Paper industry market concentration in North America

By Peter Takacs P. Eng., is part of the Strategic Analysis Group at NLK Consultants Inc., Vancouver, B.C.

Since 1999, mergers and acquisitions in the North American pulp and paper industry have substantially increased concentration of market share for the producers of many grades. The most dramatic change has occurred in the groundwood publication papers market. To demonstrate, the Herfindahl-Hirshman Index (HHI), a recognized measure of market concentration used in many industries, was calculated using the following formula:

where:
   N = the total number of producing companies
   qi = the percentage of market share

For a monopoly, the HHI would be 10,000. Generally an HHI less than 1,000 indicates an unconcentrated market while an HHI over 1,800 indicates a concentrated market. An HHI of around 2,000 may trigger antitrust action on mergers.

HHI AND THE PAPER INDUSTRY. The HHI Summary Table indicates the change in HHI from 1999 to 2000 for the major North American paper and pulp grades. As expected, tissue has one of the highest levels of concentration. The recent increase in concentration is due to Georgia Pacific's acquisition of Fort James in 2000. G-P voluntarily divested its commercial tissue business (335,000 mtons) because of the U.S. Justice Department's antitrust action. Prior to this divestiture, the HHI for tissue was around 2,000 with the top three producers controlling over 70% of the production.

Market pulp has the lowest level of concentration within the North American industry. Even the biggest player, Weyerhaeuser, accounts for less than 13% of the market. The top five producers account for less than 50% of market share.

Groundwood publication papers, particularly newsprint, have shown the most significant increase in market concentration. These grades were relatively unconcentrated in 1999. Newsprint is now at the same level of concentration as tissue. Abitibi-Consolidated has increased its newsprint market share from around 20% in 1999 to over 35% after acquiring Donohue. The top two newsprint producers, Abitibi-Consolidated and Bowater, account for almost 55% of market share. These same companies controlled just over 35% in 1999.

FUTURE IMPLICATIONS. So what does this increase in concentration mean for our industry? Hopefully, it will lead to some discipline in regards to capacity expansion and production curtailments. This could tighten up the market and reduce the rollercoaster price swings that have characterized the industry through the last decade. The now highly concentrated newsprint market seems to be especially tight. This is no doubt a result of Abitibi-Consolidated shutting down high cost mills and some producers, such as Bowater and Alliance, announcing shifts to higher value grades. At the beginning of 2001, market pulp is holding its position but is on a very slippery slope. The recent curtailment announcements may be too little and too late. It seems that Adam Smith's proverbial "Invisible Hand" does not apply to the unconcentrated pulp market. With so many players, an attitude of "every man for himself" does not universally benefit the collective.