Growth, inflation and uncertainly mark the industry’s global outlook; but markets should loosen in early 2018.
Economists see hope for some sectors of the forest products industry—but the bad news for graphic papers seems to have no end.
Lassa Sinikallas, director, macroeconomics at RISI, was the kickoff speaker at the 32nd annual RISI North American Conference in Boston this past October. Sinikallas said the global economic outlook has three themes: growth, inflation and uncertainty. He is looking at moderate GDP growth globally.
In North America, the estimate is for 2.7 percent growth in 2018. China is still experiencing better growth than other regions with a 5.9 percent rise expected. Latin America is on pace for 2.4 percent growth in 2018 while Europe can look for an increase in GDP of 1.7 percent.
Both developed and developing economies are showing promise. The US is doing well while China is in transition, although the fiscal and monetary stimuli seem to have worked well.
There is positive momentum in Europe, Sinikallas continued, but there is some risk of deflation.
Uncertainties do make the global economy brittle. These include the US political situation, geopolitical tensions, populism, and low population growth.
As well as the RISI economists, several guest speakers contributed to the event. Pete Madden, president, Drax Biomass, said industrial pellet demand continues to increase with significant growth in the UK, Japan, South Korea, and the Netherlands. Madden said that pellet-fueled bioenergy offers a cost-effective, reliable and low-carbon alternative to coal.
Rod Young, founder and now chief economic advisor of RISI, began the forecast for the various pulp, paper and board markets. Looking at pulp, he said the market is in a frenzy, with sustained momentum for bleached hardwood kraft (BHK). Prices have rebounded in bleached softwood kraft (BSK).
Factors that led to the situation include the environmental crackdown in China, combined with its moratorium on recovered paper (RCP) import licenses and its ban on imports of some RCP grades. There was also unexpected downtime and a slower than expected ramp up of the giant OKI mill. BSK producers are taking advantage of the high BHK prices in China.
Young described three near-term conditions:
First, there is seasonal strength in the P&W markets. Pulp prices are high, therefore paper prices will increase. Inventories of BHK are low across the industry.
Second, there have been some large pulp capacity additions; but there has been some unexpected downtime to offset the new capacity. Suppliers may take more offsetting steps as more new capacity enters the market.
Third, there is a narrow price differential between dissolving pulp and BHK, so some swing capacity is going back to paper grade.
Young said that, in 2018, world production of paper and board will increase—but very slowly (Fig. 1). Most of the growth will be in the packaging end. There will be little BHK expansion, but more BSK expansion. Pulp markets will loosen in the first half of 2018 and the current high prices will be vulnerable. Later in the year, market conditions will tighten as capacity expansion slows.
Although he did not speak at the North American conference, Esko Uutela, tissue principal of RISI and renowned globally, did speak at the TAPPI/RISI tissue event in Miami, FL, which was held a couple of weeks prior to the North American conference. There, Uutela noted that China has now surpassed Western Europe in market size. North America is still the largest. China has been the largest producer of tissue since 2015. The global market is growing by about one million tons per year. The tissue sector is very dynamic and is now a global industry.
A new retailer entering the North American market, Lidl, is a hard discounter. Therefore, the pressure will be on other retailers to reduce their prices. This will put pressure on producers as well.
There is a danger of global overcapacity as many new projects have been announced. Some restructuring may be needed.
On the packaging end, global demand for containerboard (kraftliner and medium, recycled, and virgin) reached 162 million metric tons in 2016, according to Ken Waghorne, vice president, global packaging for RISI. Asia is the largest market by far, he said; global capacity will grow, but mostly in domestic recycled containerboard (Fig. 2).
North American prices have rallied since August 2016. The US corrugated box market accelerated in late 2016 and has stayed strong through August 2017.
US kraftliner exports have been more resilient than expected between 2014 and 2016, almost five million metric tons. Containerboard exports should increase from 2018 onwards to reach about seven million metric tons (Fig. 3).
Globally, demand growth in Latin America should increase as the Brazilian economy improves. However, Asian capacity growth should outstrip demand this year. It is the same picture in Europe. But, demand growth in emerging Europe will accelerate toward 2018.
North American operating rates should improve through 2018 and stay above the rest of the world.
Waghorne also spoke about recovered paper and boxboard (all packaging papers except containerboard). He said OCC prices are on a roller coaster and the situation is even worse in China. As already noted, there have been some drastic changes in Chinese RCP import policy. It has banned the import of unsorted waste paper, it is trying to improve its domestic recycling programs, and it is revising its RCP import permit management system. In 2016, China imported 28.5 million metric tons of RCP, of which OCC was 59 percent and mixed paper 20 percent. About 35 percent of Chinese RCP comes from the US, which will be affected by the new Chinese policies (Fig. 4). About 40 percent of US RCP is exported, with China being the biggest customer by a long margin.
In the boxboard sector, the majority of the demand is from Asia: 27.8 million metric tons. It is a large and fast growing market. The North American and Western European market are mature, at 25.6 million metric tons total.
Overall, demand growth is restrained for a few reasons, including a spend shift by consumers. Capacity is growing faster than demand and boxboard is one sector where plastic substitution is a real threat, e.g., the growth of cereal pouch bags.
In 2016, fluff pulp accounted for about 10 percent of the world’s paper grade market pulp supply. It is a growing segment of the pulp industry thanks to favorable demographics and economic factors.
In 2016, global consumption of fluff pulp reached 5.9 million metric tons. In the next five years annual growth should be in the range of 4.7 percent. Emerging markets will account for most of the growth, although mature markets will still see some growth thanks to aging populations.
Patrick Cavanagh, associate economist at RISI, explained that per capita income drives consumption of the hygienic products made from fluff pulp. As incomes rise, more is spent on convenience goods. There is a large consumer base in emerging markets where income is increasing.
He noted that hardwood fluff pulp may be a disruptive force in the market. Costs are lower and if the product’s quality is high enough, it could put pressure on traditional producers.
NEWSPRINT AND GRAPHIC PAPER
RISI co-founder John Maine, vice president, graphic papers, painted a dismal picture for graphic paper. He noted that the decline for P&W grades began in 2008 while that of newsprint started more than 15 years ago, in 2001. Global P&W paper demand has declined steadily with mechanical grades the hardest hit (Fig. 5).
In 2017-18 the decline in demand for P&W paper should slow, but it varies by region: for example, North America at -2.4 percent; Western Europe at -4 percent; Eastern Europe at 1.4 percent; Latin America at 0.4 percent; and Asia remaining neutral.
Newsprint is still on the decline globally. The decline in demand for newsprint in North America is accelerating, but capacity closures have allowed for some recovery in prices. The decline in magazine advertising pages is the main factor driving down paper use. As producers look to new markets to try to sell their paper, governments are increasingly resorting to tariffs to stem the tide of imports. Changes in capacity through 2019 show a net decline of 2.8 million metric tons.
Graeme Rodden is senior editor, North and South America, for Paper360°. You can reach him at [email protected].
Sensing the Future at CEPI25
The paper industry is entering a transformational era, with the bioeconomy representing “the greatest promise of our future.” This was the message from Peter Oswald, CEO of Mondi Group and outgoing chairman of CEPI, the Confederation of European Paper Industries. CEPI held its annual European Paper Week event in Brussels in November, and Oswald was the lead-off speaker for the event’s high-level session titled “Sensing the Future.” The event offered an industry forecast that went well beyond the coming year, and called for a major shift in the way pulp and paper manufacturers view the market.
The pulp and paper industry is at the center of the bioeconomy, Oswald said in his welcome address. Globally, public awareness of climate change issues will continue to drive a desire to connect with, and protect, the environment.
It’s an idea echoed by keynote speaker Dr. Gunter Pauli, chairman of Novamont and author of The Blue Economy. He offered examples of disruptive technologies that go beyond the traditional model of “value-added.” For instance, in South America’s Patagonia forest, the largest area of biodiversity is not trees—it’s yeast, with more than 3,000 varieties, which can be used to produce a variety of products including beer, bread, and wine. “Do pulp and paper companies consider themselves the caretakers of yeast revenues?” asked Pauli. “No—but revenue can be made.” This thinking applies to the bioeconomy, which includes not only traditional pulp and paper products, but chemicals, high-value byproducts, foods, and fuels.
In the future, shareholders will demand multiple product streams as the only viable investments; the key to taking advantage of these value streams will be integrated cash flow models, Pauli said. “We don’t need innovation that changes one product into a bioproduct—we need innovation that changes the entire business model for long-term success. The pulp and paper industry is still very much a commodity-based industry, but that is why the opportunity is so big.”
Also speaking in the session was Sylvain Lhôte, CEPI’s director general. Earlier this year, CEPI released the newest version of its 2050 Roadmap, which details the pathways and investment needed to cut member companies’ carbon emissions by 80 percent while creating 50 percent more added-value. Lhôte reported that, when he presents the Roadmap to various groups, he always gets the same two questions. “People never ask ‘What is it?’ or ‘Why do this?’,” he said. “I think this reveals true industry alignment to the Roadmap’s goals. Instead, everyone asks ‘Where are the investments happening?’ and ‘How do we finance this transformation?’”
The Roadmap projects the need for increased investment of 44 billion euros (US$52.2 billion)—about 40 percent more than current levels—to transform the industry in Europe and lead the low-carbon bioeconomy by 2050. The industry, and the world, are at a crossroads, Lhôte explained. “How do we spur a circular bioeconomy in Europe? CEPI wants to provide the Roadmap.”