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Coated paper demand expands, but global challenges loom

Jun 29, 2001 12:00 AM


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Demand growth has slowed while capacity and output expand, but consolidation is changing the landscape in all regions

During the past decade, demand for coated papers has continued to expand worldwide, with strong growth in Asia and Europe balanced by more modest growth in North America. The business has also undergone profound change, as global consolidation has radically transformed the producer side. The outlook remains promising, but storm clouds are on the horizon for producers of these key grades.

In recent months, a major slowdown has occurred in key coated paper markets in North America. In Europe, demand has continued to expand, but signs point to slowing growth there as well. Asian demand continues to grow, although not at the pace of recent years in many areas. A big challenge in the next two to three years will be a surge of European capacity. If demand slows, as many expect it will, operating rates will dip considerably.

Despite these concerns, coated papers continue to be a growing market worldwide. World coated paper production advanced strongly in 1999 — the most recent year for which global data is available — reaching a new record of 37 million mtons, up 5.8% from the 1998 level. Production rose in all major world regions, led by double-digit growth in the Asia/Pacific region, where output jumped by nearly one million mtons over the 1998 level. Production rose 4.5% in Europe, the world's largest producing region, reaching 17.4 million mtons, a new record level of output.

Output in North America rose a modest 2.6% during 1999, reflecting not only increased coated paper imports, but also the relatively slower growth in this mature market. U.S. output rose 2.5% in 1999 to 8.6 million mtons, but production decreased 1.5% in 2000 as a 5.5% drop in coated free-sheet shipments offset a 3% gain in coated groundwood shipments.

World coated woodfree (free-sheet) production expanded to 20.8 million mtons in 1999, an 8.5% gain over the 1998 level. Strong gains were posted in Asia and Europe, 10% and 9.8%, respectively, as several major expansions were brought online in recent years, and as output rebounded in Asia following the financial crises of 1997-98.

Coated mechanical (groundwood) paper world production expanded 0.8% in 1999, reflecting little or modest growth in the major producing regions. Changes in market demand and increased use of coated woodfree papers and uncoated super calendared (SC) grades in traditional coated mechanical markets were important factors. Coated wood-containing output fell in Europe, while rising modestly in North America. Output also surged in Asia due to a rebound in Japanese production. Coated mechanical paper is made primarily in North America, Europe and Japan. Several projects in China may add capacity in that latter region. However, it is not known how many of the several projects identified as “LWC” (lightweight-coated) in China are actually traditional coated mechanical papers.

Coated paper output expanded in all major regions of the world in the last decade, but growth varied widely by region (Fig. 1). In areas such as Asia and Europe, demand expanded quickly. The largest gains in output have been in Europe, followed by Asia, which is close to becoming a larger producer than North America. Growth in all major regions appears to be decelerating, however.

GLOBAL RESTRUCTURING ACCELERATES

The biggest change in the last couple of years has been a massive ownership restructuring worldwide. The largest cross-continental merger was Finnish Stora Enso's acquisition of Consolidated Papers in the U.S., forming the world's largest coated paper producer (Table 1, p. 9). In addition, one of the biggest mergers in U.S. history occurred when International Paper (IP) acquired Champion International by successfully outbidding UPM-Kymmene. Many observers believe the major reason for the acquisition by IP was Champion's coated paper assets. UPM-Kymmene has now launched a bid for Haindl Papier (Augsburg, Germany).

Another mega-merger occurred in the rapidly consolidating European paper industry. Metsa-Serla launched a two-pronged strategy that led to a major consolidation of its fine-paper business — both coated and uncoated. First, the company acquired Modo Paper, followed in the fall of 2000 by the acquisition of Zanders Feinpapier from IP.

A new name in the European coated paper business is Lecta, which is the holding company for CVC's fine paper assets. The group acquired Torraspapel of Spain, making it the third-largest coated woodfree producer in Europe with a capacity of 1.2 million tons per year (tpy). Lecta previously had acquired Condat in France and Garda in Italy.

CAPACITY CONSOLIDATION

Mergers have led to a major increase in industry concentration (Fig. 2). The share held by the top five producers almost doubled in five years, while that of the top 10 approaches two-thirds of total capacity. In 1996, 11 producers had more than one million mtons of capacity, and the largest, UPM-Kymmene, had global capacity of 2.6 million mtons.

At year-end 2000, the top producer, Stora Enso, had a combined coated paper capacity of 5.1 million mtons. The number of producers with more than one million mtons of capacity actually decreased from 11 to 10. In 1996, only one company had capacity for more than two million mtons per year — five producers are now at this level.

MANUFACTURING TECHNOLOGY ADVANCES

Among the key advances in paper manufacturing technology is the continued rise in operating speeds. Kymmene's new Rauma, Finland, paper machine operated at 1,712 mpm and set a 24-hr. speed record. The machine produces LWC grades.

A second standard was set for off-machine coaters when Metsa-Serla's Kirkniemi, Finland, mill ran its No. 3 coater at 1,700 mpm on double-coated woodfree grades. Another benchmark was achieved with the start-up of the world's widest off-machine coater, installed at Asia Pulp & Paper's Gold East Paper Mill (Dagang, China). With a 9.77-m web width, the Valmet coater has capacity for 600,000 tpy of double-coated fine papers and a design speed of 2,000 mpm. The capacity is also a record for a single coater. Similar gains in scale have occurred in coated groundwood papers, as new state-of-the-art facilities, such as Haindl Papier in Augsburg, and UPM-Kymmene in Rauma, can produce 400,000 tpy.

The number of large machines continues to increase, but it's notable that all of these are located outside North America. At least four lines have annual capacities exceeding 400,000 tons, and eight exceed 300,000 tpy.

All of the largest production lines are located in Europe or Asia, with the vast majority in Europe. What this means for the long-term health of the North American market is uncertain, but it certainly doesn't look promising.

GRADE-BY-GRADE GROWTH

The world outlook for coated papers continues to be positive, but growth rates are slowing.

Asian demand will continue to expand at strong rates over the long term if the huge Chinese market continues to expand. Growth is unlikely to match that of the 1990s, however. Reasons for this decline include protracted problems in Japan's economy and slow growth in some other markets.

In the future — as has been the case in the last decade — the strongest gains globally will be for coated free-sheet grades. Coated groundwood long-term demand and output are likely to grow more slowly due to a maturing of key markets such as inserts and mass-market magazines in big markets such as the U.S. In addition, market penetration by grades such as improved SC papers, LWC free-sheet and niche products are taking growth away from traditional coated mechanical papers.

Most analysts and forecasters peg world coated paper demand growth in the next 10 to 15 years at 3% to 3.5% for coated mechanical grades and 4.5% to 5% for coated woodfree. While these rates of growth may be down considerably from the high rates of recent years, it continues to place coated papers at the top of the growth rates for pulp, paper and paperboard grades.

According to Pulp and Paper Forecaster, coated woodfree demand in the U.S. should expand by 3.7% annually over the 2001 to 2005 period, with coated groundwood demand rising just 0.6% annually over the same period. In the U.S., demand has grown slower in each five-year period since 1990.

LONG-TERM THREATS

Threats to coated paper, notably the notion that the Internet would drastically lower or even eliminate the use of magazines, direct mail and similar products, remain far-fetched. Major threats to growth do remain, however. For example, the boom of Internet-driven advertising drove up coated paper use in 1999 to 2000. But with the crash of many dot-coms, advertising is contracting this year and pulling down coated paper demand as it shrinks.

Distribution costs are also a major issue. The postal rate increase that took effect in 2001 will slow growth in direct mail and catalogs if history is any indication. The U.S. Postal Service (USPS) is also facing a crisis caused by a drop in first-class postage, largely attributed to increased use of the Internet for e-mail, billing, etc. This is putting pressure on the USPS to raise rates again, which would have a chilling effect on the use of many print products.

Table 1

World coated-paper company ranking
Company Location Total capacity
(000 mtons)
Market
share %
1 Stora Enso Finland 5,150 13.3
2 UPM-Kymmene Finland 4,370 11.3
3 SAPPI Ltd. S. Africa 2,974 7.7
4 Metsa-Serla Finland 2,860 7.4
5 International Paper U.S. 2,448 6.3
6 Burgo Italy 1,780 4.6
7 Nippon Paper Ind. Japan 1,669 4.3
8 Oji Paper Ind. Japan 1,429 3.7
9 Lecta/CVC UK 1,200 3.1
10 Mead Corp. U.S. 1,084 2.8
11 Asia Pulp & Paper Indonesia 856 2.2
12 Haindl Germany 830 2.1
13 Daishowa Japan 620 1.6
14 Mitsubishi Japan 615 1.6
15 Westvaco U.S. 590 1.5
16 Arjo Wiggins Appleton UK 576 1.5
17 Hansol Korea 500 1.3
18 Moorim Paper Korea 466 1.2
19 Bowater U.S. 444 1.1
20 SCA Sweden 410 1.1
21 Potlatch U.S. 384 1.0
22 Chuetsu Pulp & Paper Japan 335 0.9
23 Daio Japan 325 0.8
24 Norske Skog Norway 312 0.8
25 Domtar Canada 310 0.8

Understanding the paper market

BY HAROLD M. CODY, senior editor, Pulp & Paper magazine, www.paperloop.com

Coated and uncoated printing papers are essentially industrial commodities. Therefore, paper markets are influenced by simple economic fundamentals such as supply, demand and costs.

Paper use is also sensitive to prices — i.e., if prices go too high, customers will find ways to use less.

Demand indicators

The amount of coated and uncoated paper printers and publishers buy to meet customer order levels directly determines the amount of paper consumed or purchased. Commercial printers produce magazines, retail inserts, catalogs, direct mail and promotional brochures for these customers. Thus, paper demand largely reflects the individual strength of these print products or markets.

On a macro scale, economic health or activity drives demand for these products. More specific indicators include volume of magazines printed, the number of catalogs mailed, and the volume of other direct mail carried by the U.S. Postal Service. General indicators include data on printing and publishing activity, which are measured in the U.S. by government industrial production data on each sector.

The importance of advertising

An additional key indicator of paper demand, particularly for coated paper, is the volume or strength of advertising. The amount spent on printed advertising in magazines or for inserts in newspapers drives the amount of paper used in these applications. Advertising spending is largely determined by economic and business activity. In recent years, advertising has been unusually strong due to the healthy U.S. economy driven by a surge in financial markets and growth of the dot-com segment. Advertising in 2001 will be much weaker than in 2000 and will decline substantially due to economic weakness in the same areas that drove demand upward in 1999-2000.

Coated paper demand in 2001 is expected to post much more modest increases than in prior years due to a much weaker U.S. economy. Coated groundwood demand may actually contract. Major print markets, such as catalogs and direct mail, will be weaker as retailers and businesses slow their promotional expenditures to reflect a slowing of business. Higher postal rates also have a dampening effect on paper demand: Publishers and catalog retailers find ways to reduce paper use to cut mailing costs.

Uncoated groundwood and free-sheet demand is similarly influenced by trends in printing and publishing. Uncoated groundwood papers are used extensively in inserts and are becoming common in magazines. Uncoated free-sheet demand is also determined by the use of business forms and cut-size paper for copiers and sheetfed office printers.

Pricing and operating rates

Operating rates provide a good guide to paper prices. The operating rate is simply the ratio of industry paper production to industry capacity. When rates are high, it means that paper mills are making all they can to meet demand; this would mean supply is short and prices are high. When operating rates are in the mid- to high-90s — e.g., 95 percent — prices are usually stronger.

However, in recent years the growth of imports has made determining the direction of prices more complicated. A large volume of imports has been coming into the U.S. at discounted prices. This has kept prices lower than indicated by U.S. operating rate data for grades such as coated groundwood.

Demand and supply

In addition to physical paper demand, paper supply is a key factor that determines price and availability. Supply in a given market is determined by local capacity and by imports and exports. For example, U.S. coated groundwood paper capacity has grown very little in recent years. Coated free-sheet capacity has increased moderately, while uncoated free-sheet capacity has contracted. However, U.S. coated paper imports have risen considerably, and thus supply has been sufficient to meet demand.

The major sources of coated groundwood imports are Canada and Europe. Coated free-sheet is imported from Canada, Asia and Europe. Coated paper capacity has recently increased considerably in these regions, and it will expand more in the next two years in Europe. Following little gain for many years, coated groundwood capacity in the U.S. is set to expand in 2002. U.S. uncoated free-sheet capacity has declined recently as producers eliminated older, high-cost capacity, while capacity has risen dramatically in Asia. The mill closures in the U.S. have meant that prices for uncoated free-sheet have remained higher than might be expected given the weakness in demand.

Advances in paper-making technology have also meant that high-quality, uncoated groundwood grades, such as supercalendered papers (SC), are being used in products such as magazines. Growing use of these grades due to expanded capacity in North America has also led to downward price pressures on coated groundwood papers. Imports of low-cost, coated free-sheet from Asia and Europe have similarly kept coated paper prices from rising much in the face of solid demand in recent years.

Cost considerations

Paper made in Europe and Asia is, in general, produced on larger, newer machines than at a comparable North American mill. This is particularly true not only in coated papers but also in other grades. This is important because it means a mill in Europe or Asia has lower manufacturing costs. Bigger machines simply mean that fixed costs (labor, chemicals, electrical power, etc.) are lower per ton of paper. In Asia, wood and labor are much cheaper, making mills in the region among the lowest cost in the world.

Energy prices for U.S. mills have risen dramatically since last year. Conversely, pulp prices have diminished, lowering costs for mills that purchase rather than produce all or part of their fiber needs.

Exchange rates are an important factor in paper trade and in pricing. Recently, the U.S. dollar vs. the Euro exchange rate has made it easier for mills in Europe to sell paper in the U.S. European mills can lower prices on paper sold in the U.S. in dollars but still receive a good return in local currency.

Weaker demand and rising capacity likely mean that paper prices won't be headed higher in coming months. In fact, it's likely that they will drift downward unless further closures occur to offset growing capacity set to come on the market in the next couple of years for coated papers and uncoated groundwood.

Data and analysis in this story are largely based on “2001 International Coated Papers,” a market report recently published by Pulp & Paper Forecaster.