Domtar Closing Paper Mill, Cutting Jobs, Curtailing Production

Ross Marowit of Canadian Press and remarks from industry experts.

Workers in Domtar Canada and U.S. paper mills were handed unwelcome news just days before the holidays, when management announced that 625 jobs will be lost next year to address reduced demand for uncoated freesheet paper.

The mill in Dryden, Ont., is being reorganized and the large No. 2 paper machine, which has been running at half capacity, will shut down Dec. 22. And the smaller No. 1 machine idled for two years will restart in mid-January for a net permanent production reduction of 155,000 tons.

The Port Edwards mill in Wisconsin will cease operation in the second quarter of 2008, cutting 165,000 tons of production.

The moves will remove 342,000 tons of production capacity as the Montreal-based company seeks to rebalance supply and transfer production to more efficient facilities.

CEO Raymond Royer said the measures were required to strengthen Domtar's position as the most efficient producer in North America.

''We need to pursue the consolidation of our production capacity to improve our competitiveness in the North American market, given continued unfavorable economic conditions and a softening of demand for fine papers,'' he said in a news release.

Some of the product lines manufactured in Port Edwards will gradually be transferred to other unnamed facilities without affecting customers, the company said.

Mark Bishop of RBC Capital Markets said the decision could help to boost prices and shield the company should the faltering U.S. economy slow further in 2008.

''The fundamentals are better now than they were before, so prices on a net basis will ultimately be better than they would be otherwise,'' he said from Vancouver.

The decision follows a similar announcement during the summer to reduce 284,000 tons of paper capacity.

''Combined with today's announcements, Domtar will have closed approximately five per cent of its North American uncoated freesheet capacity in 2007,'' Pierre Lacroix of Desjardins Securities wrote in a research note.

These decisions represents 2.8 per cent of North American freesheet capacity and eight per cent of the Domtar's freesheet capacity.

The decision was foreshadowed in September, when the company suggested that 425,000 tons of paper could be removed from the system next year.

Demand for uncoated freesheet grade has decreased by 5.5 per cent this year, and is expected to continue to decline by one to two per cent annually in the years to come, said Bishop.

A worsening market and economic situation could lead to additional closures, he added.

''I think there's likely more to come,'' he said, noting that Dryden has been an underperforming asset for a long time and could face an uncertain future if conditions worsen.

Rumors circulated for months that Domtar would close the facility. The company issued a news release last month to deny a report that Domtar was planning to announce the closure of the mill. Domtar spokesman Michel Rathier said the company hopes its decision will enhance the viability of the Dryden mill.

Domtar is the largest integrated producer of uncoated freesheet paper in North America after its merger with the fine paper assets of U.S.-based Weyerhaeuser.