Uncertainty Clouds the Market in a Volatile World

The industry’s top analysts convened in San Diego for RISI’s 31st Annual North American Conference. Here is their expert forecast for 2017.


For the first time, RISI scheduled a tissue seminar as a prelude to its North American forest products outlook conference held in October, and delegates were not disappointed.

In a rare occurrence for a conference such as this, Luigi Lazzareschi, CEO of Italian firm Sofidel, announced that the company would be installing a second tissue machine at its Circleville, OH, mill. The Circleville project was announced in late 2015 with startup of the first machine expected in Q1 2018 and the second in Q3 of the same year. Each will be a Valmet Advantage NTT model.

Lazzareschi said it was his passion for the business and desire to invest in the US that led him to expand Sofidel from its European home base. Its first investment came in 2012 when it acquired Florida-based Cellynne. Sofidel also operates converting plants in Tulsa, OK, Green Bay, WI,  and Hattiesburg, MS. In fact, in 2016-17 two new Perini Constellation converting lines are being installed in Hattiesburg and Green Bay.

Lazzareschi said Sofidel would like to expand further in the US, but will probably do so by greenfield projects rather than acquisitions, as he said the quality of most tissue operations in the US is not to Sofidel’s standards.

RISI’s Esko Uutela provided the facts and figures in his tissue market analysis. The North American tissue market has been in a strong position the last two years. For the first eight months of 2016, the US tissue market grew by 2.9 percent. Why? A strong economy coupled with population growth. There were new product launches and heavy promotional campaigns by the brand owners.

Imports grew by 10 percent in 2015, both parent reels and converted products. Canada is still a leading source of imports, but China has moved up to second, based mostly on the rise of converted rolls.

The away from home (AfH) market is booming—up 3.1 percent in 2015—while the at home market grew 1.7 percent. Although the private label share of the market has grown significantly in the past few years, the split with retail brands has stabilized. Uutela pointed out that the market has grown overall, helping both (see Fig. 1 on opposite page.)

Looking at new technology, Uutela asked if there could be a place for new quality categories. It could happen as it did for P&W papers. He cited some producers who are looking at this possibility, such as Cascades, Wausau (now SCA), Orchids Papers, and von Drehle. New technology will challenge conventional products, but Uutela expects TAD will remain the top technology.

New players such as Resolute, APP, and Sofidel are entering the North American market, and between 2017 and 2019, 363,000 tons of new capacity is expected. It does not appear to be a serious issue, but if all potential expansions occur, they could affect operating rates and imports could drop.


The main conference opened with a keynote by RISI’s North American CEO of the Year, Doyle Simons, Weyerhaeuser. Weyerhaeuser’s pulp and paper assets have been taken over by IP, leaving the company as a solid wood player.

Simons noted that the buy-in of the company’s policies by its employees has been the catalyst to growth, crediting their vision and determination. In the past two years, Simons said, Weyco employees drove US$330 million worth of operational improvements. The company’s timberland assets grew from six million acres to 13 million through the acquisition of Plum Creek, leaving it “well-positioned for the future.”

In the CEO panel that followed, Linda Massman of Clearwater Paper said her company has grown its EBITDA 16 percent annually since its formation in 2008, when it was spun off from Potlatch. With both tissue and board mills, Massman said the supply side for both sectors is the issue, as demand is good for each.

For tissue, even with new capacity announcements, she said there is still a reasonable balance. She added that both of Clearwater’s sectors show good long-term growth prospects. Clearwater is now one of the largest suppliers of private label at home tissue. In response to a question, Massman said the company is open to splitting the business if doing so creates a way to create value, but that she does not see it happening soon.

Pete Watson, Greif, looked at the reasons behind the announced containerboard hike. He said that supply and demand fundamentals in the sector are improving; there has been no price hike for three years; and companies saw eroding margins because of increasing costs. “It’s always challenging to increase prices, but it is necessary,” he said. “We’re in a slow- to no-growth industrial economy. Some parts are better; Europe is improving.”

Although it has good long-term potential, South Africa is in turmoil presently, but, he added, it is a good gateway to Africa. “No matter the situation anywhere, we expect to improve our financial situation every year.”


Then it was the RISI economists’ turn to take the podium. (Note that this conference was held before the US presidential election.)

David Katsnelson, director of macroeconomics, said the global economy is growing moderately (Fig. 2 on next page), but growth is scattered and it is developed countries that are setting the pace.

US growth has been driven by the domestics sector. The non-domestic sector (manufacturing, exports) is struggling because of the strong greenback, low oil prices and external struggles offshore. Productivity growth is low in the US, at only about 1 percent. Katsnelson cited few advances in technology and government regulations as possible reasons for the struggle, but noted that productivity is hard to measure and it could actually be higher than the data show.

For recovered paper, senior economist Hannah Zhao said OCC prices rebounded in mid-2016, but are still at relatively low levels. Chinese demand has fallen and US exports to China are off by 3 percent.

For ONP, US prices rose rapidly in 2016, by more than 50 percent. However, US exports fell—not because of price, but due to lack of supply. US consumption of newsprint has dropped significantly since 2000, by almost 12 million tons, to about 2.5 million tons in 2016. Thus, ONP collection has dropped, as has quality. For high-grade recovered paper, demand is good, prices are good, but supply is tight.

China is still not self-sufficient in secondary fiber. Although imports rose in 2015, they fell last year. Import share of the Chinese market is still 37 percent. Zhao expects North American demand for recovered paper will rebound in 2017-18 because of new containerboard capacity coming online.

In world markets, Zhao said, “other Asia” countries may have a large effect on the market. They will be the new, big importers. North America may export more recovered paper because collection rates are still relatively low. Western Europe will export less because of strong domestic demand and already high collection rates.

Ken Waghorne, vice president, global packaging, predicted that over the next 15 years there will be a push to use more virgin fiber in containerboard furnish. He sees some demand growth in North America. The domestic market has emerged from a decades-long slowdown; however, capacity has grown faster than demand, so there is an oversupply. Annual demand growth is about one million tons. There is abundant supply for the export market, but it will not be an easy sell.

For boxboard (according to RISI, all paperboard grades other than containerboard), global demand in 2015 reached 57.6 million tons. Asia accounts for the majority, at 27 million tons. Western Europe and North America account for 21 million tons, but the market is mature and no significant growth is expected.

On net, North American boxboard demand has contracted in the last decade, but capacity has not risen, so operating rates are still relatively high.

Headwinds will keep global demand restrained through 2017. Capacity overbuild in China and now Europe will affect global trade. US producers are insulated, but pressure is building.

John Maine, vice president, global graphic papers, addressed printing and writing (P&W) papers. He said that for many, it is a fight for survival in a declining market. P&W demand has fallen 1.5 percent annually and this will continue through 2018.

Tariffs are popping up globally as P&W trade soars. Reduced demand and oversupply are prompting producers to search for export demand. The US is an obvious target—yet there are countervailing duties or anti-dumping duties in place for copy paper for all major current offshore suppliers (Canada SC paper and Chinese and Indonesian coated sheet). Non-tariff countries are increasing their exports to North America. Therefore, Maine noted, the situation is back to the point where the offshore producers’ share of the market is the same as it was pre-tariff.

The strong US dollar means US prices are “persistently and unprecedentedly far above” European prices. This limits the ability of US producers to raise prices and opens the door for more imports. Operating rates for both coated and uncoated P&W will be hard-pressed to stay around the 90 percent mark in the next few years.


On the pulp side, RISI’s pulp guru Kurt Schaefer, vice president, fiber, said that with all the new capacity coming online, prices could drop and result in a drop in profitability and operating rates. It is not so much a problem with the market, but a problem of oversupply.

The relatively weak euro, Brazilian real and Canadian dollar have had the effect of reducing costs compared with the American dollar. As production costs decrease, Schaefer noted, prices tend to decrease also.

Pulp demand has been on a steady climb over the past five years, about 2.5 percent annually. Global production of paper and board is increasing, albeit very slowly: 0.7 percent/yr between 2011 and 2015. Schaefer sees this sort of rate continuing.

Most of the growth is coming in the packaging sector and this will also continue, but a lot is secondary fiber-based, so the key drivers will be P&W grades as well as tissue. Fluff pulp demand is also growing steadily, by about 250,000 tons/yr.

Despite a drop in Chinese P&W production, pulp imports will keep growing. Why? Tissue production is rising. Older mills are closing, which favors bleached hardwood kraft (BHK) growth. More virgin fiber boxboard is being made. Bleached softwood kraft (BSK) demand is growing for absorbent applications.

In summary, Schaefer said “supply side surprises” will continue to drive uncertainty and forecast changes. The startup of APP’s massive OKI mill will be a strong determinant of BHK pricing into early 2017. He also foresees low operating rates in the early part of the year. For BSK, 2017 looks weak for operating rates, especially SBSK and fluff. Capacity rationalization could be an upside risk for BSK and BHK.

In dissolving pulp, world demand is up after two years of slow growth, but so is capacity expansion, according to RISI’s chief economic advisor, Rod Young. Viscose pulp prices are increasing (due to high cotton linter prices). In 2016, demand rose between 7 and 10 percent.

Between 70 and 80 percent of dissolving pulp is used to make viscose staple fiber. Other uses include acetate.

It should be noted that the viscose pulp market is only 10 percent the size of the paper grade pulp market. Thus, it does not take much new capacity to have a significant effect on the market, and this is a concern in the future. In 2017, demand growth will slow for viscose pulp. Hi-alpha (specialty) pulp use will increase modestly, at 2 to 3 percent.

Capacity expansions will continue at a strong pace. Further conversions from market pulp are likely. There should also be a steady upgrading from viscose to
hi-alpha pulp, despite the narrowing price differential, as there is more competition in the viscose market. Profitability will be under pressure.


Keynoter Bonnie Byers, an international trade economist with King & Spalding, discussed Trade Remedy Litigation in the Paper and Paperboard Sector. She started by noting that trade was a major issue in the US presidential election—“So you can see how important it is.”

A trade law’s objective is to address cheap and often subsidized imports that are causing harm to competing producers. Byers said some countries use them for other aims: for retaliation, to carve out a market share because of overcapacity, or to create a protected market for less efficient domestic producers.

Byers went through the factors that could lead to anti-dumping tariffs or countervailing duties, and what domestic industries must prove in order to have the Department of Commerce impose penalties. Some of the recent cases where penalties were imposed include:

• Lined paper from China and India (2006);

• Certain lightweight thermal papers from Germany and China (2008);

• Coated paper for high-quality graphics from China and Indonesia (2010);

• SC paper from Canada (2015).

It’s not only the US that has imposed penalties. Byers listed many examples of other nations’ penalties on pulp/paper imports, one of the most well-known being China’s duties on dissolving pulp from various countries in 2014.

In the future, Byers said several factors could lead to new cases in the US (see Fig. 3 below.)

She also advised delegates that proceedings are becoming increasingly retaliatory. There is excess capacity in China and many other markets. Are duties a potential remedy for currency manipulation? The globalization of industries and supply chains needs to be studied. There will be a greater focus on preventing evasion/circumvention of the law.

Mark Wilde, BMO, gave an update of various merger and acquisition (M/A) activities. He started by saying the track record has been “very mixed.” Many deals have failed to deliver value and some have even been “value destructive,” he said. Too often the acquirers have overpaid and/or taken on too much debt. Failure to integrate acquisitions is also a common occurrence.

An accurate assessment of the deal can take years, Wilde added, citing the Smurfit/Stone and Weyerhaeuser/Willamette deals as examples. Offshore deals are often the most challenging. Here he cited Stora Enso/Consolidated and UPM/Repaper. The most successful offshore moves have been gradual and incremental.

The consolidation trend has shifted; now, many markets have leaders with large market share. There can be regulatory limits on further share gains by these leaders. So, many recent deals have included divestitures.

Bolt-on acquisitions have increased. Wilde gave many examples in the wood products and paperboard packaging sectors.

Where is there room for more consolidation? Wilde said there is still room for a large one in the containerboard sector. Boxboard has room for portfolio moves. In uncoated freesheet, there may be further consolidation in commodities and specialties. In tissue, the second and third tiers appear overcrowded.

For offshore transactions, the keys will be valuation, synergies, and execution. Mexico has attracted a significant amount of capital. IP, WestRock, and SmurfitKappa have invested in Central and South America. In Europe, Graphic Packaging and IP have made investments and Wilde sees room for larger deals to be done between Europe and North America.

There are a number of fast-growing markets in Asia—but there are structural hurdles in some cases and oversupply issues in many markets.

Graeme Rodden is Paper360° senior editor, North and South America. Reach him at [email protected].

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