Economic indicators signaling slower growth in the Chinese economy are among the last things packers and brokers of recovered fibre want to see as they try to protect and grow their businesses.
While the paper industries in Europe and North America have been scaling back production or eking out slow growth (depending on the sector), the healthy appetite of Chinese mills for recovered fibre has helped provide the necessary demand to keep the market in balance.
If 2013 turns out to be a tipping-point year for basic materials demand in China, the consequences for the paper and board industries and the recovered fibre sector that helps feed it could be considerable.
Ups and Downs
In a presentation at the 2013 Paper & Plastics Recycling Conference Middle East, held in Dubai in early March, paper industry analyst Tobias Crabtree noted that from 2007 to 2011 the Asia-Pacific region’s “total paper and paperboard production increased 23%, offsetting North American and European production declines of 12% and 7%, respectively.”
Crabtree, director of corporate ratings in the natural resources sector for Standard & Poor’s, said the strong paper industry growth in Asia contributed to an average annual global growth rate in paper production of 1% during that five-year period.
Without the growth in Asia, the world would have been producing less paper and paperboard year-to-year, as North America’s peak paper production was in the year 2005 and Europe’s was in 2007.
The divide in global production numbers is joined by sharp divisions among major paper sectors. During that 2007-2011 timeframe, the world annually produced an average of 3.2% more tissue and towel grades and 2.6% more packaging grades.
The story was different for printing and writing papermaking, which declined 0.7% annually from 2007 to 2011, while newsprint sector production shrank 4.2% annually during that same time.
The declines in these sectors in Europe and North America in particular may not be reversed any time soon, according to Crabtree. “Limited to no production growth is expected in North America as the U.S. economy continues to recover [and] European production declines could accelerate from the 2007-2011 trend due to weak economic prospects and newsprint and printing and writing paper overcapacity,” he commented.
Paper output in South America, however, may increase, Tobias noted, to meet regional demands and potentially to export finished paper to Asia.
The world’s stingier appetite for ink-on-paper communication may be the culprit behind another statistic presented by Crabtree, who noted that global paper production growth is lagging global GDP growth significantly. While global GDP was growing at a compound annual rate of 5.8% from 2007 to 2011, global paper production increased just 0.7%.
One of the reasons, according to Crabtree: “Newsprint consumption decline is accelerating in Europe and continuing to fall in much of the world.” Standard & Poor’s predicts newsprint production will continue to decline at a compound annual rate of from 10% to 12% from 2012 to 2014 and will level off in China.
Production of printing and writing paper is predicted to keep growing in China, but it too is expected to face declining production rates of 4% to 10% in Europe and North America. “Printing and writing paper growth in Asia-Pacific won’t be enough to offset declining consumption in North America and Europe,” said Crabtree.
The Better News
The better news for papermakers and the recovered fibre merchants who serve them comes not on the newsprint side but instead in packaging and tissue products.
From 2007 to 2011, however, global growth in the paperboard and packaging sector hinged largely on economic growth momentum being sustained in China (and to a lesser extent in India and other Asian nations).
In North America, the already reeling printing and writing paper sector avoided another blow when the United States Postal Service (USPS) decided not to discontinue Saturday mail delivery.
The American Forest & Paper Association (AF&PA), Washington, D.C., decried the USPS’s announcement in early February that it would discontinue Saturday delivery. “The U.S. Postal Service’s decision to eliminate six-day mail delivery is a short-sighted solution with questionable financial savings and will only drive volume out of the system, stripping both the USPS and businesses that depend on the mailing industry of potential revenues,” AF&PA President and CEO Donna Harman said at the time the USPS announced its decision to discontinue Saturday delivery.
In early April, however, the USPS said Saturday mail delivery would continue, with the agency’s board of governors saying language in the latest government funding measure prevents cutting Saturday delivery.
Acknowledging the importance of mail service within the paper industry, Harman said, “USPS is the essential component of a $1 trillion mailing industry that employs more than 8 million Americans in [sectors] such as advertising, printing, paper manufacturing, publishing and financial services. Approximately one-third, or $6 billion, of printing and writing paper produced in the U.S. is delivered through the Postal Service.”
For the 2012 to 2014 timeframe, Crabtree predicts modest growth (2% to 4%) in paperboard production in South America and even more modest growth in North America (less than 2%). The key, as it was from 2007 to 2011, is China, where Standard & Poor’s predicts compound annual growth anywhere from 5% to 10%.
In mid-April, as a disappointing purchasing managers’ index from China caused concerns about the nation’s ability to sustain GDP growth of 7% or higher, economic forecasters tried to discern which industry sectors might be affected and how.
China has been a factor in the global growth of the tissue and towel sector, but the rest of the world also has shown steady to strong demand for these products.
Crabtree sees consumption of these products growing in China by a compound annual rate of from 7% to 10% from 2012 to 2014. Both South America and the rest of Asia are expected to consume more tissue as well, with Standard & Poor’s predicted 3% to 5% compound annual growth in both places.
Europe and North America will lag in terms of growth rate (1% to 3%) but are predicted to grow nonetheless as consumers of tissue products.
With these drastic differences in outlook for the four paper sectors, particularly in North America and Europe, it should come as little surprise that some makers of newsprint and printing and writing papers are taking steps to diversify their product lines.
Montreal-based Resolute Forest Products Inc. (formerly AbitibiBowater), one of the largest newsprint producers in the world, is among the companies that has taken steps to lessen its focus on newsprint production.
In October 2012, Resolute sold its Bowater Mersey Paper Co. newsprint mill to the province of Nova Scotia. The company had operated the Mersey newsprint mill until it was indefinitely idled in June 2012.
Another newsprint producer switching from newsprint production to other paper grades is SP Fiber Technologies LLC, based in Georgia in the U.S. The company, which acquired the assets of SP Newsprint and its recycling division in 2012, is investing to convert some of its newsprint production to the production of lightweight specialty packaging paper. The investments are being made at SP Fiber’s mills in Georgia and Oregon.
American papermaker Wausau Paper has shifted its operations to produce more tissue. The company recently entered the startup phase for tissue production at its mill in Kentucky. The company says this $220 million (€168 million) project will accelerate the growth of its tissue segment and establish its “green leadership” position in away-from-home tissue markets.
“Our tissue segment has demonstrated strong profitability and exceptional growth over the last decade,” says Hank Newell, president and CEO of Wausau Paper. “We believe our shareholders’ interests will be best served through a focus on successfully marketing the capacity of our new tissue machine and sustaining the historically strong growth and profit performance of our tissue business.”
As the Standard & Poor’s numbers indicate, the consequences of staying focused on newsprint or printing and writing paper may be muted growth, which is difficult for public companies to explain to shareholders.
In a Feb. 1, 2013, press release reporting the 2012 financial results for Canadian papermaker Domtar, John Williams, CEO of the Montreal-based company, states, “In 2013, we expect market demand for uncoated freesheet paper to decline at a 3% to 4% rate in North America.”
Echoing these statements, U.S.-based International Paper (IP), as part of a recent quarterly report, says it is forecasting a 3% decline in uncoated freesheet shipments in North America in 2013. As well, IP forecasts that uncoated freesheet paper shipments will decline by 1.5 percent in Western Europe in 2013.
Waking up from its economic slumber remains a major concern for papermakers in Europe. According to several analysts, European paper markets are in far greater distress than those in North America. The overcapacity, along with the sluggish economy on the continent, is resulting in more cuts to or shifts in capacity.
In late January 2013, German company UPM Paper, through its French subsidiary, announced the sale of its coated magazine paper mill in Stracel, France, to a new company called Blue Paper SAS, which was formed by the German company Klingele Group and the Belgian company VPK Packaging Group.
Reflecting the changing demands affecting the paper industry, Blue Paper says it plans to convert the Stracel mill from producing magazine stock to producing packaging paper (using recovered fibre as furnish). When fully operational in the third quarter of 2013, the mill will have an annual capacity of 252,100 tonnes of fluting paper and testliner. Depending on market demands, Blue Paper says capacity could grow to more than 364,000 tonnes per year.
UPM also has announced it is permanently reducing paper capacity in Europe by 580,000 tonnes, closing a paper machine at UPM’s Rauma mill in Finland as well as a paper machine at its Ettringen mill in Germany. UPM’s Rauma and Ettringen machines, both scheduled to be shuttered by the first half of 2013, produce uncoated magazine paper.
The company also said it plans additional “streamlining” and that it intends to sell off or exit from its UPM Docelles mill in France
In early February 2013, Finland-based paper company Stora Enso announced that by the middle of 2013 it would close two newsprint machines at mills it operates in Sweden. The closures are expected to remove an additional 475,000 tonnes of newsprint capacity from the market, equaling about 3.4% of the total European newsprint market capacity.
As societies around the world seem to embrace paperless reading and communication, the capacity cuts in these two sectors of the paper industry may not have reached their conclusions.