Abitibi axes Newfloundland paper mill

“The newest machine was put in here in 1968 and they haven't done much to it since,” lamented Mr. Healey, the Communications, Energy and Paperworkers Union national representative in Newfoundland. “Abitibi has spent very little money on infrastructure over the last 20 years – just took a lot of profit out of here – so the writing was on the wall.”

If that's true, then CEP members' rejection of two recent Abitibi proposals involving job cuts and other contract concessions punctuated the sentence. So, by March, the central island town of 13,500 will lose its biggest employer as the mill – first built to supply newsprint to the London Daily Mail – shuts down for good only months shy of its 100th birthday.

Grand Falls' fellow mill towns in Canada got off relatively lightly, however, as Montreal-based Abitibi unveiled a massive reduction in North American paper-making capacity in a bid to stay a step ahead of freefalling demand in newsprint consumption. The cuts are sure to enrage hurting newspaper publishers as the contraction in supply puts upward pressure on already record high newsprint prices.

“Our customers are mad,” Abitibi chief executive officer Dave Paterson conceded in an interview. “But our belief is that 2009, from a demand perspective, is going to look a lot like (the 15-per-cent decline of) 2008. As our stated goal is to maintain a good supply-demand balance, we felt these steps were necessary.… You can draw your own conclusions on pricing.”

The 830,000-tonne cut to annual newsprint output – on top of another 170,000-tonne reduction in the production of other types of paper – follows shutdowns of similar size announced a year ago.

Once all of the cuts are implemented, Abitibi will have slashed overall newsprint production by about a third, to about 4.1 million tonnes, since last year's merger of Abitibi-Consolidated Inc. with U.S.-based Bowater Inc. While analysts agree Abitibi's longer-term viability depends on shuttering high-cost capacity, that does nothing for morale.

“If you want, you can get down in the dumps, but as long as you can see progress being made your confidence level is such that (you feel) you're going to succeed,” Mr. Paterson confided. “We're still here and we're still fighting.”

Union leader Mr. Healey sees it differently.

“They've basically got a last-man-standing strategy. They're trying to prop up prices to save a doomed company. I suggest they get out of the paper business. They're no good at it.”

CIBC World Markets forest industry analyst Don Roberts is only slightly more optimistic. “This really is just death by a thousand cuts. We now have a cyclical contraction reinforcing a secular downturn in newsprint demand.”

Mr. Roberts suggested Abitibi should accelerate its shift out of newsprint into other papers. The firm recently began making a line of uncoated groundwood paper (used mainly in printers and copiers) at one of its Quebec mills that uses less wood fibre and is cheaper to produce than the uncoated freesheet that is rival Domtar Corp.'s bread and butter.

Until now, Abitibi's cuts have come mostly in Canada. But the sliding dollar has helped Abitibi's remaining Canadian mills earn a reprieve for now, while surging electricity costs in the southern U.S. means, this time, its mills there will get the axe.

In Canada, Abitibi will resort to temporary, revolving mill shutdowns to reduce newsprint output by 240,000 additional tonnes in 2009.

Abitibi estimates that every 1-cent movement up or down in the Canadian dollar exchange rate means $29-million (US) in additional costs or benefits on an annual basis. With the loonie sinking from above parity since last year to below 80 cents now, Mr. Paterson said there is “a good chance” Abitibi will be profitable on an operating basis in the fourth quarter.

Abitibi's share price has collapsed in recent weeks as investors worry it could be forced into a debt restructuring. It has $350-million in notes due in March and a further $1.3-billion due by the end of 2010.

“The March deadline is our first hurdle,” Mr. Paterson said. “Those are well-collateralized loans that we anticipate being able to roll over with existing lenders.”