Nova Scotia ratepayers who think this contraction in the North American market for high-end paper has nothing to do with them should think again.
Other customers of Nova Scotia Power are paying a significant part of the power bill for Port Hawkesbury Paper (PHP). And the justification for that power subsidy is all tied up with PHP’s earnings in this tightly contested paper market.
Madison Paper Industries is owned by UPM-Kymmene Inc. of Finland and a subsidiary of the New York Times Company, Northern SC Paper Corp. UPM said this week the partnership would be dissolved and the mill closed by May.
PHP and Madison Paper both produce high-end supercalendered paper, which is used in magazines and catalogues as an alternative to glossy coated papers.
The closure of the mill in Maine opens up room for PHP to sell more product in the U.S.
There are various grades of supercalendered paper. PHP spokesman Marc Dube said Friday in an interview that the Maine mill made lighter-weight papers than at Point Tupper, but the two mills overlapped in about half their product categories.
“Obviously, if there’s less paper being produced (in the U.S.), some people may switch to the products we produce,” said Dube, who described the market as over-supplied.
He also predicted UPM would be “aggressive” in trying to increase its sales of supercalendered paper from Europe, to replace the lost production from its Madison Paper mill. For these reasons, the mill closure would not have a “significant” impact on sales, he said.
Supercalendered paper is also made by New Brunswick’s Irving Paper Ltd.; Catalyst Paper Corp. in British Columbia; Resolute Forest Products Inc., which has its headquarters in Montreal and operates mills on both sides of the border; and by Verso Corp. in Memphis, Tennessee.
Canadian exports of supercalendered paper to the United States are subject to countervailing duties ranging from 17.87 per cent for Resolute to 18.85 per cent for Irving Paper and Catalyst and 20.18 per cent for PHP.
The duties were imposed last year after Madison Paper and Verso complained of government subsidies to Canadian paper companies. Verso owns the NewPage group of companies, which used to own the paper mill in Point Tupper, now operated by PHP.
PHP was singled out for its financial support from the province and for its discounted price for electricity under an agreement with Nova Scotia Power, which U.S. officials regard as a government-mandated utility. The U.S. government therefore treats this electricity agreement as an illegal public subsidy under its domestic trade rules.
With Madison Paper out of the picture, Verso remains the sole U.S. company to directly benefit from the imposition of countervailing duties against its rival, PHP.
And when Madison stops making paper, PHP will have one less rival in the U.S.
If there was ever a time when the PHP mill could stand on its own two feet, without a power discount paid for by other ratepayers, this would be it.
However, the power agreement between PHP and NSPI is locked in until the end of 2017 and may be extended for two years.
PHP pays for the incremental cost of servicing its load, after all other customers have been served, and its power supply may be interrupted during peak demand. It also pays a small portion of its fair share of the fixed costs of running the power system.
Its contribution to fixed costs ranges between 0.20 cents and 0.40 cents per kilowatt hour and is keyed to its earnings. PHP pays 18 per cent of its net earnings before tax towards the fixed system costs, up to the cap.
After the five-year deal, PHP will have to justify to the Nova Scotia Utility and Review Board why its contribution to fixed costs should continue to be capped at such a generous rate.
I asked Dube if he thought PHP could survive without the power subsidy in the current market. He said he expected the current arrangement to continue. He also said PHP was looking at the prospect of buying electricity delivered via the Maritime Link at competitive off-peak rates.