North American coated paper demand and capacity are closing the gap, but Europe will likely announce huge closures in 2010

By John Maine, Vice President, World Graphic Papers, RISI

CHARLOTTESVILLE, VA, Oct. 23, 2009 (Viewpoint) - North American coated paper markets have come a long way toward closing the gaping hole between supply and demand that opened up as a result of the collapse in magazines and catalogs. A gap of more than 2.0 million tons (annualized) opened up between actual capacity and the normal level of capacity that would be needed to support a 95% operating rate in North America. Producers coped with this problem by shutting even more capacity and taking massive amounts of downtime at their remaining mills.

The supply gap is now closing thanks to a partial recovery in demand combined with capacity shuts and shifts to other grades. In fact, the PPPC recently reported that operating rates in North America during September were at 99% for coated freesheet and 95% for coated mechanical. The market will never return to its previous levels of demand, but it has come back to some degree because buyers are no longer reducing inventory as they were earlier in the year. September may have been a bit of a fluke and operating rates will not stay at 95-99% for long, but the fact remains that much of the oversupply is now gone. Operating rates were in the low 70s earlier in 2009.

We have estimated that for coated mechanical, the current capacity base is 4.5 million tons, and for coated freesheet the current capacity base is 4.4 million tons, which includes 568,000 tons of coated Bristol capacity. In order to maintain a 95% operating rate, we only need to shut a further 100,000 tons to 150,000 tons of coated mechanical capacity and a further 400,000 tons of coated freesheet capacity. This latter number may end up being less if large tariffs are placed on Chinese and Indonesian coated freesheet paper and cause much of this tonnage to go away (the subject for another RISI Viewpoint later this year). These shuts may be announced in early 2010 if rescinded black liquor credits make it difficult for some marginal mills to survive.

The story in Europe is completely different. Primarily because of a huge collapse in exports, European mills have a much larger oversupply situation to deal with. The capacity closures in 2009 have been small compared to the drop in demand, only 150,000 tonnes of closure for coated mechanical (Plattling) and 400,000 tonnes for coated freesheet with various closures in Spain and Sweden. This led to European operating rates that also dropped into the low 70s, but they have yet to return to the upper 90s as North America did in September. In fact, the market needsto have about 1.5 million tonnes of further shuts in coated mechanical and 1.0 million tonnes of further shuts in coated freesheet to even come close to balancing the market. This assumes no miraculous recovery in exports, which seems like a safe assumption given the strength of the euro. In fact, we expect the Chinese to begin exporting more to the European market in 2010 and 2011 because of the new capacity in China and the problems that may arise with tariffs into the US market. Thus, there will be no easy fix for the coated paper oversupply in Europe in 2010 and it will be a very difficult environment for the selling side of the market.

John Maine, RISI Vice President for World Graphic Papers and author of the monthly Paper Trader, works out of RISI's Charlottesville, VA, office.

Tel: 434 978 2927 Email: jmaine@risiinfo.com

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