By Sandy Lu, Economist, Graphic Papers, RISI
SHANGHAI, July 24, 2008 - Facing persistently weak demand and high production costs, the idea of any capacity expansion in the North American and European printing and writing paper sector remains the least attractive topic for conversation among producers and investors. Instead, capacity closures and M&A have become the "hot" topics in these mature markets.
Of course, industry consolidation is usually triggered as producers struggle to survive periods of weak demand, excess supply and high production costs by closing capacity and/or merging with another company. Recent examples in North America include the announced uncoated woodfree capacity closures by Domtar and IP and the merger of Abitibi/Bowater followed by the substantial reduction of capacity in the newsprint sector. While major mergers are for now only at the rumor stage, western Europe is also undergoing a major reduction in capacity, particularly by the Nordic producers.
One may argue that the Chinese market looks so much different from the markets of North America and Europe that it will probably take the industry another 10 years before we even think of the "consolidation" thing. For one, China's break-neck economic growth continues to generate strong paper demand growth. In 2007, Chinese demand for printing and writing paper accelerated to an 8.2% pace, following the already strong 5.9% increase in 2006.
In addition, unlike the sluggish price movement in Europe, printing and writing paper prices in China actually outpaced people's expectations. Compared to levels in the first quarter of 2007, coated and uncoated woodfree benchmark prices in Hong Kong have increased by 22% and 20%, respectively, in the second quarter of 2008. Also, several new giant capacity projects are likely to take place in the next two to three years.
With the market looking so optimistic in China, why should I bring up "the industry consolidation" topic today?
This is an excerpt from a full story that is available in RISI's Pulp & Paper News Service.
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