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Australian Paper Manufacturers Essay

Introduction

The case deals with the Australian Paper industry in 1990, the major players operating in it and how the environment is throwing up challenges to its major players and shaping the future growth of the industry. The paper industry in Australia can be separated into three categories – Newsprint, Paperboards and Fine paper. The industry is dominated by two big players namely the PCA and Australian Paper Manufacturer (APM) and the rest catered to by imports.

PCA operates in the fine paper market enjoying a 75% market share, while APM is a leading player in the paperboards segment. Both the companies are part of a huge diversified parent organization. Environment regulations from the government, green peace activists have been recently posing threats to PCA on organochloride emissions. APM is proactively seeking to strive ahead of the environmental issues facing the industry. Ken McRae, the GM of APM has to decide on three alternatives to choose upon for utilizing the A$ 50 million allocated by the parent company Amcor, keeping in view the Financial, Strategic, Ethical and Environmental issues.

Case Facts

Before 1987, the Australian paper industry was divided into three companies. Australian Newsprint Mills supplied newsprint, Australian Paper Manufacturers produced paperboard, and Paper Company of Australia produced coated and uncoated fine-papers. All three of those companies were subsidiaries of major Australian corporations. Maitland sales, which owned Paper Company of Australia (PCA), recorded $495 million in net sales. Amcor Limited, which owned Australian Paper Manufacturers (APM), grossed $2.4 billion in net sales. APM decided to enter another aspect of the paper industry and dive into uncoated fine papers. They figured that they could draw on their strength in paperboard manufacturing. The making of fine paper or paper in general requires close attention to detail. The first step in making paper requires the wood to be pulped.

This process refined the wood so that only the fibers remained. During pulping, the cellulose fibers were separated from the other components so it could be processed further. This process can be done in two different ways, mechanically or chemically. The chemical process produces much sturdier pulp, but unlike mechanical pulping, which uses 90-95% of the wood, chemical pulping uses 45-50%. Chemical pulping is also the least environmentally friendly of the two. When the fibers are made into fine paper, it goes through an immediate step called bleaching, where as chlorine gas and chlorine dioxide are applied to the pulp. After bleaching, chemicals such as, rosin, aluminium sulphate, or synthetics to reduce absorbency for writing papers. The annual consumption of fine paper in Australia rose to nearly 358,000 tonnes in 1987.

Uncoated fine paper, such as photocopy paper, stationary, and offset printing paper, comprised 52% of that market, while coated fine paper, the type used in an annual report, comprised of the rest. In 1984 APM completed a a $163 million modernization of its kraft pulp plant in Maryvale, Victoria. The improvement added 140000 tonnes per year of kraft pulp capacity, bringing the Maryvale plant’s total output to 350000 tonnes per year. The Maryvale plant had four paper machines and in 1986 APM turned its attention to Paper Machine 3.Originally built in 1972 to produce brown shopping bags Machine 3 had a capacity of 31,000 tonnes per year. By the mid 1980s, though people had stopped using these checkout bags and between Machines 1 and 2 the company could cover demand. This left Machine 3 ripe for transformation.

APM seized the opportunity, upgraded machine 3 and used it to take them into the heart of PCAs fine-papers market. People in the plant were convinced that it could be done and that their years of experience in making bag paper could be adapted to such a closely allied process. A number of trial runs were made in order to determine the general viability of the idea. Once it was proven feasible, APM sanctioned the investment. Between May 1986 and July 1987 APM spent A$50 million to rebuild Maryvale’s Machine 3, converting it from making bag paper to producing white wood free paper. The upgrading of Machine 3 had not only put APM next to PCA as the second domestic supplier of uncoated fine paper. It also made APM the owner of Australia’s largest and most technologically advanced fine paper machine. The 70,000 tonnes per year of Machine 3 capacity gave APM the product it needed to steal from imports-the company’s primary goal in entering the fine paper market.

Customers had been accustomed to buying some of their paper from PCA and some from overseas but PCA had not kept pace with the growth in demand. Although aiming to replace imports, McRae, director marketing for APM papers group at the time, knew his toughest job lay in establishing APM’s fine papers amid a market dominated by PCA. In August 1987, APM inaugurated its move into the fine papers market. McRae developed a careful paln for ramping up to full capacity on Maryvale 3.APM intended to be producing at 40,000 tonnes annual rate by august 1988, starting with three crews working Monday through Friday and eventually moving to four and then five crews. Like all of Maryvale’s other paper machines, Machine 3 would eventually operate 24 hours a day, 365 days a year.

By August 1988, Maryvale Machine 3 was producing at a rate of 50,000 tonnes per year and by March 1989 it had reached its capacity of 70,000 tonnes per year. In May 1989 APM introduced its newest entry in the fine papers market, ReRight. It was Australia’s first stationery paper made from 100% recycled paper- post- recycled paper that was produced without chemicals and was neither de-inked nor bleached. The World Wildlife endorsed ReRight and the product generated significant interest and publicity. Despite ReRight’s higher cost it grabbed a 3% market share (7,000 tonnes per year) of the uncoated fine papers market. To recoup its research and development expense, APM charged 20% more for ReRight than for comparable, non recycled paper.

ReRight’s immediate acceptance inspired APM to introduce ReRight-Form in the spring of 1990, a recycled computer paper. While APM expanded its recycling efforts PCA suffered yet another blow on the environmental front. Greenpeace released a surprise report on PCA’s Kayser soda pulp mill on the coast of Tasmania, declaring it the dirtiest mill of its type in Australia. It found Kayser discharging 11.5 tonnes of organochlorides per day into the sea, at times reaching a level 80% above government standards.

It also decried the presence of chloroform a cancer causing agent, in the effluent and cited it as a health risk to PCA’s workers. The environmental group called upon the government to monitor the mill’s effluent levels more closely and demanded that the company reduce its discharge of organochlorines to a maximum of one kilogram per tonne of pulp. It also recommended complete elimination of organochlorine discharges by 1993 and asked the government to review employees’ medical records to search for abnormal incidence of cancers attributable to oraganochlorines such as chloroform.

Future Scenario

Encouraged by APM’s success Amcor had provided A$50 million to APM to consolidate yhe investment that had carried it into fine papers, though a pre-tax return of at least 20% was expected. While larger sums could always be requested, it was understood that larger sums required more attractive returns-as had been the case when APM originally entered the market by upgrading Machine 3. Further expansion into fine papers loomed as a possibility. Copier paper alone promised 10% annual growth and recycled paper continued to grow in popularity.

The uncoated fine papers market as whole was projected to grow at a rate of 6.5% annually through the year 2000. Now, McRae had the following options for the capital budget: 1) The capacity of Machine 3 at Maryvale could be expanded upto 100,000 tonnes. Initial estimates put the cost of increasing from the existing capacity of 70,000 tonnes at A$35 million. McRae would have to decide how he would use this extra capacity. Analysis of option 1-

2) APM was producing 7,000 tonnes of recycled paper at its Fairfield plant and increasing capacity would cost A$18 million. Analysis of option 2- 3) In addition to APM’s recycling efforts, McRae focused on ways to reduce APM’s discharge of organochlorines. APM could reduce its dependence on chlorine by substituting oxygen in one of two ways: a) To replace chlorine through oxygen pre-bleaching, APM would have to spend A$15 million in development and implantation. Oxygen pre-bleaching would reduce chlorine use by 50%.

Pulp output at Maryvale would drop by 5% from 350,000 tonnes to 332,500 tonnes, but many engineers at the plant had expressed keen interest in learning about the technology. Pulp contribution at Maryvale was A$200 per tonne of pulp. Analysis of option (a)- b) Alternatively, APM could intensify the use of oxygen during bleaching, which would reduce the level of chlorine by 15% and cost approximately A$8 million. Pulp output would be unaffected. Analysis of option (b)-


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