I used to say the winter price of heating oil depended on the commuting experience the heating oil traders had on their way into Manhattan from suburban Connecticut each morning. If they had a cold, miserable experience, they jacked up the price. Maybe that is not giving them enough credit, but I don't think I am far off.
Believe it or not, I have sat in capital strategic planning sessions in our industry that display just about the same perspicacity. Here we are, working on a long-term major investment plan that has far ranging effects, perhaps twenty or more years out, and there are people in the room talking about a change in the price of their product or a feedstock that happened last week. Give me a break--you need better data than that, you need a better perspective than that.
As recently as 1995, Canadian and US newsprint producers were licking their lips, not able to wait until they could build newsprint mills in China. Are you kidding me? Even though the Internet was nascent, a ten-year-old could have told you there would never be a gigantic newsprint industry unfold in China.
Getting strategic decisions right is hard work. There are long range views as well as short range views that must be taken into account. And you have to root out the politics that are always gumming up the process (see last week's column).
It is like the training I had on publishing a book. You have to get the editing right at the detail level, but that is not the end of the story. You have to step back from the proof, about three feet, and see what the book looks like in total at that distance--titles, placement on pages and so forth. It takes a detailed as well as long view to get it right.
Factor in all the moving parts over which your company has no control and you have a challenge indeed.
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Join us in Guatemala next summer for the 3rd Paperitalo Papermakers' Mission Trip [12.06.18]
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In another mill case, the lender decided that natural gas prices would continue to rise. Forced the borrower into a hedging scenario that probably cost the borrower over $30 million in three years. Just because one powerful person got out of bed one morning and had cold tootsies going to the bathroom.
I can think of one mill in construction in the United States right now (and there are several, I'll not give you any more hints) that suffered myopia in its planning. Likely the company and the mill will survive, as it will make a highly demanded grade of paper, but it will not be optimized from a profitability standpoint because the capital expenditure already has an unnecessary burden in the tens of millions of dollars.
A warning sign is this. Unless you are very good, and you get very good by having lots of recent experience, a project examined and vetted internally only likely has some gaping problems. If you have not been growing on a regular basis, you just cannot know the state-of-the-art thinking on optimizing capital projects.
In the past ten years, for instance, owners, except through lost revenue of starting up earlier, have not been punished by the financial costs of taking an excessive length of time to build a mill--the interest on the construction debt has just not been that high as compared to years gone by. This is about to change and add a new cost to price of construction schedule. Rule of thumb today-if you are building a non-integrated mill (a recycled or market pulp consuming mill), you better do it in eighteen months or less from ground breaking. If interest costs precipitously rise, expect the experts to find a way to reduce that to fifteen or even twelve months. Procurement and construction techniques have gotten good enough that I think the twelve-month mill is just around the corner.
So, look in the distance; look up closely when planning your next major capital project. Make sure you ferret out all the unconscious biases in your thinking, individually and corporately.
Safety, when built into capital projects is nearly free, both up front and in the accidents avoided down the road. Get a competent safety professional involved from the beginning.
Be safe and we will talk next week.
