Paper companies respond to changing market conditions by adjusting production capacity.
The paper market has undergone a significant transformation throughout the past several years. After years of declining demand for many finished paper products, the paper industry, especially in North America, may have found some solid footing going forward, at least in some segments.
It may be too early to determine whether this is a long-term trend. However, a number of paper industry observers express modest optimism regarding some paper grades, which they say are finding slightly better markets because of an improving U.S. economy.
The tissue sector is likely to show the most improvement in the North American market over the next several years. Reflecting the comparative strength of this sector, several new projects are in various stages of development. Along with new capacity installations, some companies such as Wausau Paper are winnowing their other operations to focus on tissue production.
The paperboard sector, the largest segment of the paper industry, also is expected to show modest improvements in 2013, though the overall percentage of growth likely will be in the low single-digit level.
A reflection of the possible improvement in paperboard markets is the move by several U.S. paperboard producers to raise their finished product prices this spring. While the increase has been limited to a handful of recycled board producers, the outlook for paperboard through 2013 is bullish. However, some question whether the price hike, which mills are pushing for during a typically slow time of the year, will hold.
The modest improvement in paperboard markets in North America is matched by the continued growth in production outside of North America and Europe. China is expected to continue to dominate the global containerboard market throughout the next several years as it continues to ramp up production.
The growth in paperboard production is stretching the supply stream of bulk grades, especially old corrugated containers (OCC). There are a number of concerns that the percentage of OCC recovered for recycling is at or near its maximum level and that it will be difficult to significantly increase the supply to meet the new capacity demands.
While the OCC market has been somewhat stable, with markets presently tight, any perceived shortage in supply could create a stronger market for OCC during the next several months.
Not all industry observers are forecasting a strong year ahead, however. A number of market bears appear to be less optimistic about the paper industry’s health in 2013. Several say improvements in the paper industry seen over the first half of this year could falter by the second half of 2013. These sources add that while it is still early in the year, many issues that affected finished paper and paper recycling markets in 2012, notably the fiscal health of the federal government, have not been resolved.
One paper grade that will likely continue to struggle is newsprint, which continues to show little sign of coming into balance. Mills in North America and Western Europe continue to shut down capacity as demand for finished newsprint continues to decline.
This downward trend is supported by recent figures from the Canada-based Pulp and Paper Products Council, which shows newsprint shipments declining on a fairly steady basis through last year with little sign of the market stabilizing.
In North America, Richmond, British Columbia-based Catalyst Paper, which has been the most recent newsprint producer to seek Chapter 11 bankruptcy protection, recently sold its 100-percent-recycled newsprint mill in Snowflake, Ariz., to an asset-based investment firm that focuses on the acquisition of industrial real estate and the purchase and sale of industrial equipment. At full capacity the mill was capable of producing 277,000 metric tons of recycled newsprint per year.
In selling off its Arizona assets, Kevin Clarke, president and CEO of Catalyst Paper, noted, “The successful completion of this transaction will assist Catalyst in reducing its interest obligations and improve overall liquidity. With challenging markets and currency impacts to contend with, we are maintaining tight control of spending on all fronts and making the sale of all remaining noncore assets a priority.”
Montreal-based Resolute Forest Products Inc. (formerly AbitibiBowater), the largest newsprint producer in the world, also 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.
The problems in the newsprint sector are not limited to North America, however. Western Europe also is facing declining demand for newsprint. In early February 2013, the Finland-based paper company Stora Enso announced that by the middle of the year it would close two newsprint machines at mills it operates in Sweden. The closures are expected to remove an additional 475,000 metric tons of newsprint capacity from the market, about 3.4 percent of the total European newsprint market capacity.
Rather than shutting down excess capacity, at least one newsprint producer is switching from newsprint production to producing other paper grades. SP Fiber Technologies LLC, Dublin, Ga., which acquired the assets of SP Newsprint and its recycling division in 2012, is investing significant capital 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 Dublin and Newberg, Ore. The move is a further indicator that companies are looking to broaden their production beyond newsprint.
Printing and writing papers also are facing challenges. The most recent issue to affect this sector is the U.S. Postal Service’s decision to discontinue Saturday delivery in light of declining revenue.
The American Forest & Paper Association (AF&PA), Washington, D.C., has decried this move. In a press release issued Feb. 6, 2013, Donna Harman, AF&PA president and CEO, says, “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.”
In acknowledging the importance of the postal service as an end market for the paper industry, Harman says, “USPS is the essential component of a $1 trillion mailing industry that employs more than 8 million Americans in large and small businesses across the country, 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.”
Recent figures from the AF&PA highlight the challenges for the printing and writing paper sector. According to the AF&PA, shipments of printing and writing paper declined 9 percent in December 2012 from the same time in 2011. For the full year, printing-writing and related paper shipments were 4.6 percent below the 2011 level. All four of the major printing-writing grades posted decreases relative to the previous December, with inventory levels increasing in November, led by double-digit increases in mechanical grade papers.
The challenges to paper companies in this sector have forced some of them to consider aggressive moves to remain sustainable. In one case, NewPage Paper Corp. and Verso Paper considered merging their operations. While the deal eventually fell through, the considered merger is among the strategies many companies in this sector are adopting.
Wausau Paper, seeing the challenges associated with the printing paper sector, is making a major investment to produce more tissue. The company recently entered the startup phase of a $220 million tissue capacity investment at its Harrodsburg, Ky., mill. Wausau says this project will accelerate the growth of its tissue segment and establish its “green leadership” position in away-from-home tissue markets through improved product performance and the introduction of new premium recycled products.
Hank Newell, president and CEO of Wausau, says, “Our tissue segment has demonstrated strong profitability and exceptional growth over the last decade. We believe our shareholders’ interests will be best served through a singular focus on successfully marketing the capacity and capability of our new tissue machine and sustaining the historically strong growth and profit performance of our tissue business.”
The challenge in the printing paper segment also is being felt by larger paper companies. In a Feb. 1, 2013, press release reporting Domtar’s financial results for 2012, John Williams, CEO of the Montreal-based company, says, “In 2013, we expect market demand for uncoated freesheet paper to decline at a 3 to 4 percent rate in North America.”
Echoing these statements, Memphis, Tenn.-based International Paper (IP), during its most recent quarterly report, forecasted a 3 percent decline in uncoated freesheet shipments in North America in 2013. Further, IP forecasts that uncoated freesheet paper shipments will decline by 1.5 percent in Western Europe in 2013.
Beyond North America
According to several analysts, European paper markets are in more distress than North America’s. The overcapacity, along with the sluggish economy on the continent, is resulting in cuts to operations.
An example of the problems in the European market can be seen with the German company UPM Paper. In late January, the company, 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 to produce packaging paper from recovered fiber. When fully operational in the third quarter of the year, the mill will have an annual capacity of 277,000 tons of fluting paper and testliner. Depending on market demands, Blue Paper says capacity could grow to more than 400,000 tons per year.
In addition to selling its paper mill in France, UPM has announced that it is permanently reducing its papermaking capacity in Europe by an additional 580,000 metric tons. It will do so by closing a paper machine at its Rauma mill in Finland as well as a paper machine at its Ettringen mill in Germany; selling or exiting its UPM Docelles mill in France; and streamlining the company’s paper business in other areas. The company’s Rauma and Ettringen machines, both scheduled to be shuttered in the first half of the year, produce uncoated magazine paper.
For paper stock dealers, the flux in paper markets in the last year has created some uncertainty. While OCC will likely continue to be in strong demand, the steady drop in ONP availability will cause more suppliers to seek out alternate grades.
Meanwhile, despite the still ample supply of office paper, many mills that have traditionally consumed office grades say they are reluctant to use much of the shredded paper being generated because they are concerned about the quality of the fiber.
Regardless of the current market, most paper stock dealers say they expect continued challenges in finding enough material to meet orders. That seems to be one of the few consensus opinions among those in the paper stock industry.
The author is senior editor of Recycling Today and can be contacted via email at email@example.com.