The fortunes of the paper industry have not been positive in recent years. Most paper manufacturers note a steadily declining demand for printing papers in North America due to changing printing technology and decreasing demand for printed communications. New capabilities, such as colour digital and variable data printing, which have enabled on-demand and finely-targeted advertising, have siphoned off some of the volume of print runs in nearly all print markets. Print buyers order only the brochures or booklets or letterhead they need for this month—or even this week—and may be more willing to pay more per-unit for highly personalized direct mail pieces than for a million brochures that most recipients will never even open. In addition, electronic media, including all types of Internet-based communications, are providing a quicker, cheaper means for marketers to reach their customers. Even many newspapers are expanding their presence on the Internet as their hard-copy circulation decreases.
With these long-term shifts in demand, North American paper manufacturers have been selling assets and/or shutting down production capacity for both pulp and paper for at least a decade. Paper is a commodity sold chiefly on the basis of price, and the only way paper producers can remain profitable is to reach a balance between supply and demand. In current markets, this balance is often achieved by reducing supply.
As a hedge against tight supply and rising prices, paper merchants and distributors, and even some large printers, traditionally have built up inventories of the most popular paper grades. However, the paper mills have responded to this by tightening supplies to compel the consumption of inventories. Over last year, many paper manufacturers reached what they believed to be a supply-demand balance, which allowed them to increase prices. Though this was an unhappy development for print buyers, many—if not most—paper mills have reported financial losses for several years, which forced them to either close pulp and paper mills that were at best marginally profitable or to sell off their assets and exit the printing papers market.
Last year, many paper companies returned to profitability or at least improved their bottom lines, but they are unlikely to re-open shuttered facilities in North America, especially with paper production increasing in Asia. Many North American and even European paper makers have, in the past, minimized the threat of competition from Asian mills. The oft-repeated belief was that the printing industry, particularly in China, was growing alongside paper production capacity, and China itself would absorb all the paper its mills could produce. However, paper production has outstripped demand in China, and the paper made there increasingly has been channeled to North America and Europe.
Early in 2007, coated papers in particular were glutting the North American marketplace. These are grades used primarily in printing magazines and catalogs, direct mail advertising, and similar items. The result was that prices dropped dramatically, and both North American and European paper producers were forced to adjust. Paper industry sources report that something like 17% of the capacity for coated groundwood papers was shut down last year in Canada and the US.
These closures included some of the Canadian facilities owned by Finnish paper mills Stora Enso and UPM Kymenne. Stora Enso sold its entire North American operation to a US company, NewPage Corp., for less than half the amount that Stora paid for these holdings only a few years ago. UPM Kymenne, which idled its Miramichi mill in New Brunswick in August last year, has now permanently shut it down, putting about 600 employees out of work. But the fate of Miramichi came about not only because of a worldwide oversupply of coated papers, but also because of the robustness of the Canadian dollar, which had the effect of increasing UPM Kymenne’s operating costs and at the same time making the product less competitive in international markets.
A restructured paper industry
All of these changes have triggered shifts in the structure of the North American paper industry. Domtar has been a principal buyer of uncoated printing paper production capacity in the US, most notably from Georgia-Pacific and Weyerhaeuser, and has thus become one of the largest manufacturers of this grade of paper in the world. NewPage Corp, based in Ohio, is one of the largest producers of coated grades on the continent since its acquisition of Stora Enso’s North American business. A relatively new organization, Verso, bought International Paper’s coated paper production capacity. NewPage and Verso both are owned by investment companies, which are generally intolerant of slim profit margins.
This doesn’t necessarily mean that paper will be hard to come by, although the mills themselves are expected to tightly control production to maintain their prices. As mentioned above, Asian paper producers have been building new capacity, as well as expanding their market reach across the oceans. Brazil, too, is being developed as a source for both pulp and paper products.
These newer entries in the worldwide paper markets have been watching global developments. Their newly constructed facilities are built with modern innovations for efficiency and enhanced productivity. They have heard the claims—true or not—that their production procedures fall short of Canadian environmental standards, and they are acting on these criticisms. China recently announced that it will shut down its older, less environmentally-friendly mills, although the closures will mean a price increase for the paper it produces at newer facilities. Much Brazilian capacity was owned and developed by outside companies and can honestly claim that its forests have been “certified” for sound environmental stewardship.
In global markets, an important factor is currency exchange rates. The value of the Canadian dollar has been steadily increasing for almost two years, and at the time of writing, is just about equivalent to the US dollar. While this might signal a healthy national economy, it also plays havoc with international trade. The US is one of Canada’s largest customers for pulp and the raw materials for paper. If US mills are no longer able to buy pulp from Canada at bargain rates, they will pass along their cost increases to their buyers in the US, Canada, and everywhere else.
Domtar announced a price increase in December, and other mills and distributors are likely to follow suit. The appreciated loonie will buy more imported paper and this may soften the impact of rising prices, although it does little to improve potential reductions in Canadian paper production.
From another perspective
In Canada, paper and forestry products are a key industry, and Canada is an important supplier of the pulp that goes into paper making. While both US and European paper producers have domestic pulp capacity, they still buy Canadian pulp—though Brazil is emerging as another pulp supply source. Most Asian producers have little-to-no domestic pulp production, but buy primarily recycled pulp in the international marketplace. Asia is one of the world’s largest purchasers of postconsumer waste paper.
The worldwide pulp market has been on a downward spiral for more than ten years for several reasons: the increasing demand for recycled pulp to meet environmental standards; a market shift away from papers with high pulp content, such as newsprint, and towards lightweight coated grades; and a general decline in newspaper production. Like the paper industry, pulp has gone through cycles of consolidation and shut-down. The end result is a significant reduction in global pulp supplies.
This is good news for Canadian pulp man
ufacturers. In fact, a research group called the Conference Board is pinning its predictions for the economic recovery of the Canadian paper and forest products industry on an increasing global demand for pulp, along with corresponding higher prices. “Much of the industry’s profit will be generated by the pulp segment, boosted by strong demand in China and Western Europe,” says the report released by the Conference Board at the end of last year. However, the strength of the Canadian dollar may undo these benefits by making pulp so expensive to non-Canadian buyers that they seek other sources. In addition, as in the case with the Miramichi paper mill, at the current rate of exchange, it may become simply too costly to operate the pulp mills at all—Canadian pulp may be priced out of the market. And in the paper industry, it’s almost a rule of thumb: when the price of pulp goes up, the price of paper soon follows.
So, what can printers expect in the area of paper prices and availability in 2008? They are likely to see some increase in pricing, although this may be absorbed by the currency rate of exchange if the Canadian dollar remains strong. Some grades of paper, particularly coated groundwood, may be in tighter supply, even though this grade is available from manufacturers outside of North America. The Canadian paper industry itself is predicted to see some recovery, unless it is undone by an increase in the value of the Canadian dollar.
Finally, with so many variables at work, any prediction should be allowed a generous margin for error.