than independent design firms. Many manufacturers have design engineers and staff that work directly with the pulp and paper plant


to define their need and tailor the equipment selected. Seven of the manufacturers interviewed provide design services to pulp processing and paper manufacturing plants. Those manufacturers that offer design services say they provide them to pulp and paper manufacturers in all of the systems that they sell, indicating that manufacturers in fact play a more important system design role than do design engineers. (It may, be however, that both manufacturers and design engineers play a role in system design: the engineers to develop specifications, and the manufacturers to design systems that meet those specifications.)

Design services are also provided by engineering firms, although they seem to be less important in pulp and paper than in other industries. Interviews were completed with 10 pulp and paper design firms that work on a variety of consulting engineering assignments. All but two of the firms interviewed do a substantial portion of their business in Wisconsin4. Across the respondents we interviewed, pulp and paper as a percentage of each firm’s business ranged from about 1 percent to over 90 percent, with an average of slightly more than 30 percent.

It should be noted that the population of designers serving the pulp and paper industry in Wisconsin is small. Dun & Bradstreet sources, for example, identify approximately 40 industrial and mechanical engineering firms in the state, while Harris data provided by Focus indicate there are slightly over 200 consulting engineering firms, of which approximately 60 had recently been contacted in connection with studies of the commercial HVAC and new construction markets. More than 100 engineering firms were subsequently telephoned and screened to determine whether they design industrial facilities, and specifically whether they had designed food processing, pulp and paper, compressed air, pump, or boiler systems in the past two years. When fewer than 10 of the in-state firms screened said they designed pulp and paper systems, additional names were found through referrals, web searches, and review of industry publications or directories.

Most of the designers interviewed work across industries rather than focusing on any one application; several mentioned food processing projects and two specifically mentioned an emphasis on pumping systems.

• Overall, respondents indicated that pulp and paper design accounts on average (unweighted) for 25 to 30 percent of their Wisconsin-based work. This result is driven upwards by two respondents that do in excess of 90 percent pulp and paper design work, have just over 80 employees each, and are located entirely in Wisconsin5. For the remaining respondents, pulp and paper design work in Wisconsin accounts on average (unweighted) for less than 10 percent of their Wisconsin-based business.

• One firm mentioned that just two years ago pulp and paper accounted for the majority of their business, but that currently the pulp and paper industry is doing fewer projects due to the current economy, competitive pressure from overseas and regulatory requirements. Other respondents also noted a significant downward trend over the last

4 These other two firms are large international consulting companies; pulp and paper makes up just 1 to 2

percent of their business.

5 It is important to note from the responses provided and related research that the design firms interviewed for this project account for very close to 100 percent of the pulp and paper design work in the Wisconsin market. In fact, just 3 of the 10 firms interviewed are said to capture more than 80 percent of that market.


two years, leaving very little remaining design work for the Wisconsin pulp and paper industry.

Three of the ten design firms that were interviewed provide installation services for pulp and paper plants; one firm clearly specializes in the installation of equipment, with 80 percent of their pulp and paper projects being installation-only. Another respondent, an engineering and construction firm, said that 25 percent of their pulp and paper projects are installation-only; the remaining 75 percent of their pulp and paper projects encompass both design and installation. A third firm installs about 20 percent of the pulp and paper projects they design; none that they have not designed.

Four of the ten designers indicated that they provide maintenance services to end-users of pulp and paper manufacturing equipment. One respondent in particular noted that they provide those services to dozens of end-users; another noted that they provide pump and fan maintenance services for a variety of industrial clients, including pulp and paper. Three of those providing maintenance services test for system efficiency, and two of the designers interviewed said that the focus of their business is on energy products and saving energy. Two designers indicated that they primarily test flow and pressure drops for pumping and fan systems, and make adjustments to ensure optimum performance. A third mentioned testing for overall system and electrical system performance, as well as drive (motor) efficiency.

3.2 MARKET SIZE, TRENDS AND COMPOSITION

The supply of pulp and paper equipment is dominated by relatively few very large foreign-based multinational firms who specialize in serving this vertical market, as well as a larger number who provide cross-cutting equipment like motors, boilers, and compressors. Prominent specialized equipment manufacturers include Voith, based in Germany; Mitsubishi (former Beloit licensee), based in Japan; MarquipWarUnited (formerly Marquip, based in Wisconsin); and Metso (formerly Valmet), based in Finland.

According to the U.S. Department of Commerce (DOC) 1997 Census of Manufacturers, Wisconsin was home to 48 of the country’s 365 establishments manufacturing paper industry machinery, including 32 of the 154 establishments with more than 20 employees. Wisconsin establishments accounted for $1.14 billion (33 percent) of the national industry’s $3.4 billion value of shipments, with $634 million (almost 40 percent) of its $1.62 billion being value added services. (Note that in 1997 Beloit Corporation was still contributing substantially to these totals.)

Since 1997, the paper machinery industry’s employment, value added services, and output have all declined. The number of workers has fallen from more than 18,000 to less than 16,000, value added services have declined from $1.62 billion to $1.34 billion, and the value of shipments has gone from $3.4 to $2.8 billion. Given the state of the national and international economy overall and the U.S. pulp and paper industry in particular (as discussed below), those declines are likely to have been exacerbated in 2001 and 2002. While more recent state data were not available for Wisconsin, the APMA respondent said the state has probably been even more dramatically affected since Beloit has gone out of business.


The Commerce Department’s industry specialist also said that he has seen the industry contract as ongoing consolidation and intense competition from overseas suppliers reduces the number of U.S. players. A clear example of the decline of U.S. production is the failure of Beloit, a long-time industry leader based in the Wisconsin town of the same name. Beloit closed its doors in 2000, with a loss of thousands of jobs. Several global manufacturing firms purchased parts of the company, including Mitsubishi, which has opened an office in Beloit and is selling paper machine headboxes that it formerly made under license to Beloit.

The decline in the paper equipment industry appears to reflect underlying trends in the production of pulp and paper in Wisconsin and the rest of the U.S. Interview respondents all identified weaknesses in the pulp and paper industry as one of the biggest issues facing suppliers of equipment. The poor economic condition of the pulp and paper industry, driven in part by overseas competition, has created economic pressures that have led to cost-reduction measures and reduced capital spending. Consolidation of mills was mentioned by several respondents as a trend affecting the equipment market. To survive, many equipment suppliers are emphasizing equipment repairs, parts sales, and services to improve competitiveness.

As shown in Exhibit 3-1, a serious trend in the industry is lack of available capital for new equipment. Some reasons for this and other industry trends are described below.

Exhibit 3-1 Pulp and Paper Industry Capital Expenditures

Source: Bob Moran & Vic Bilodeau, Trends In Capital Management, American Paper Machinery Association Meeting, Asheville, NC, September 30, 2002

In a paper presented at a September 2002 American Paper Machinery Association (APMA) meeting, Moran and Bilodeau note that the combination of economic, pulp and paper market, and financial/investment realities drove U.S. capital expenditures down from $8 billion in 2000 to less than $7 billion in 2001; 2002 capital expenditures were expected to fall further, to about


$5 billion. Even though, as noted above, Wisconsin has been somewhat less affected, the general climate is still one of reluctance to invest in new facilities.

Moran and Bilodeau say that from 1990 to 2001 an average of 73 paper machines were built per year in the U.S. New machine installations have been below average for the last 4 years, and by 2001 fewer than 50 new machines a year were installed, with the 2002 total expected to be less than 20. Beloit, Voith, and Metso had roughly equal shares of the 1991 market for 100 new machines; by 2001, with Beloit no longer in business, Voith was the largest single player, albeit in a smaller market.

Respondents cited regulations – with regard to both emissions and water use/wastewater discharge – as major drivers affecting capital spending. Because they are a major source of both water and airborne pollutants, forest products plants are subject to a variety of regulatory constraints that affect their capital equipment (and other operations) decisions. The wide ranging regulatory influences on the industry are illustrated in Exhibit 3-2.

Exhibit 3-2 Forest Products Industry Regulatory Influences

(Source: American Forest and Paper Association)

When asked about regulatory pressures and their effect on the pulp and paper industry, manufacturers overwhelmingly pointed to pollution controls that are in place, with some bringing up the competitive disadvantage that this places on U.S. plants.


Since pulp and paper producers are heavy users of steam in their production processes, many of the issues shaping the boiler market are highly relevant to this industry. According to the spokesman for the Wisconsin Paper Council (WPC), “the overwhelming issue influencing equipment selection and even operations is the new source review process. The new source review regulations don't affect big plant expansions all that much; if you're going to go through all that trouble you're going to be involved in that whole process anyway. It's the small energy efficiency projects that it kills.”

The Environmental Protection Agency has recently announced that it is revising those regulations in a way that will encourage mills to optimize their processes. The WPC spokesman says that “the reforms to the new source permitting process have been signed, but I haven't seen them in the federal register yet. And even when they pass, it won't mean that the DNR (Wisconsin Department of Natural Resources) accepts them -- they're still sticking with the old approach. I think we'll be successful in changing that eventually, but it's going to be a lot of work.”

3.3 WISCONSIN PULP AND PAPER EQUIPMENT PRODUCT FLOWS

An overview of the product flow for specialized pulp and paper equipment (rather than cross-cutting technologies such as boilers or pumps) in Wisconsin is presented in Exhibit 3-3. It must be born in mind, however, that the percentages given are derived from a small number of estimates by manufacturers and designers. As such, they are indicative of the relative importance of various market channels, but should not be interpreted as precise market shares.

Exhibit 3-3 Pulp and Paper Equipment Product Flow

100 100% 100% 100% 100%Engrs - 1% Designer DB 7%

90 82%Mfrs Reps 24% Designers Designers 3%

80 Plan and Spec23%

70Contractors

60 35%

50 Manufacturer OwnerManufacturers Sales Force Manufacturers

40 75% 70%

30Manufacturers

20 44%

10

0

Manufacture Sales Design Installation Operation


Manufacturers sell their products both using their own sales force and through manufacturer representatives; a few sales are made through design engineers. Manufactures also say they design most of the systems they install: over two-thirds according to the manufacturers interviewed. Design firms account for the remaining 30 percent of designs, mostly on plan-and-specification contracts where they are hired by the mill owners, but sometimes through design-build contracts where either designers or a large construction company have responsibility for both designing and providing the equipment.

Manufacturers also play an active role in installation, with the manufacturers we interviewed reporting that they install an average of 44 percent of the equipment they sell. Even when they don’t do the actual installation, manufacturers often send engineers to supervise the installation and start-up of new equipment. In addition to contractors, who account for 35 percent of installation, installation services are sometimes provided by design-build engineering firms. Approximately 18 percent of installations are handled by the owner’s in-house staff.

3.4 EQUIPMENT AND SYSTEM DESCRIPTIONS

According to DOC data, broad categories of equipment under paper industry machinery include wood preparation equipment (which represents about 10 percent of the national industry’s output); paper mill paper making equipment (also about 10 percent); coating, calendaring and rolling machines (13 percent); finishing machines (5 percent); converting machinery (34 percent); and separately sold parts and accessories (about 30 percent).

Among the manufacturers and designers interviewed, paper making equipment is more important to their business than suggested by the national data cited above. The distribution of pulp and paper equipment sales by industrial process is shown in Exhibit 3-4, using the unweighted average estimates obtained from manufacturers and designers interviewed for this study. Compared to the national industry, the interviewed manufacturers were more likely to sell paper making and finishing machines, and less likely to sell converting machinery. This is in part due to our efforts to contact some of the largest paper making machinery manufacturers. Note that designers are more likely to offer their services for other, cross-cutting technologies that also serve a number of other industries, such as boilers, wastewater treatment, and HVAC.

Exhibit 3-4 Percent of Pulp and Paper Business by Industrial Process

(Self-Report from Manufacturers and Designers)

Manufacturers Designers

Industrial Process

Average Percent of Business

Number of Respondents

Citing Category

Total Number of

Respondents

Average Percent of Business

Number of Respondents

Citing Category

Total Number of

Respondents

Wood preparation 6% 3 10 4% 5 10Paper making 57% 8 10 48% 8 10Coating, calendaring and rolling machines 9% 6 10 12% 6 10Finishing machines 12% 4 10 5% 5 10Converting machinery 16% 6 10 4% 2 10Other* - 0 10 27% 5 10

* Other technologies include cross-cutting industrial systems like HVAC, wastewater/water and boilers.


While the number of respondents citing paper making machinery appears to suggest that there is substantial competition among manufacturers that provide such equipment, the market is in fact fragmented and specialized, with the companies we interviewed facing limited competition for the specific products they provide. Follow-up questions revealed, for example, that the eight manufacturers who cited paper making machinery include two that manufacture rolls and six that specialize in unique products such as rotary joints and siphons; drying and stock preparation; coaters, calendars and winders; plates and screens; and metering rods. Competition, however, is evident in the converting and the design services market.

3.5 MARKET EVENTS AND BID STRUCTURE

The relative importance of new construction/plant expansion, redesign, and replacement sales in the pulp and paper equipment market is shown in Exhibit 3-5.

Exhibit 3-5 Replacements, Redesigns, and New Construction

Manufacturers Designers(n=10) (n=10)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Replacements Planned redesignsof existing systems

New construction/plant expansion

With the decline in capital spending, new construction or plant expansion activity has been limited, and direct replacements and redesigns of existing processes account for most of the business of both manufacturers and designers. Manufacturers estimated the share of their sales accounted for by new construction at only 13 percent; designers at less than 5 percent.

Both manufactures and designers are increasingly focusing on helping pulp and paper mills make the most of existing production lines. For manufacturers, this has meant offering


rebuilding services, replacing parts and equipment subsystems, or integrating selected new items into an existing facility; 45 percent of their business was accounted for by such process upgrades – slightly more than the share accounted for by direct equipment replacements. Redesigns of existing systems are even more important for designers; on average, designers said that over 60 percent of their business consisted of such redesign work. While most redesigns involve the addition or replacement of equipment, modifications of existing processes without equipment replacement are also fairly common for designers, with four of ten designers providing design services in this context.

Manufacturers who install or supervise the installation of their equipment say that emergency replacements are rare (at most 10 percent of installations) and that emergency repairs are more likely in the event of equipment breakdowns. When equipment is replaced in an emergency, they say, equipment selection is totally focused on putting the plant back into operation, with little concern for long-term operational issues such as energy efficiency:

• “They take whatever they can get to get the machine running again.”

• “There's less bidding, there's less concern about price, it's a ‘we got to get up and running’ emergency situation.”

• “They just duplicate what was provided before…so there isn't a whole lot of a selection process if it's an emergency. You just pull out a drawing and build it.”

Bid Structure and Contracting Arrangements

Design engineers do most of their work under direct contract to the facility owner; on average, designers reported that the owner was their client on 95 percent of engagements. Designers are either selected directly (interview results yielded an unweighted average of 42 percent of engagements) or through invitation-only bids (53 percent); less than 5 percent of design contracts are awarded though an open competitive bid process, according to the designers interviewed. The lack of open (as opposed to invitation-only) bidding for design work was further emphasized by a respondent who pointed out that “many Wisconsin mills now have corporate agreements that mandate that work over a certain size go to one of several national design firms.” In addition, he said, “At this time there is very little work being given to consultants, with most work being done in house by the client's people.”

Designers say that 76 percent of their designs are done as part of a plan-and-spec process where the designer provides a specification for the system to be installed; in 20 percent of designs, the designer also provides the equipment for the owner. In a few instances the designer specifies and provides the equipment for a general contractor.

According to manufacturers, contracting arrangements for equipment selection are relatively informal, with over 80 percent of sales made through negotiation with the buyer (usually the owner, sometimes a designer or contractor). This appears to contradict the much higher percentage of plan-and-spec work reported by designers; note, however, that 1) manufacturers say they are responsible for the majority of equipment designs, and 2) the fact that designers are providing a specification to the owner does not mean that the owner chooses to use a formal bid process to fulfill their equipment requirements.


Design Scope

Interview results suggest that a distinctive feature of the pulp and paper equipment market is the importance of manufacturers in providing system design as part of their offering to plant owners. Interview results indicate that manufacturers are seeking alternative ways to add value for their customers – both to generate revenues to substitute for lost equipment sales and to maintain their relationships at a time when customers are doing very little capital spending.

Designers highlighted the importance of system optimization in the design process, noting that system optimization is part of 15 to 100 percent of assignments. Most agreed that optimization is a major owner requirement, citing the need for maximum efficiency and consideration of production targets, water balance, energy balance, machine tuning, heat transfer, chemistry and wastewater/water optimization. One designer noted, however, that equipment is often specified oversized to provide a safety margin and “cover future unknowns.”

For new equipment, designers say they provide detailed specifications, responding to client demands for specific materials, equipment size/capacity, even warranty and maintenance requirements. Some designers say a detailed feasibility study is often conducted to guide the development of specifications. All noted that owners ultimately drive the design process.

3.6 EQUIPMENT SELECTION INFLUENCE

According to manufacturers and designers, plant managers and the designers working under them have the greatest influence over the equipment selected in a new construction or plant expansion project. Equipment selection for retrofits is more likely to be influenced by the production and engineering staff at the plant. The other substantial factor that influences equipment specification (and the decision making/makers involved in a given project) is the budget for a given project. For larger jobs the decision making process moves higher up in the corporation, whereas a smaller budget may be approved by production staff alone.

Designers often specify equipment that the owner wants, but several noted that there are not many choices in the market. Other said they discourage equipment selection based on first cost alone, indicating that equipment should have a relatively long track record in the market and be produced by a company that understands the pulp and paper industry and provides engineering support that understands the product and its application. Comments include:

• “The highest efficiency equipment available. If the owner is looking for cheaper or less efficient equipment, we wash our hands because it will come back and bite us.”

• “In many cases they have preferences that we will honor unless they are not appropriate. We will not specify equipment that does not meet safety, regulatory or process requirements; to protect ourselves.”

Designers mentioned that the owner’s engineering staff or the consulting engineer who developed the specification will often conduct a systematic analysis comparing bids offered in response to a design. “After a spec goes out and bids come in for equipment, those bids are all evaluated on some kind of a common platform....So you stack up all your information: the maintenance information, the proof of ability, who the customer really wants to work with, how close the facilities are, what the company's mean time between failure record is, how fast they


can service the parts in case they've got a problem. The long term energy costs are a big part of that evaluation too.”

In retrofit jobs, equipment is often selected to maintain commonality of spare parts, by choosing the same manufacturer that made the equipment being removed. Also, maintenance staff at the plant will have a say in the matter, as many retrofit jobs are undertaken to improve ailing production processes.


4. KEY BUSINESS DRIVERS, PRACTICES, AND INFORMATION SOURCES

4.1 DRIVERS AND PRACTICES

Drivers of equipment investment include the need to improve quality, manage a large work force, plan and manage maintenance, and move from commodity to specialty products. According to a presentation at the APMA meeting in September 2002, what drives paper manufacturers are those things they would like to do better, including making constant, small, incremental improvements in manufacturing; managing a large work force, often unionized, and often for round-the-clock operations; maintaining a large, complex asset base so that downtime is minimized to help cover fixed costs; and marketing to meet the special requirements of a large number of customers, while smoothing out market cycles.

To help them achieve these goals, the pulp and paper industry would like equipment suppliers to have the following characteristics:

• Strength in technology (particularly hardware) development, comprising both incremental improvement and major gains over a long development cycle

• Project-driven project management skills

• The ability to manufacture low volume, specialty and one-of-a-kind machines

• Engineering talent

Other key issues driving pulp and paper equipment purchases include:

• Regulatory issues mentioned above, especially air emission and water discharge requirements, drive many capital expenditures in the pulp and paper industry. Regulatory issues may hamper investments that might improve overall process efficiency, but would trigger a regulatory review.

• All sources suggest that the current economic slowdown, overseas competition (driven in part by low labor costs) and recent consolidation in the industry are all adversely affecting capital investments for new equipment.

• According to manufacturers and designers, the need for increased production is driving the development of paper making equipment that operates at higher speeds. Wider machine widths are also a trend that affects paper machine production.

• Supply-side actors suggest that machines are being refurbished rather than replaced, as mills strive to reduce operating costs while maintaining a reasonable level of competitiveness.

• According to a 2000 Northwest Energy Efficiency Alliance Report, pulp and paper equipment, including pumps, fans and blowers, require relatively frequent replacement due to the corrosiveness of the pulp and paper manufacturing processes and other factors that make this industry particularly hard on equipment.


In addition, each of the supply-side market actors was asked to identify the key factors that they believe differentiate themselves from their competitors, as well as the most important pulp and paper equipment features. Results are shown in Exhibit 4-1 and discussed below.

Exhibit 4-1 Distinguishing Business and Pulp and Paper Equipment Features (Self-Reports)

Manufacturers Designers

• Technical product innovation

• Product range

• Product excellence

• Service

• Reliability

What owners require:

• Reliability

• Design that works

• Maintainability / maintenance access

• Energy efficiency / low operating cost

• Safety

Designer goals:

• Reliability / durability / dependability

• Performance / efficiency / low operating cost

Manufacturers say they distinguish themselves from their competitors through technical product innovation, product range, product excellence, service and reliability; individual answers varied substantially. Only one manufacturer specifically mentioned energy efficiency as a distinguishing characteristic.

Customers demand a host of features when purchasing equipment from manufacturers, spanning reliability, suitability for the application, various economic justification, competitive technology and durability. Manufacturers said they meet the demands of their customers, emphasizing equipment speed, accuracy, quality and advanced technology. While efficiency was mentioned, it is clearly not a high priority feature for manufacturers; instead, the emphasis is on increasing output or improving quality. If that can be achieved without increasing energy consumption (so that energy efficiency is increased), respondents said, so much the better.

Designers said that owners require reliability, performance, low first and operating cost (including O&M), system oversizing, durability, maintainability, and an acceptable return on investment. Owners sometimes request a specific machine/manufacturer (due to reliability, warranty and service). In addition, safety is always a major consideration.

When asked what they think is most important in a design, designers most often mentioned reliability/durability/dependability, followed by performance/efficiency/low operating cost. Some designers noted that equipment replacements are more likely to be driven by practical considerations such as maintainability, in part because plant maintenance staff will have greater input into the decision, and will make equipment selections based on their experience.


5. ROLE OF ENERGY EFFICIENCY, PERCEIVED OBSTACLES, AND SUPPLIER PROGRAM SUGGESTIONS

5.1 ROLE OF ENERGY EFFICIENCY

While energy efficiency is important to suppliers and (to a lesser extent) their customers, suppliers say their ability to offer energy efficient solutions is directly affected both by the state of the paper industry and by regulatory pressures.

A respondent from the Center for Paper Business and Industry Studies stated that, “Pulp and paper is the most energy intensive industry in the world and it's one of the leading users of water, so yes, energy is a key part of it.” Both he and others noted, however, that overcapacity and poor returns on investment in the paper industry hamper investment generally, and particularly incremental expenses for energy efficiency. One observer noted: “The lack of money has led to increasingly rigid payback requirements. We used to say two years as a rule of thumb. Now it’s less. It still varies from plant to plant, but it’s generally shorter everywhere than it used to be – in some cases it has to be less than one year.”

One equipment manufacturer expressed the same view, explaining that overcapacity makes it “an even harder sell to management to advocate more energy efficient equipment. The ROI equation is out of whack since prices are lower. No one is buying--there have been layoffs and shut downs. Therefore, because of the strong U.S. dollar and burgeoning Asian paper market, more production isn't the focus, but rather, consolidation and focusing resources. The industry is in an adjustment and evaluation period in North America.”

Respondents say regulations can also hinder energy efficiency projects. One industry observer said that, “There's a real world example I'm familiar with where a mill had wanted to run one of their three boilers in energy saving mode, which would have reduced their fuel use and saved them about $20,000 per year. However, because this was considered a change in the method of operation in that it minimally increased the amount of particulate emissions, it triggered the new source review process and required the installation of ‘best available technology’ for the entire process, which would have cost millions.”

When asked specifically about energy efficiency promotion for the pulp and paper equipment they manufacture, only about half of the respondents noted its importance. Several of the manufacturers went on to note the importance of energy efficiency in the drying process, due to the energy intensity involved. Most manufacturers view the greatest opportunity for energy efficiency improvement in a pulp and paper plant to be in drying.

When asked what aspects of energy efficient equipment are stressed during promotion, most manufacturers noted cost savings. Manufacturers went on to note that in all instances energy efficiency is a consideration and is thus promoted. However, one respondent indicated that co-generation plants result in a lack of concern for energy efficiency in many pulp or paper plants.

It is important to note that when asked specifically about energy efficiency, nearly half of the manufacturers responded by emphasizing the importance of paper quality, indicating that quality is often top-of-mind for manufacturers and end-users. One respondent said that quality


and energy efficiency are often at odds, saying that “you can’t get something for nothing; if you want finer quality then you will pay for that in increased energy use.” Specifically, he cited the example of using a two-loop process to remove ink from recycled paper feedstock rather than a single loop: “The quality requirements are driving that product to have a cleaner fiber. So you are having to put it through another loop and of course that translates into energy.”

Quality also affects the selection of the fiber source used as feedstock in a paper making process. The higher the quality requirements of the end product, the greater the likelihood that pulp from a raw tree source is used rather than recycled paper. This is an important manufacturing decision from an overall environmental perspective, including energy efficiency. Substantial energy is required to generate fiber from virgin trees, vs. the much less intensive process of extracting fiber from a recycled paper source.

Designers are generally more focused on energy efficiency than either manufacturers or end-users. Most designers noted that they specify energy efficient equipment in order to help their clients save on energy costs and thus reduce their operating costs and overall production costs. A few respondents also noted environmental benefits, pride of plant personnel that comes with a green design, fewer mechanical problems, and enhanced performance.

In response to a direct question about the importance of energy efficiency in pulp and paper system designs, 6 of the 10 designers interviewed said it was extremely or very important, primarily because of its effect on the cost of production; another designer said it was becoming more important because of rising energy costs. Four designers indicated that they see energy efficiency as a primary design objective in all the projects they complete; others said it was an objective in zero to 40 percent of assignments. Designers agreed larger clients are more likely to ask for an energy efficient design. Designers mentioned premium efficiency motors, VSDs and heat recovery as key characteristics of an energy efficient design. One respondent, with a business focus on pump and fan designs, clearly considers a full system-level efficiency, and made the following statements:

• “Key characteristics include optimized controls, minimizing system resistance, and maximizing the time that the equipment operates at peak efficiency.”

• “One of the occasions when it really makes sense to go high efficiency is when you have equipment that has to operate at a whole wide range of operating points….What you want to do is make sure that it is efficient all the way across the whole range, because that is very hard to do. Usually one is at the sacrifice of the other.”

Another designer noted that pumping systems provide the greatest opportunity to incorporate energy efficiency in design. Also mentioned were opportunities involving controls and valves and, for wastewater treatment applications, optimization of compressed air usage.

5.2 PERCEIVED OBSTACLES TO ENERGY EFFICIENCY AND SUGGESTED SOLUTIONS

End-User Obstacles

The current overcapacity in the paper industry creates a two-fold barrier to energy investments. First, it creates downward pressure on prices and profits, thereby limiting the industry’s ability to invest. Second, the existence of excess capacity means that production lines must be consolidated, encouraging plant managers to redeploy existing machinery rather than invest in


new equipment. In addition to the effects of this cyclical downturn, several respondents expressed concern about the longer-term viability of the Wisconsin paper industry, noting that uncertainty about the future would further discourage energy efficiency investment and other process improvements. A few cited the tighter regulatory climate in Wisconsin relative to southern states and overseas economies, suggesting that regulations could pose a continuing barrier that discourages efficiency upgrades even when the investment climate improves.

The majority of designers interviewed believe that the key barrier to energy efficiency in pulp and paper projects is the initial cost and the difficulty justifying that cost to senior management.

• One designer noted that pulp and paper industry buyers are well aware that operating costs over the life of new equipment far exceed the capital cost, yet their payback criteria for energy efficiency investments are shorter than ever, and even energy efficiency projects that meet the “traditional” two year payback requirement are often bypassed.

• Some designers mentioned that some improvement in the production process is needed to drive a project; it is rare that a project will be justified on ROI alone. “The biggest hold up,” one explained, “is that it [energy efficiency] seldom has anything to do with the process. The number one priority is to keep the wheels turning on the machine. While energy projects do get slated every year, only a few of them sneak through.”

With the emphasis on production, concerns about the ability of energy efficient equipment to perform can hamper its adoption. Sometimes in the pulp and paper industry, one designer noted, “you have blowers that have to blow air that has various types of sawdust or wood chips and whatnot in there. If you go too efficient, it will clog up on you. So they tend to go more plain and rugged with some of those things - they are not as efficient.”

All of the manufacturers interviewed agree that the greatest barrier to energy efficiency in the pulp and paper industry is the lack of capital available for investments even if they make good economic sense. Comments from manufacturers include:

• “They don't have capital dollars to spend, even if it is a good ROI and a short payback.”

• “Because of all the effort to consolidate in this industry there's a whole lot of equipment out there that's being underutilized. So, in many cases we'll find our customers taking equipment from one mill they have shut down as opposed to purchasing new.”

• “To think that U.S. managements, with all the pressure they get from quarterly returns and stock market scrutiny, are going to do things that will promote long term efficiency is a fiction. They are constantly maneuvering for the next quarterly financial report and earnings reports. You can't do any kind of long term capital improvement project in 3 months. You are lucky if you can do it in 3 years.”

• “Barriers are lack of capital, lack of government and utility support. We have a piece of equipment that will replace an existing piece of equipment and reduce the energy by 40 percent, but we can't find any programs from utilities or the government to help the customer pay for that investment.”


Supplier Obstacles

Most observers said that awareness of energy efficiency among equipment suppliers, engineering firms, and others is high, since the energy intensity of the paper industry makes efficiency an important purchase criterion. One respondent noted, however, that “efficiency is important, but it takes a back seat to regulatory concerns,” adding that “if you have to choose between a more efficient boiler and one that helps you meet emissions requirements, you'll choose the lower emissions -- and the vendors are going to promote them accordingly.”

Similarly, the representative of the Center for Paper Business and Industry Studies said that, “suppliers are willing to promote efficiency if it will help them make sales, but they can't change the regulatory or business environment. To the extent that energy efficient equipment is going to cost more or expose them to regulatory review, it will certainly make them less aggressive in promoting efficiency if it raises their cost relative to the competition.”

Manufacturers tend to downplay any barriers to their own marketing of energy efficient solutions, pointing out that they respond to the requirements of their customers, who place a far greater emphasis on reliability and quality. Several manufacturers replied with variations on the statement that “there are no suppliers barriers,” since energy is an important cost of doing business for the mills. Among the obstacles noted were the following:

• Several interview respondents said that there can be real or perceived drawbacks associated with an efficient design, including reduced dependability, more maintenance, and that a newer technology is less likely to be proven.

• Others noted the inability of suppliers to provide detailed estimates of savings from more efficient equipment, which leads vendors to sell on price alone. One manufacturer explained that it is difficult for his firm to provide accurate estimates of savings because paper mills are reluctant to share detailed operating cost data.

Designers also said that their own ability to supply energy efficient solutions has no barriers other than the interest of their customers. Several noted that they routinely specify high efficiency equipment because their customers demand it. One designer, however, explained that both manufacturers and designers are concerned about potential liability arising from poorly performing equipment, which tends to make them more conservative in specifying proven, accepted equipment regardless of its efficiency.

Existing and Potential Solutions

Most designers and manufacturers believe that the best way to overcome end-user barriers is through a combination of information and incentives, with some noting that it is important to provide input early in the planning process. Specific solutions offered included:

• Several respondents suggested pilot plants where suppliers or others offer to share part of the cost in order to demonstrate a new technology. One manufacturer, for example, said, “If there were a governmental body that was promoting energy improvements, it could provide some technical support to mills - perhaps not in system design, but in identifying opportunities, bringing them to the attention of senior mill managers and then utilizing demonstration or reference sites to confirm the potential.”


• Several proposed either a shared savings approach or a performance guarantee that savings from new equipment would more than offset the added cost.

• One manufacturer felt that suppliers should be better informed about the range of utility and other programs available to help offset the cost of energy efficiency improvements, citing a New York state program that his company is working with.

Others felt that dramatically higher energy prices are the only way to get the attention of decision makers. And one designer doubted if end-user barriers could be overcome, in light of what he sees as the ongoing decline in the Wisconsin pulp and paper industry.

Regarding current and past programs, one industry observer cited the U.S. Department of Energy Agenda 2020 project for its long-term focus on bringing together all the major players and “looking at energy efficiency in the context of broader concerns about competitiveness and economic viability.”

The WPC respondent was less convinced that the long-term approach would yield significant benefits, noting that, “We participated in the DOE roadmap for the industry, which was good as far as it went, but was really pretty general. I can't say that it's provided the industry with clear guidance on what to do to improve their processes. It may be time to revisit that and get down to greater specifics, which is going to take more than one or two meetings.”

As a more immediate approach, he suggested working with regulators to address the regulatory barriers to energy efficiency. “I'm pulling together information for an energy efficiency project. The goal is to come up with a list of projects that could be done to enhance energy efficiency cost-effectively, but that are not implemented because of the emissions issues. So we want to get a whole database of these projects and take them to EPA and DNR and say, OK, which of these could we get a break on from the regulation side.”

He also sees an opportunity to integrate this approach with the availability of funding. “We might want to add information on whether some kind of federal or other funding would be available to help defray the cost of those projects. If we can cover both the regulatory side and the cost side, that should go a long way.”

5.3 IMPLICATIONS FOR PROGRAM DESIGN

The best opportunities for efficiency improvements in the pulp and paper industry appear to lie in process optimization in the context of the consolidation and equipment overhaul that characterize the current market. Even after the overall economy improves, these market characteristics are likely to become a permanent part of the pulp and paper landscape, creating an ongoing need to make the best possible use of existing resources. This approach would involve both manufacturers and designers, as well as the mills themselves.

• Manufacturers say they are increasingly involved in equipment repair and renovation rather than new product sales. Incorporating energy efficiency into some of these repair and refurbishing projects could both advance energy efficiency and help manufacturers in their efforts to reposition themselves as suppliers of a broader range of services to pulp and paper mills.


• Most designers already provide process optimization services, both in the context of equipment specification and in situations where no new equipment is being purchased. A combination of information and incentives could make energy efficiency a more explicit focus of these optimization activities.

Program approaches should be framed in the context of the high-priority issues that will likely continue to face the paper industry and its suppliers; namely, competitive pressure and regulatory concerns.

• Competitive pressures of necessity shorten planning horizons and limit the ability of plants to devote capital to non-core investments such as energy efficiency. Efficiency initiatives should therefore focus on measures or actions that 1) improve product quality or other key aspects of the production process, and 2) have relatively lower capital requirements.

• Regulatory barriers to energy efficiency could be addressed by working directly with regulators and suppliers to identify an agreed-upon list of measures that can be pursued without triggering extensive regulatory review. As awareness of these measures becomes more widespread, manufacturers and designers will be able to use them to market efficiency projects throughout the Wisconsin pulp and paper industry.

An approach based on audit and optimization of production processes similar to that employed by the Industrial Assessment Center program may be appropriate for the Wisconsin pulp and paper industry. Rather than focusing exclusively on energy, the IAC program approaches energy efficiency in the context of the overall production process, evaluating medium sized industrial plants for a variety of process upgrades and waste reduction opportunities.

Program planners should consider taking advantage of the fact that foreign-based companies play a major role as both suppliers and end-users of pulp and paper equipment. These companies often operate in economies where energy costs are higher and planning perspectives longer than in the U.S., causing them to place greater emphasis on energy efficiency than the American industry has traditionally done. Moreover, they tend to be well supported by associations and research organizations (for example, the Paper Federation of Great Britain; the Munich-based International Association of the De-inking Industry). Efforts to build on work done overseas could, for example, take the form of pilot projects demonstrating the cost-effectiveness of techniques that have proved successful elsewhere.

Supply side actors place a high priority on being able to provide their customers/clients with documented proof of savings from a given technology in the same application or under the same conditions found in their plant. Demonstration projects were mentioned several times as a potential tool for disseminating information and raising awareness.

Suppliers (as well as their customers) also attach importance to the availability of rebates or other incentives. In addition to addressing the first cost issue raised by manufacturers and designers, incentives appear to have the additional value of demonstrating the funding source’s commitment to the specific measure and to the pulp and paper industry. Since a less-than-two-year payback alone has not induced owners to make energy efficiency investments, the provision of incentives is unlikely to result in a high degree of free ridership. On the other hand,


even incentives may not be enough to induce owners to invest any of their scarce capital in energy efficiency projects.


6. CONCLUSIONS

The most important finding is that energy efficiency, while valued by pulp and paper equipment suppliers, is seen as less important to end-users than regulatory issues and the need to hold down costs in a highly competitive business environment.

• The current economic downturn and global consolidation in the pulp and paper industry is affecting virtually every aspect of the Wisconsin pulp and paper equipment market. Capital budgets are down, production lines are being consolidated, and technical staffs are being cut or shifted overseas. Design work that used to be contracted out is now done by in-house staff, limiting prospects for designers. Manufacturers, who do much of the equipment design, find that there is a limited market for new equipment, forcing them to focus on repairs, refurbishment, and upgrades.

• Reliability, product quality, and environmental compliance are the highest priorities in system design and equipment selection. Downtime is expensive. Wisconsin mills need high quality products to help them mitigate the effects of price competition, and mills must meet stringent air and water emission requirements.

• While there is very little new construction activity, there may be more opportunities to introduce lowest life-cycle cost solutions in process redesigns and equipment rebuilds. Since manufactures are struggling to identify new opportunities to offset the decline in equipment sales, it may be possible to encourage them to more actively promote efficiency improvements as part of the repair or refurbishment of existing equipment. Their search for new market niches may make manufacturers a natural ally for Focus in promoting efficiency upgrades.

• As in other industries, design review by an independent third party is an established practice. It may be possible to encourage a more explicit consideration of energy efficiency opportunities in this review process.

• Similarly, existing processes may be modified or redesigned as a result of industry consolidation. An opportunity may therefore exist to encourage consideration of energy efficiency as part of a broader process optimization effort, similar to the approach used by the Industrial Assessment Center (IAC) program sponsored by DOE.

• Responding to the priorities of their customers, neither designers nor manufacturers place a great deal of emphasis on energy efficiency in their equipment designs. There are, however, several design firms among those interviewed who specialize in process optimization – not so much through hands-on fine tuning as through the integration of various process subsystems in the plant. Such process-oriented designers may prove to be valuable partners in addressing energy efficiency in the context of the pulp and paper processing industry’s focus on product quality and environmental compliance.

REFERENCES

NEEA, 2000. Energy Efficiency within the Pulp and Paper, Water and Wastewater and Irrigation Markets in the Pacific Northwest, prepared by Ducker Worldwide for the Northwest Energy Efficiency Alliance, Report No. 00-067, November, 2000.


ECW, 2002. Wisconsin Focus on Energy Statewide Evaluation, Major Markets Supply Channel Study: Phase I Evaluation Report, prepared by XENERGY Inc. for the Energy Center of Wisconsin, Summer.

ECW, 2001. Roadmap of the Wisconsin Pulp and Paper Industry, December.

Jaakko Poyry Consulting, Fall 2002. Global Industry Changes/Update – Poised for Better Times?, American Paper Machinery Association Meeting.

Bob Moran & Vic Bilodeau, 2002. Trends In Capital Management, American Paper Machinery Association Meeting, Asheville, NC, September 30.

U.S. Census Bureau, 2001 Annual Survey of Manufacturers.

U.S. Census Bureau, 2000 Annual Survey of Manufacturers, Geographic Area Statistics.

Documents

State of Wisconsin Department of Administration Division