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An obituary for two icons

 This is not quite the column that I had intended to write. Recent events, one expected and one unexpected, call instead for an obituary for two icons of the Australian industry.

On March 5, 2013, Gunns Ltd was laid to rest. The ultimate demise of Gunns was a virtual certainty after the company was put into receivership. Creditors have now formally voted for the company to be liquidated. Debts total about A$3 billion of which about A$450 million is owed to secured lenders who are unlikely to be paid in full. Unsecured creditors are expected to receive nothing and the Receivers have implied that the company traded while it was insolvent and, in fact could have been insolvent six months before the Administrators were called in. Unsecured creditors include about 300 farmers who grew wood for Gunns. What an ignoble conclusion for this venerable company. It effectively bet the farm on a strategy that was stymied by the GFC and a failure to convince the many opponents of its pulp mill strategy that a win-win outcome was possible.

John Howard, a former Prime Minister of Australia, once described his prospects for regaining leadership of his political party as being akin to "Lazarus with a triple bypass" after losing the leadership. Well, he did go on to regain leadership and ultimately to become the second longest serving Prime Minister in our history. Finding a company to buy the rights to deliver the Gunns pulp mill is not necessarily impossible, but it will require more than the political miracle described earlier. The pulp mill opponents have vowed to continue opposition and specifically threatened the major secured creditor, ANZ Bank, with retribution if the bank takes any action that appears to support the mill in order to recover outstanding debts.

Of more personal impact to me was the announcement on February 18, 2013 of the impending closure of the Amcor cartonboard mill at Petrie in Queensland. As a former General Manager of the mill, and later leader of a significant redevelopment project at Petrie, this announcement was like being told your child is terminally ill. The announcement was buried in the interim half yearly profit release details, which were otherwise very bullish and well received by the market. According to Amcor, the Petrie operation was no longer covering cash costs “due to structural changes in the competitive environment.” Implicitly, this was code for the impact of increased volumes from a raft of big new Asian cartonboard operations but also, it would seem the Whakatane mill of Carter Holt Harvey in New Zealand, which has put Petrie into uncompetitive territory. The company highlighted the challenges of Australian manufacturing operations at the current strength of the Australian Dollar. After Petrie ceases operating in September, Amcor will have the new mill at Botany (a suburb of Sydney) as its only paper making operation. Pundits are already speculating on what will come next in what seems to be part of a comprehensive strategy for rationalising the paper packaging industry in this part of the world.

Petrie was a single machine operation that commenced operations in 1957 as a much delayed post second world war containerboard mill to supply the growing agricultural market in that area. Its evolution as a sophisticated coated cartonboard operation was not part of the long term strategy. In the 1960s, Amcor (or Australian Paper Manufacturers, as it was then) had 2 coated cartonboard machines, one at Botany and one at Fairfield Mill in Melbourne. Fairfield mill ceased operations just before Christmas last year, although the coating machine was shut down about twenty years ago. The Botany 9 machine was originally conceived as a coated cartonboard machine in the late 1960s and Petrie was converted to a coating machine as a stop gap measure while Botany 9 was being constructed. Construction of Botany 9 had been postponed for various reasons, but the recession created by the oil shock of 1974 saw the project abandoned. Petrie, in the meantime, was also the test mule for evaluating the new Inverform technology that was subsequently enthusiastically adopted by APM.

So Petrie evolved as a coated mill by default and over the years its capacity was increased from 25,000 metric tons annually to about 140,000 tpa. Petrie's demise was certainly not due to the lack of capital investment. A significant rebuild project in the mid 1980s included major waste paper recycling and wet end upgrades, new coaters, and a huge investment in innovative roll handling and non-stop sheeting. In fact, the mill was comprehensively cited as an example of industrial innovation in a major study published in a book called “Managing the Innovating Enterprise.”

A further significant coating and calendaring upgrade in 1993 was followed in 2005 with the entire forming section being replaced with a multi-fourdrinier section and significant coating upgrades. In many respects, the mill was maintained as a state of the art facility. However, it always was constrained by the legacy of its original design. As a relatively narrow machine (137 inch trim width), capacity had been progressively increased by adding several sections of small diameter dryers, which probably contributed to the product never being able to quite achieve the sort of very high quality of the newer machines in Asia. Although Amcor was a significant consumer of Petrie cartonboard via its printing and carton business, the in-house demand was well short of mill capacity and it relied on selling cartonboard to competitors and to some extent the export market. Both options were decreasingly viable in the current business and overlaying financial climate.

Other aspects of the business model undoubtedly contributed, such as a decline in local manufacture of goods which had been packaged in cartonboard and alternative packaging options, which in many cases were delivered by other Amcor businesses. Importantly and despite the construction of the Botany 9 machine, since Amcor spun off most of its paper expertise into PaperlinX, there was no longer an appetite for paper manufacture and it was certainly no longer part of its corporate DNA. Furthermore, although the company is still headquartered in Australia, its business operations are increasingly global. 33% of its business is done in North America, 29% in Europe and only 19% in Australasia. Investors love the new business model with stock price almost doubling since its low during the GFC. PaperlinX, by contrast, has seen its stock price decline dramatically, and its obituary seems imminent. Perhaps the most telling indication of the lack of relevance of this part of the business is that the Amcor website still states “the future for the (Petrie) Mill is promising as it continues to build on its strong foundation of quality and service well into the future.”

Paper and packaging are now very much global businesses and parochial considerations are very much sacrificed on the altar of free trade compliance by successive Australian Federal Governments. It does not matter that as a country we have been generally played on a break by many of our so called "free trade" partners. This situation is not confined to paper manufacture but across a range of industries. In the paper industry, numerous dumping cases have been brought by industry to achieve only a pyrrhic victory. A sustained campaign by tissue manufacturers saw dumping established but no penalty was levied because "injury" was determined as insignificant.

If free trade principles are not enforced or difficult to substantiate, it is a significant challenge. However, if a specific manufacturing business is not seen as critical or even relevant in the global big picture then it is likely that more obituaries will be written in the years ahead.

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