TEDD POWERS, FISHER INTERNATIONAL
Global trade is one of the most important issues in the pulp and paper industry. While trade is a great opportunity for some, it is a great threat to others. In some regions, domestic producers worry about the impact imports will have on the profitability of their markets. For others, finding new customers beyond their borders is a primary driver of growth and increases the utilization of existing assets.
Many in the industry feel that global trade is more of a factor today than at any time in history. But is that really the case? Figure 1 reveals that trade in paper and paperboard grades as a percentage of production actually peaked in 2004 and has been in decline ever since. Pulp exports, on the other hand, have continued to grow and now represent about 30 percent of all production.
The picture is not the same for all grades of pulp and paper. Figure 2 illustrates that truly global trade—that is to say, trade between regions (inter-region trade)—varies widely among grades. For some grades, nearly all of the production is shipped domestically within the borders of the country of origin. Other grades are heavily exported to countries within the same region (intra-region), while still others are readily shipped between regions.
RESOURCES AND TRANSPORTATION
Why are some grades traded between regions so much more than others? One of the most obvious reasons is the availability of natural resources. For example, North America and Europe have an abundance of softwood trees and over time have developed the capabilities to produce vast amounts of bleached softwood kraft pulp. Conversely, Asia has very limited resources to produce softwood pulp, so it relies heavily on imports from North America and Europe. In some cases, necessity requires that products be moved from where they can be made to where they are needed.
Transportation costs also limit the free flow of some grades between regions. For example, tissue and towel products are very lightweight, so shipping costs as a percentage of the value of the product is much higher than for other grades. What modest trade that does occur in tissue and towel grades is largely parent rolls, which may be shipped between countries for converting.
Testliner, or recycled linerboard, is another grade that is rarely traded between regions. Figure 3 shows that the average cost to produce testliner in the lowest-cost region (North America) is only US$45 per ton less than in the highest (Asia).
Manufacturing cost differences among regions are not enough to offset the transregional shipping costs. Indeed, very few mills can be cost competitive outside their own region, so testliner producers have a strong home court advantage.
While there is almost no inter-regional trade of testliner, its fresh fiber counterpart, kraft liner, presents a completely different picture. More than 70 percent of global production is in the United States and most of that production stays in the US. However, the US exports nearly 4 million tons, most of it traded inter-regionally, with European countries taking the largest part.
Figure 4 reveals that few North American suppliers can be considered low-cost producers for kraft liner delivered to Rome, yet Italy gets more that half of its 600,000 tons of kraft liner imports from the US for the simple reason that Europe does not have enough tons available to meet all of the continent’s needs.
Italy must compete with other countries in Europe and Asia for a limited supply of board.
Of the world’s main grades of paper, coated mechanical is by far the most widely traded. Figure 5 shows that only about 30 percent of coated mechanical is sold in the country of manufacture. A large portion of production is exported outside its region of origin.
The four biggest producers—Finland, Japan, Germany and the US—have similar production volume at 2-2.5 million tons, but very different consumption and distribution patterns as shown in Figure 6. At one extreme is Finland, which exports almost all its production, much of it inter-regionally. At the other extreme, Japan has a relatively closed system, with a small export tonnage and somewhat larger imports. In the US, most production is consumed locally, but both exports and imports are shared between intra- and inter-regional trade.
Germany has similar production to the other three countries, but a small percentage is consumed within Germany itself. Exports and imports—almost all within Europe—are both far greater than domestic tonnage consumed locally. This prompts the question: Could producers outside Europe capture part of the German domestic market?
Fisher’s Cost Benchmarking data and analytics show that there are indeed both Asian and North American producers in the lowest-cost quartile for coated mechanical delivered to Berlin. Why would they not export? One reason may be that they can be more profitable selling at home. Still, there may be opportunities for improvement.
Let us assume that prices for coated mechanical are on the floor—i.e., at about the mid-point of the fourth quartile of production costs. Typically, higher-cost mills tend to shut down if prices fall below this floor price and market forces push prices back up.
Figure 7 shows that for coated mechanical delivered to Tokyo, the floor price is significantly lower than the floor price in Berlin. This suggests that some Asian producers might be able to divert some of their output to Berlin and earn higher margins, even with the added freight costs.
WHAT ABOUT EXCHANGE RATES?
It seems logical to assume that a strong home currency will make a country vulnerable to imports. Some time ago, we asked whether the strengthening US dollar might make it very attractive for European producers to ship coated freesheet products to the US.
Yet, as the US dollar strengthened from 2014 through 2016, the 12-month moving average of coated freesheet imports from Eurozone countries remained remarkably flat. In fact, our analysis shows very little relationship between exchange rates and imports over time. Statisticians look to the coefficient of determination (R2) as a measure of how much a change in one variable is causing a change in another. Between 2010 and 2016, the R2 was .08, meaning only 8 percent of the change in imports of coated freesheet could be explained by changes in exchange rates. This is considered to be statistically insignificant and likely comes as a surprise to many industry observers.
So we see that different grades of pulp and paper display quite different global trade patterns. Factors such as raw material availability, home market dynamics, transportation costs as a percentage of value, and competition for supply all play important roles in explaining why some grades are traded so much more regularly than others.
Tedd Powers is a senior consultant for Fisher International; reach him at [email protected] The information and analyses for this article are drawn from FisherSolve™, the industry’s premier market intelligence database and analytics resource. Visit www.fisheri.com.