Heading For a Downturn?

Cloudy skies, literally and figuratively, greeted delegates at Fastmarkets RISI’s annual North American forest products conference held in Boston last October.

Following the official presentation of the company’s North American CEO of the Year Award, winner Brad Southern of LP Building Solutions joined fellow CEOs John Williams (Domtar), Luigi Lazzareschi (Sofidel), and Craig Gunckel (Iconex) on the CEO panel, which addressed myriad issues, mostly dealing with economic and political uncertainty.

(Left to right) CEO Panel moderator George Staphos, Bank of America Merrill Lynch, and panelists Craig Gunckel, Iconex; John Williams, Domtar; Luigi Lazzareschi, Sofidel; and Brad Southern, LP Building Solutions, discussed economic and political uncertainty.

In response to a question from moderator George Staphos (Bank of America Merrill Lynch), who asked how customers are managing given this era of uncertainty and political volatility, the always-erudite Williams said agility is the key. He brought up heavyweight boxer Mike Tyson’s adage: “Everybody has a plan until they get punched in the mouth.” And the risk of being punched in the mouth is greater than it used to be, Williams added. “You need to keep a careful eye on the horizon. And productivity levels need to be kept high.”

Lazzareschi said Sofidel was luckier than most because it works in the tissue sector, noting that it was a more stable sector. He also addressed the rise of private labels in the US (growing very rapidly): “This will change how we produce and approach the market.”

Another question dealt with private ownership compared with a publicly traded company, especially regarding M&A. Gunckel said that noted companies are acquired to “make your company better.” He added that public companies are under a lot more scrutiny when they try to acquire others.

Williams said, “You can’t buy something to fix your business. But, if you grow organically, you have the customer.” He added that he believes both examples have their place and that they can learn from each other.

For his part, Lazzareschi said that private companies can decide more quickly if they want to acquire others. But he feels that, for Sofidel, its strength is in its own new assets.

Fastmarkets RISI Director, Macroeconomics Lasse Sinikallas said global economic growth will be moderate, but as covered in the CEO panel, he noted that political and economic uncertainty means risks are heightened.

For 2019, Sinikallas sees US economic growth at 2.2 percent, slowing to 1.3 percent in 2020 before bouncing back to 1.8 percent in 2021. In China, growth this year should reach 6.2 percent before falling to 5.8 percent in 2020, but jumping back to the 6 percent range in 2021.

Figure 1: Global downturn in manufacturing is undermining containerboard demand.

In Europe, momentum is low. All indicators point down. The area will grow, but very slightly. European industrial production “hit the brakes” in 2018.
Consumption growth in the US is being driven by the service sector. Therefore, Sinikallas believes the US will avoid a recession.

US housing starts and sales have stalled. This could be tied to the federal interest rate and, if it is cut again, housing may move up. Investment growth in the US has slowed significantly.

In China, the trade war has dampened the economy. Investment growth is slowing, as is growth in industrial production. It is not a good sign for a country trying to transition from an export-led to a consumer-led economy.

What are the present-day risks? Sinikallas listed a few:
• Trade policy issues and a trade war (uncertainty slows growth);
• Race of GDP growth decelerating in China;
• Overall political uncertainty;
• Geopolitical tensions;
• Central banks’ ability to continue stimulus.

When asked what was driving the expectation for global improvements in 2021 given the relatively gloomy forecast, Sinikallas said he expects the trade war to be settled, leading to a better climate for business and more investment.

There is a “massive” amount of inventory in market pulp globally (close to 60 days of bleached hardwood kraft), and reaching a market balance won’t occur until the inventory is reduced, said Fastmarkets RISI’s Vice President of Fiber Dave Fortin.

What will it take to correct the situation? Fortin said inventory correction is the key to the next price swing. But, he added, “We need an increase in demand as well.”

Figure 2: No matter how China tries to make up the loss of RCP, a big fiber gap remains. After 2020, China may ban all RCP imports.

Suzano has announced 1.2 million metric tons of downtime for 2019. The premium for northern bleached softwood kraft (NBSK) versus hardwood has widened, so demand may move back to hardwood pulp. Fortin also said that he expected “increased market curtailments if prices continue to drop.” End use markets remain relatively weak, at about one percent growth. There are limited capacity expansion projects announced through 2021, which could help, although Fortin says he believes pulp markets could remain weaker longer.

Abdulla Zaid, Fastmarkets RISI economist, said boxboard demand is slowing, with only 1.1 percent growth expected in 2020. The market is getting oversupplied. Since 2010, boxboard has only experienced an average annual growth of 0.5 percent.

Demand in this sector is generally tied in to macroeconomic drivers and trends, Zaid added. Non-durables production sets the tone for boxboard demand and there was weak performance in dry foods, soaps, and detergents.

However, with the battle against single-use plastics underway, there may be an opportunity for boxboard to gain market in the liquid packaging sphere.

With folding cartonboard having the lion’s share of the market, there is downward pressure on demand because of the appreciation of the greenback. Zaid expects 0.1 percent average annual growth in this market between 2019 and 2021.

Liquid packaging and food service are the bright spots in the sector, with average growth of 2.2 percent over the past five years and 1.5 percent growth expected through 2021. Between 2017 and 2022, about 280,000 tons will have been taken out of the market, but oversupply remains an issue. Zaid said to expect more imports into North America from Europe.

To no one’s surprise, Derek Mahlburg, Fastmarkets RISI senior economist, graphic paper, said US domestic box shipments’ recent strength corresponds with the rise of e-commerce, which will continue to be the driver for containerboard demand growth. From 2015 through 2018, there was US$59 billion in growth each year in e-commerce/mail order trade.

E-commerce retail uses seven times more corrugated per dollar than traditional retail. The e-commerce supply chain offers more potential for damage because of handling, so goods can be overpackaged.

How long can this strong run continue? Mahlburg said that real growth in e-commerce and mail order is actually slowing and has been since 2015. What this says, he added, is that the peak growing period is over, but growth still exists. For example, the 2018 growth of 7.7 percent is the lowest since 2013.

Reducing packaging will be a trend, but even if that “seven times more” figure falls to three or four times, the sector will still use more packaging than traditional retail.

What are the risks? According to Mahlburg, the biggest is sustainability. For example, the plastics industry is touting its own story about plastic cases. Also, he mentioned the failure of the single stream recycling system in the US. Rising costs of corrugated could also be an issue.

On the opportunity side, sustainability is also seen as a plus for the sector. Primary packaging redesign is another area of opportunity, as is branding. Mahlburg did note that e-commerce is not affected as much in recessionary times.

Ken Waghorne, vice president, global packaging paper, Fastmarkets RISI, then discussed the overall market for containerboard. He noted that the global downturn in manufacturing is undermining containerboard demand around the world (Fig. 1). Annual consumption growth will be down everywhere except non-China Asia.

Figure 3: Major tissue capacity closure could improve market outlook—but only marginally, due to global overcapacity.

The overall containerboard market is 173 million tons, most of which is consumed in Asia (83 million metric tons), with China being the largest single market. The North American market is 31.4 million tons, the bulk of which is in the US. However, Waghorne said that the US manufacturing sector is on “shaky footing,” with the PMI falling to its lowest level since 2009.

US industrial production will go “sideways” through 2020 before accelerating in 2021. However, the recovery should be more modest than in 2015-16.

Supply will grow substantially for the next five years in the US. There is confirmed growth of two million tons, Waghorne said, citing the Cascades and Green Bay Packaging projects as two examples. However, projects under discussion could add another five million tons. Still, US containerboard supply and demand should be in good balance in 2020 and 2021.

Latin America is a key sector for North American exports.

In Europe, demand growth is slowing and oversupply is developing. Capacity expansions in emerging Europe will push more Western European exports outside the region.

Demand in China will drop by another two million tons in 2019. A further drop is expected in 2020 before a recovery in 2021. Waghorne said China’s RCP policy has had an effect. Net imports of containerboard will climb. The market is attractive to other Asian suppliers. Smaller exporters have reaped most of the benefits from the shift in China’s RCP legislation.

In conclusion, Waghorne said global economic uncertainty remains the biggest threat to the sector. The industry must watch for changes in the consumer product sector, adding that the e-commerce sector is beginning to mature. Timing and/or changes to the announced capital investments must be monitored.

Uncertainty is the underlying theme in recovered paper as well, according to Hannah Zhao, senior economist, global recovered paper, Fastmarkets RISI. Chinese imports have fallen off the board and there is slowing demand from other Asian countries as well. By the end of October, 2019, China had issued import permits for 10.7 million tons, compared with 17.5 million tons in 2018. Will China ban all RCP imports? Most believe it will after 2020. But, it may allow small amounts of very clean OCC and OMP. No matter how it tries to make up the loss of RCP, China has a big fiber gap (Fig. 2), so paper and board production will fall.

Imported recycled pulp has emerged as a viable option. About five million metric tons of recycled pulp capacity expansions have been announced in the US and non-China Asia. But, Zhao cautioned, many of these projects are assumed, not firm.

Chinese domestic collection has increased greatly and the collection process has become very regulated and much more sophisticated. There has been a shift from small vendors to well-managed recycling companies. Shanghai was the first and the system is being rolled out across the country. There is a fear that other Asian countries—Indonesia, Vietnam, and India—will follow China’s lead in regulating, if not banning, RCP imports.

In the US, RCP exports actually rose in 2018 because of non-China Asia imports. But, 2019 shows a big drop in US exports, down 6 percent in the first eight months. All grades, except deinked high grades, posted declines.

US domestic consumption of RCP fell in 2018 and not much hope is held for 2019. Zhao said the recycling business in the US has suffered for two years now and the downturn has changed the face of the collection system.

In the specialty pulp sector there is some optimism. Patrick Cavanagh, economist, pulp, Fastmarkets RISI, said dissolving pulp demand is still growing at a strong pace. Viscose fiber leads the way, although high-alpha products (e.g., cellulosic ethers) are also growing. North America accounts for more than half of high-alpha pulp capacity.

The textile market is about 100 million tons per year and the cellulosic fiber market is growing (about 6 million tons). Synthetics still lead the way, followed by cotton. Cavanagh said there is room for cellulosic fiber to replace cotton.

Annual growth in viscose fiber production has averaged 5 percent for the last five years. Production should continue to increase before falling. The major viscose fiber production region is Asia, particularly China.

High-alpha pulp production is also growing, but on a much smaller scale because the market is so much smaller. Total dissolving pulp capacity is about 10 million metric tons annually. Future capacity growth will be in Latin America because of its low wood costs.

On the negative side, new capacity is pushing down operating rates and prices are at their lowest since 2008. There is also downward pressure on prices from lower paper grade pulp prices.

Looking at fluff pulp, Cavanagh said the market is very depressed at the moment and the sector is also being pushed down by the low price of paper grade pulp. Still, the outlook is positive.

Why? The global population is aging, average income levels should increase, absorbent hygienic product use in emerging regions is still low, and lower fluff pulp prices will help curb substitutions from entering the market. Global demand in 2018 was 6.3 million metric tons, which was almost zero growth over 2017.

Demographics are supportive of future growth. The population of adults older than 65 years is growing everywhere; the population of females aged 12-51 years is growing in emerging regions. Cavanagh said 95 percent of growth will come from emerging markets.

Esko Uutela, Fastmarkets RISI’s well-known tissue principal, gave an update on the global situation (Fig. 3). He called the market “dynamic,” with 38.8 million metric tons being consumed in 2018. North America is still the biggest market, but China is closing the gap quickly. China has been the biggest producer of tissue since 2015.

As many know, the sector has shown steady growth, although Uutela called 2018 a “disappointment,” with only 2.6 percent growth compared with a 4 percent average over the past few years.

In North America, the market has been strong recently. The away-from-home (AfH) sector has been especially buoyant recently because of a strong economy, low gas prices, and a changing lifestyle among younger generations.

In 2018, the US imported more than one million metric tons of tissue. The average annual growth rate of imported tissue into the US between 2009 and 2018 was 5.4 percent. However, Uutela pointed out that the US-China trade war will have an effect, as the 25 percent tariff on Chinese tissue will make the product uncompetitive in the US. He estimates a 15 percent drop in imports from China (equivalent to 330,000 metric tons).

In the US, private label napkins are approaching European market share levels (60 percent). This is because the big brands are not so dominant in the napkin sector and do not promote their napkins like they do other products.

Uutela said at home private label products will grow gradually, attaining 36 percent market share by 2027. A lot will depend on how much the brands invest in promotional measures to retain market share.
Currently, the Big 3 hold 66 percent of capacity. With its purchase of Orchids Papers, Cascades rose to the No. 4 spot with 8.6 percent, followed by Essity at 6.9 percent.

There has been and will be a lot of new investment in the US. Why? Facilities in the US tend to be older compared with other regions.

The rise of the private label has attracted many companies to invest in new tissue machines. Regionally, market growth is concentrated in the US South and players with little or no capacity there have decided to build mills in the region to gain market share. He cited Irving, Clearwater, Resolute, and Sofidel, among others. Between 2018 and 2021, more than 450,000 metric tons of new capacity has been or will be added.

In Latin America, the market is 4.3 million metric tons. There are a lot of variations in growth rates around the continent, but Uutela expects a change to a more positive trend. Most of the growth will come in Brazil and Mexico. There should be more than 650,000 metric tons of capacity coming online by 2021. Capacity utilization rates have been historically low in the region and will probably stay that way.

In Western Europe, growth rates will be less than 1 percent annually. Capacity utilization rate will also stay low, 86 percent at best in 2019.

There will be lots of new capacity coming online in China, but closures and project delays are expected. More than 90 percent of tissue now made in China comes off new machines, so the capacity for closure is diminishing.

In conclusion, Uutela said that tissue demand should grow globally by about 3 percent in 2019 and through 2021. Volume growth is about 1 million metric tons per year. There is too much new capacity announced, so some major closures could help.

It fell to John Maine, vice president, graphic papers, Fastmarkets RISI, to give the final talk of the conference. It also marked the final presentation of his distinguished career, as he will be retiring after more than four decades serving the industry. Maine was also one of the founders of RISI.

Unfortunately, he did not have good news to deliver as the crisis affecting the graphic paper sector is going from bad to worse. Perhaps his title said it all: “Global outlook for graphic papers: Accelerating demand slide and waning opportunities for conversion mean tough choices and decline in profitability.”

Global demand for printing and writing (P&W) papers fell 2.5 percent in 2018. This is the equivalent of 2.6 million metric tons, with a further drop of 3 million metric tons expected in 2019. The market is 12 percent smaller than it was in 2010. To top it off, the downward trend is accelerating. It’s worse for newsprint: in 2019, the market will be less than 50 percent of where it was in 2010.

Maine said he is forecasting a 6.2-percent decline in North American graphic paper for 2019, but he is basing that on an uptick in the last three months of the year and that is not assured.

Globally, the average annual rate of decline in P&W grades over three years is 2.4 percent. When combined with newsprint, this is a drop equivalent to 3.5 million metric tons per year.

Some sectors are performing better, such as uncoated woodfree, but that is relative to bigger drops in coated and mechanical grades.

Few pockets of demand growth for P&W remain, e.g. India. Maine said more and more Asian countries are joining the ranks of secular decline.

In North America, the average rate of decline in magazines is only 1 percent annually, but advertising pages have decreased dramatically; 2018-19 marked the worst years for ad pages since the recession of 2008-09. Even catalogues have fallen off. Catalogue mailing was down 1.7 percent in 2018, but the decline rose dramatically in 2019, about 9 to 10 percent. The reason? The increasing cost of paper and postage, Maine said. Marketing (i.e., junk mail) is one bright spot, but it is still down 1.4 percent in terms of pieces, and the weight of marketing mail has fallen more than 5 percent.

Maine said that there are no more safe havens for graphic paper. Also:
• Packaging papers are being oversupplied.
• Tissue and specialty papers offer little volume for sufficient growth.
• China is no longer the growth engine it was.

Although numerous capacity closures have been announced globally, Maine believes more could be announced in 2020. Capacity closures announced earlier helped many companies turn a profit, but the peak came in early 2019 and will now trend down. It has become more difficult to convert to other grades, so this will drive more capacity closures.

Graeme Rodden is senior editor, North and South America for Paper360° magazine. He can be reached at: [email protected]