MAY/JUNE 2007
The North American paper market is—at best—stabilizing after several years of declines. Behind the numbers are increased international competition, changes in Americans’ reading and writing habits, and other trends.
BY KIM FERNANDEZ
The trends shaping the North American pulp and paper industry come from as far away as China and as close as the nose on your face. Chinese investment in paper production is drawing more raw materials and recovered fiber from the United States, raising costs and increasing competition for domestic paper producers. At the same time, Americans are reading fewer newspapers and printing and writing fewer documents, leading to declines in those segments. We still wash our hands and blow our noses as much as we ever did, though: Our use of tissue—the category that includes facial tissue, paper towels, and the like—is projected to grow, one of the few bright spots in the market.
These paper production trends have been evident for several years, and most people predict more of the same. The industry’s steady downÂslide seems to have stabilized, with modest growth in some segments offsetting modest continued declines in others. Capacity, which crept up in the 1990s, appears to be flat now and in the foreseeable future.
What this all means, experts say, is that U.S. paper mills should expect continued tough times. Mills that haven’t already updated and streamlined their operations must do just that, and the sooner the better, to survive and compete in an increasingly expensive and competitive global market. In short, the picture isn’t rosy.
“In terms of overall demand and growth, the market is still fairly weak,” says David Clapp, senior economist for RISI (Bedford, Mass.). “Growth rates were at about 1 percent per year for the past several years,” he says. “Some years were better than others. I don’t see much of a change in those growth numbers going forward.”
Total paper and paperboard production capacity fell to 97.7 million tons in 2006, a decline of 1.6 percent from 2005, according to the American Forest & Paper Association (Washington, D.C.). Production has dropped 4.7 percent since 2000, an average annual decline of 0.7 percent. The association expects that fall to continue in 2007, then reverse in 2008 and 2009 with 0.7 percent and 0.2 percent growth, respectively. Here’s a trend-by-trend and segment-by-segment look at the factors shaping the U.S. paper industry today.
Trend 1: Americans are reading fewer newspapers.
“Newsprint has had a pretty tough year in North America,” says Bill Moore, principal of Moore & Associates (Atlanta). Daily and Sunday newspaper circulation in the United States has fallen steadily since 1990, according to the 2003 Editor and Publisher Yearbook, and newspapers are reducing the size and weight of their pages as well as their page counts to cut costs. Combined, these factors make newsprint one of the least healthy paper markets.
AF&PA reported that newsprint capacity was down 4 percent in 2006, to 5.53 million tons. Capacity has fallen 26 percent since 2000, and Clapp says that figure is unlikely to improve in the near future. “Some are predicting a 7-percent loss in the newsprint business this year,” he states.
Trend 2: Electronic communications are slowly replacing print.
More people are e-mailing, text-messaging, or phoning instead of writing old-fashioned communications, and offices are relying more and more on electronic communications and records.
“People are printing out less because they’re becoming more used to saving documents electronically,” says Frank Perkowski, president of Business Development Advisory (Marietta, Ga.). “People in my generation, which is the baby boomers, are all used to printing out paper copies. Younger generations don’t have that habit. As they become a bigger and bigger part of the workforce, there’s less and less printing of documents.”
As Moore puts it, “It’s not the paperless office, but the less-paper office is kicking in. Real estate firms, lawyers, insurance companies, they’re all getting out of paper.”
And it doesn’t end there, Perkowski says. “Cell phones, iPods, PDAs, and all of these things are, in their own way, negatively impacting the tendency of people to work with paper. E-books are a very young technology, but gradual advancements are taking place on a regular basis with those mediums, and they’re becoming much more user-friendly and accepted.”
As this trend continues, printing and writing papers are “probably the second-worst grade
category,” Moore says. The segment’s capacity dropped 1.2 percent in 2006, according to AF&PA, and it expects an average decline of 0.7 percent over the next three years. This segment peaked in 2000 at 27.6 million tons, and the association does not expect it to reach that level again in the foreseeable future.
This decline is beginning to affect the document destruction business, Moore says, which is still experiencing positive growth, but at a slower pace than in the past. A drop in printer scrap also is related to this trend.
Trend 3: Paper recycling and demand for recycled paper are up.
A record 53.4 percent of U.S. paper was recovered in 2006, totaling 53.5 million tons, AF&PA reports. The recycling rate has grown nearly 84 percent since 1990.
On the production side, more consumers who use writing papers are demanding recycled content papers, so that segment of the market has seen some strengthening, Moore says. “The use of products—board or containers or papers—with recycled content has become mainstream. That’s
a good thing for the recycled paper guys.”
Trend 4: The tissue market is nothing to sneeze at.
Tissue producers—who are significant consumers of recycled fiber—have one of the only markets forecast to stay healthy in the near future. Though tissue paper capacity declined 0.4 percent in 2006, AF&PA says, the segment saw average annual growth of 3.7 percent from 1999 to 2002 and 1.3 percent growth from 2003 to 2005. The association expects growth in the 2007-2009 period to average 1 percent a year.
“The tissue sector has [more than] 100,000 tons of new recycled base capacity that will come online in 2007 and 2008,” Clapp says. The sector “has performed well year after year. Demand is stable, and [mills are] able to add capacity.” He notes that “a large portion of the recycled base is targeted for the away-from-home market, though. The premium grades you tend to encounter in households are still largely virgin-based.”
Trend 5: Corrugated cartons are holding strong in shipping.
Experts say corrugated might be one of the few packaging segments to survive fierce competition with plastic alternatives, which are making strong inroads in the consumer and household packaging markets.
“Corrugated still represents more than 90 percent of the consumption and market for shipping products,” Perkowski says. “The only real substitute is returnable containers, which are making significant inroads in Europe but not so much in the United States.” Wal-Mart experimented with using returnable containers for produce, he says, but “the initiative kind of lost steam, and Wal-Mart has gone back to mostly corrugated. That was a rare win for the paper industry relative to plastic alternatives.”
Looking at the two components of corrugated, AF&PA reports that linerboard capacity grew 0.2 percent in 2006 and is expected to grow further in the next two years. Corrugating medium capacity declined 4.6 percent in 2006, but it’s expected to remain stable through 2009.
Trend 6: OCC demand and prices are on the rise, increasing paper producers’ costs.
China is adding huge amounts of capacity in the recycled containerboard sector, which is boosting recovered paper prices. Without a steady supply of virgin material to work with, Chinese buyers are importing record amounts of recovered paper from the United States and Europe. That’s good news for recyclers, who now see strong demand both domestically and internationally, but not for paper mills faced with paying higher prices for such grades as OCC.
“The containerboard sector is also being supplemented by tight markets for OCC domestically,” Clapp says. “December was strong, and [demand] looks strong going into the spring,” in part due to forecasts of a strong fruit crop.
The decline in U.S. housing construction also plays a role in recent OCC price trends, Clapp explains, because some mills are substituting OCC for softwood chips, which are a residual product of lumber production. “With housing markets being so weak in recent quarters, lumber production is off considerably,” he says. “Lumber mills are shutting, and that’s reduced the supply of softwood chips for paperboard mills,” causing those prices to go up significantly over the past couple of quarters.
The result, he says, is “containerboard mills have swung as much as they can into old corrugated containers to avoid extremely high softwood chip prices. We saw the same three sets of circumstances in 1995, and [it caused] a significant spike in recovered paper pricing.
“Back then, however, we saw finished product pricing moving in lockstep with raw material costs,” Clapp says. “Most paper and board producers increased containerboard pricing aggressively, which led to even higher OCC prices. But now, there’s more reluctance to do that.” Why? Because China plans to add more than 4 million tons of capacity in the recycled containerboard market in 2007. Further, U.S. containerboard demand is much weaker now than in 1995, Clapp says. Overcapacity in China and a sluggish U.S. market have the potential to undercut any domestic containerboard price increases. Chinese producers in particular are wary of raising finished product prices and losing their customer base, he says. This will work to cap OCC prices.
Trend 7: The above trends are leading to mill closures, consolidations, and buyouts.
A wave of mill closures, consolidations, and mergers that began in the late 1980s is ongoing. Back then, the United States had 725 paper mills, says Larry Montague, president of the Technical Association of the Pulp and Paper Industry (Norcross, Ga.). Today just 539 mills remain. Eighteen mills closed in 2006 alone, Moore says, up from 16 in 2005 and just seven the year
before that.
Mills that haven’t upgraded their equipment to maximize efficiency are simply finding it’s too expensive to stay in business, experts say. Montague drives home the importance of efficiency when he notes that the 539 mills operating today produce the same volume of paper as those 725 mills produced 20 years ago. “Production has gone up as people have invested in mills to get them modernized,” he says.
“High-cost mills begin to shut operations because they can’t compete,” Clapp explains. It’s
a Catch-22: More mills could afford to stay open if they modernized their equipment to increase their capacity, but they need that extra production volume now to afford the modernization. Many mills have been able to tweak and rebuild existing machines to improve efficiency, but it might not
be enough in the long run, Perkowski says. “Companies are still going out of business. High-cost mills and machines are being shut down. They can’t compete even given the fact that no new, state-of-the-art machines are coming online.”
Mills that do survive often do so via buyouts and mergers. Two of the largest players in the newsprint market, Abitibi and Bowater, announced their merger in January, creating the world’s largest newsprint producer and eighth-largest paper and forest products company. The combined AbitibiBowater (Montréal) does not plan to reduce its production capacity, thus the merger will have little short-term impact on the newsprint market, according to Kevin Conley, RISI’s senior economist for newsprint. In fact, he says, “other producers’ highest-cost newsprint mills that have benefited from [the two companies’] past efforts to balance the market will not survive.” The merger does have long-term benefits in creating a “leaner, more efficient manufacturing platform,” he says.
Larger companies from outside the industry are snapping up paper businesses as well. “We’ve never seen the kinds of investment that we see now in terms of people from outside the business buying up paper companies,” Montague says. He points to natural gas company Koch’s (Wichita, Kan.) buyout of Georgia-Pacific, Apollo Management (New York)—a financial services company—purchasing what is now Verso paper, and Brookfield Asset Management’s (Toronto) recent acquisition of Longview Fibre.
Despite the shutdown numbers, “it’s not as bad as the situation was a few years ago,” Clapp says. “Much inefficiency has been taken off the market, and existing mills are doing well. We’ll probably see some more shut going forward in Canada, however.”
And for now, he says, increased investment in mills will mirror the markets that are doing relatively well. “Domestic capacity going forward will largely center around tissue,” he says. “We don’t see any real changes there. We occasionally see a new machine here or there, but the overall trend points to further reductions in North American capacity.”
Kim Fernandez is a writer based in Bethesda, Md.