International Paper's recent announcement that they were closing their Courtland, Alabama, facility caught many by surprise. Why IP? And, if IP, why Courtland? And, if Courtland, why not repurpose the mill to make other grades?

WHY IP?
We estimate that the one-time cash cost of the closure plus the loss of operating margin the mill was making, is outweighed by the reduction in required capital spending at the mill and any improvement in market dynamics from higher operating rates. So, the move seems to make financial sense for IP, even if the result is that other players also benefit from it.

WHY COURTLAND?
If it makes sense for IP to reduce UFS capacity now, why close Courtland as opposed to another IP mill? While Courtland's FOB cash costs were low among commodity UFS producers in North America, the cost curve is flat and the difference between Courtland and others is small. Factors such as logistics may have had an impact: Courtland's inland location gives it more difficult access to water transportation, and large new pellet plants in Alabama may have forced local wood costs up.

However, today's costs are not the only measure of a mill or machine's long term competitiveness. Using the FisherSolve™ Benchmark Viability model, we conducted an analysis which evaluates assets with a broad basket of matrices including cost competitiveness, capital requirements, asset quality, scale, grade health, and several other factors; the higher the Viability Index score, the greater the risk.

The Benchmark Viability curve (Figure 1), shows that while all of IP's major mills appear to be competitive, Courtland has the highest risk score among the large mills producing commodity UFS grades, and thus appears to be the logical choice for closure among an unfortunate set of options.

Even at a machine level, a Viability Analysis shows Courtland's machines to be among the riskiest in the IP fleet. As shown in Figure 2, Courtland remains the logical choice.

WHY NOT REPURPOSE?
If IP simply wanted to reduce UFS capacity, why not repurpose Courtland to make other grades? There may be a collection of reasons. Repurposing requires significant capital, as the Pensacola and other conversions have shown. Neither the containerboard market nor fluff pulp, the two major alternatives for conversion, appear to need more supply at this moment. Perhaps Courtland's pulp mill will come back at some time in the future. Lastly, reducing Courtland's consumption of wood may take some pressure off wood costs at other nearby IP sites, of which there are four within 200 miles (Figure 3).

The announced closure of Courtland may have surprised the industry, but our models lead us to believe this is a sound financial decision, painful as it is to those associated with the facility. The elimination of ongoing capital expenditures at Courtland, the potential improvement in market dynamics for their remaining UFS business, and any collateral dividend to other IP mills in the area from changes in the demand for wood, could result in a very short pay back of the one-time shutdown costs.

Good companies make decisions based on complete information and analysis. It seems that IP considered and came to a logical decision regarding Courtland.

Tedd Powers is a Senior Consultant at Fisher International, Inc. He can be contacted at tpowers@fisheri.com. The source for market data and analyses in this article is FisherSolve. To learn more, please visit www.fisheri.com.