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  • Economy
  • Paper Industry Capacity Cycles–Again

Economy

15 Jun 2007

Paper Industry Capacity Cycles–Again

  • By Bill Conerly
  • In Economy

Forbes has a good article about International Paper.  Here’s their most recent comment about the paper industry:

Paper is a lousy business. Any brief spurt of profitability is inevitably followed by a mad frenzy of plant additions, and then by another round of overcapacity and depressed prices.

Now let’s read a passage from Businomics: From the Headlines to Your Bottom Line–How to Profit in Any Economic Cycle (learn more):

As a college student in the early 1970s, I studied theoretical economics, but I also followed real businesses by reading Forbes Magazine.  I remember a disconnect between my academic studies of rational businesses and an article in Forbes about the paper industry.  The article said that paper companies had once again over-invested in their plants, leading to overcapacity in the industry and a vicious price war.  The writer asked if they would ever learn not to do that.  I remember that article today, 35 years later, because events have reminded me of it regularly over the course of my career.  The paper industry and other capital intensive sectors have routinely experienced cycles of overinvestment and price weakness—and they never seem to learn.

So it’s true: some things never change.  Here are the guidelines for running a highly capital intensive business from my book:

  • When times are good, do not add capacity.  Instead, build up cash.
  • When times are bad, buy capacity at cents on the dollar from debt-laden competitors.

But truly, I’m not giving this advice because I expect it to be taken.  I’m giving the advice to soothe my conscience the next time that I sneer at business leaders who make the same mistakes over and over again.

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