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Materials on Chapter V.

Wood Pulp Finance.1

From the Federal Reserve Bulletin, vol. 8, pp. 787-795 (July, 1922).

The following study endeavors to present the methods employed in financing wood-pulp operations, both by companies confining their activities exclusively to this product and by paper manufacturers. It includes such data relative to production and distribution as are believed necessary to afford an understanding of the financial aspects.

I. The Manufacture of Wood Pulp.

The wood-pulp industry is closely bound up with the paper industry. A majority of the establishments produce paper exclusively (they are frequently called converters), but the largest firms (measured both in terms of capital investment and in terms of value of product) produce both pulp and paper. Comparatively few mills make pulp exclusively, and they are relatively small in size. The situation is shown in the following table, giving census data for 1914 and 1919:

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The manufacture of paper from wood pulp in the United States dates back to the early sixties, and to-day wood fiber is the most important product used. Poplar was the first wood used, but to-day spruce leads all other kinds, comprising over 50 per cent of the total wood used. Hemlock is second, and poplar and balsam are rivals for third place. In addition, other products besides wood are still used, such as old rags, waste paper, etc.

Wood is converted into pulp suitable for making paper by two different classes of processes-mechanical and chemical. That produced by the chemical process is in turn subdivided into three mains groups, according to the respective chemicals used-sulphite, soda, and sulphate or kraft pulps. The grades of pulp thus made are used in different proportions in the various kinds of paper. The relative importance of these

Prepared by Woodlief Thomas. Federal Reserve Bank of Philadelphia, in co-operation with the Division of Analysis and Research, Federal Reserve Board.

processes can be seen from the following table, which gives production of pulp by processes in the United States for specified years:

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Mechanical pulp or ground wood, as it is more frequently called, is made by grinding up barked 'wood, then mixing the resulting material with water, and finally screening it. This process is the cheapest of all, but the pulp produced is inferior. In the production of pulp by chemical processes, the wood is cut into chips and then digested with a chemical liquor at high temperature and pressure for several hours. The chemical dissolves all the constituents of the wood chips except cellulose, leaving an unbleached pulp. After screening, it is ready for bleaching. Sulphite pulp, which is of very high grade, is made by the use of calcium and magnesium as chemical agents, while in the soda process caustic soda is employed for dissolving the nonfibrous parts of the wood. Sulphate or kraft pulp, noted for strength, is reduced by means of a liquor of caustic soda, sodium carbonate, sodium sulphite, and allied products.

The geographical distribution of the wood-pulp industry is shown in the following table, compiled from Lockwood's Directory of the Paper Trade for 1922:

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1 Data on processes of manufacture of pulp secured from Witham, "Modern Pulp and Paper Making," and from bulletin of the Department of Commerce, "By-products of the Lumber Industry, 1916."

DEPOSITS AND LOANS

From this table it will be seen that the pulp mills are nearly all located in States which have large timber resources, the five great pulpproducing States being Maine, New York, Wisconsin, New Hampshire, and Pennsylvania. The following table gives the actual 1919 output in tons for certain States, as reported by the census:

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Ground wood mills in particular are localized near their wood supply because of the bulkiness of the product. Over three-fourths of this grade of pulp is made in New York, Maine, and Wisconsin, which are also the chief newsprint producing States.

II. The Supply of Pulp Wood.

The primary operations in the production of wood pulp largely center around the cutting and purchase of wood by manufacturers. While the time of the year at which the different operations are carried on varies as to the grade of pulp produced, as to the section of the country in which the mill is located, and as to the respective policies of the individual manufacturers, uniform practices are found with respect to certain aspects.

Some pulp manufacturers produce pulp primarily for the market, while others manufacture for consumption in their own mills. Many of the latter also sell their surplus supplies. The larger companies with extensive capital resources usually cut their own pulp wood, and the smaller ones purchase their needs from other sources. Even many large firms that possess their own wood properties frequently purchase as much as possible from outside sources in order to conserve their holdings for future use. The division of the wood used between that cut from owned properties and that purchased thus varies widely among the different firms.

In purchasing wood, several different methods may be used. The pulp manufacturer may purchase directly as needed from wood-pulp jobbers or importers; he may contract with large or small operators, lumbermen, or jobbers for his yearly requirements; he may contract

1 Included in all other States.

102 MATERIALS OF BANKING

with or purchase directly on a small scale from local lumbermen and farmers such wood as they may be able to provide; and finally, he may secure timber rights to certain properties and operate them.

Wood may be bought in three states of preparation-rough, peeled, or rossed. The cycle for peeled wood is much longer than for the rough variety. Contracts are let during the spring and summer for the following year's supply, or may be postponed until fall or winter, but purchases are usually made before logging operations begin. In July and August the large operators frequently employ a small number of men to build roads, construct camps, and make other preparations for the coming season's output.

Cutting of the rough wood usually begins in this country about the latter part of August or the first of September, although in northern Canada it may be done in the summer because of the early heavy snows. The heaviest cutting is ordinarily done during the months of October, November, December, and perhaps January. The idea is to cut all the wood before the snow gets too heavy, or approximately by Christmas, after which snow-roads are made for the purpose of hauling pulp wood to the nearest streams. This hauling is done principally in the months of January, February, and March. The driving of the logs in the streams and rivers begins in the latter half of April, and sometimes the last of the logs do not reach the mills until late summer. Deliveries on contracts or on purchases by those mills that made no contracts begin about April and are heaviest during the three months following. Some firms report heavy purchases also in October and November. In States where driving is not done on streams the wood may be carried out during the winter by railway, and deliveries and purchases consequently begin earlier in the year than in the above illustrations, which apply chiefly to New England and New York.

The operations in supplying peeled wood are slightly different as to seasons and extend over a longer period of time. The bark will slip only in the spring when the sap is running, so cutting is not usually done until that time. Its period of greatest activity is in April and May. The logs are sawed and peeled during June and July. They are then hauled to the streams, where they remain until the drive of the following spring, when they are carried to the pulp mills. There they must remain until dried out and ready for use. Thus the cycle of operations extends well over a year. Of course, where the wood is hauled by railroad the length of time is much shorter. In the South, also, it is shorter, and cutting is usually done in the spring, while in the far South the cutting and purchase of wood is uniform throughout the year. Those pulp manufacturers who also operate lumber mills and use the

mill waste in the production of pulp usually secure a fairly regular supply of raw material throughout the year.

To summarize, we notice in general the process of supplying wood to pulp manufacturers has the following seasonal characteristics: June to November, placing of contracts; September to January, cutting of rough wood; September to May, cutting of peeled wood; January to March, hauling of wood; March to June, spring drive; January to September, deliveries on contracts and purchases.

The acquisition and carrying of large supplies of wood offers the greatest financial problem which manufacturers have to face, whether they operate their own properties themselves or under contract, or whether they purchase wood from other sources. Stocks vary within certain limits at different seasons and according to the policy of the individual manufacturer, but in general they are rather large. Most mills report that they ordinarily carry available for current use from 12 to 18 months' supply of wood, either in their yards or elsewhere. One firm states that on April 1st of each year it has at least 70 per cent of the total year's requirements on hand, which, in conjunction with later receipts, insures against a shortage. Most manufacturers try to keep a year's supply ahead, because few purchases can be made except at certain seasons and because the fresh green wood is not as good to work up into pulp as that which has been dried. The largest stocks are usually held in the fall, when deliveries on contracts are ended. A few mills, however, which have relatively small requirements, or which for special reasons are able to secure wood promptly, carry small stocks. Particularly in the South is this true, because of the regularity with which wood can be purchased during the year, and stocks sufficient for six months or less are frequent with mills securing their supplies from this section of the country.

Some information as to seasonal changes in stocks of pulp wood held by pulp manufacturers in different sections is given in the following table, showing data gathered by the Woodlands Section of the American Paper and Pulp Association:

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