By Sampo Timonen, Director, European Graphic Papers, RISI
HELSINKI,
July 13, 2010 (RISI) -
Poor operating rates and a fight over market shares led to severe price declines in all paper grades in Europe during the second half of 2009 and in the beginning of 2010. The drop in demand and exports was more severe than ever before. In 2010 the price of pulp has increased by 50% in euros, the price of recovered paper has doubled and transport costs are close to the levels seen before the recession. Despite a clear recovery in demand and export figures, operating rates were still between 79% (for SC paper) to 90% (for UWF) in May and from 79-88% when measured on a six-month average level. Profitability is poor among all producers except net sellers of pulp.
What can be done to restore profitability?
Investments in low cost energy and fiber are among the key elements, but five to seven years pulp projects started today do not solve the urgent need of positive cash flow. Cost management will be done, but the fastest way to higher profits is through higher prices.
The main drivers behind the price development are:
- a) Balance in supply and demand
- b) Pricing power through meaningful market share
- c) Cost development
Paper producers made decent profits during the second half of 2009 due to shrinking costs. Buyers suggested that it would be reasonable to offer paper with lower prices because costs are shrinking. Some producers said yes, but most said no. However, because operating rates were at a record low, buyers had more negotiating power and could basically switch all paper from their main suppliers to another who was willing to improve operating rates through somewhat lower prices. Producers defended their market shares by accepting the same or even lower prices. Market shares remained unchanged, but prices dropped. This downward spiral in prices is present in all mature markets suffering from overcapacity.
This is an excerpt from a full story that is available in RISI's Pulp & Paper News Service.
