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Demand growth has slowed while capacity and output expand, but consolidation is changing the landscape in all regions

By HAROLD M. CODY, Senior Editor

Coated Paper Demand Expands, But Global Challenges Looming

During the past decade, demand for coated papers has continued to expand worldwide, with strong growth in Asia and Europe balanced by more modest growth in North America. The business has also undergone profound change, as global consolidation has radically transformed the producer side. The outlook remains promising, but some storm clouds are on the horizon for producers of these key grades.

In recent months, a major slowdown has occurred in key coated paper markets in North America. In Europe, demand has continued to expand, but signs point to slowing growth there as well. Asian demand continues to grow, although not at the pace of recent years in many areas. A big challenge in the next two to three years will be a surge of European capacity. If demand growth slows, as many expect it will, operating rates will dip considerably.

Despite these concerns, coated papers continue to be a growing market worldwide. World coated paper production advanced strongly in 1999-the most recent year for which global data is available-reaching a new record of 37 million mtons, up 5.8% from the 1998 level (Table 1). Production rose in all major world regions, led by double-digit growth in the Asia/Pacific region, where output jumped by nearly one million mtons over the 1998 level. Production rose 4.5% in Europe, the world's largest producing region, reaching 17.4 million mtons, a new record level of output.

Output in North America rose a modest 2.6% during 1999, reflecting not only increased coated paper imports, but also the relatively slower growth in this mature market. U.S output rose 2.5% in 1999 to 8.6 million mtons, but production decreased 1.5% in 2000 as a 5.5% drop in coated free-sheet shipments offset a 3.0% gain in coated groundwood shipments.

World coated woodfree (free-sheet) production expanded to 20.8 million mtons in 1999, an 8.5% gain over the 1998 level. Strong gains were posted in Asia and Europe, 10.0% and 9.8%, respectively, as several major expansions were brought online in recent years, and as output rebounded in Asia following the financial crises of 1997-98.

Coated mechanical (groundwood) paper world production expanded a more modest 0.8% in 1999, reflecting little or modest growth in the major producing regions. Changes in market demand and increased use of coated woodfree papers and uncoated SC grades in traditional coated mechanical markets were important factors. Coated wood-containing output fell in Europe while rising modestly in North America. Output also surged in Asia due to a rebound in Japanese production. Coated mechanical paper is not made much outside of North America and Europe-except in Japan. Several projects in China may add capacity in that region. However, it is not known how many of the several projects identified as "LWC"-lightweight-coated-in China are actually traditional coated mechanical papers.

Coated paper output expanded in all major regions of the world in the last decade, but growth varied widely by region (Table 2). In areas such as Asia and Europe, demand expanded quickly. The largest gains in output have been in Europe, followed by Asia, which is close to becoming a larger producer than North America. However, growth in all major regions appears to be decelerating

GLOBAL RESTRUCTURING ACCELERATES. The biggest change in the last couple of years has been a massive ownership restructuring worldwide. The largest cross-continental merger was Finnish Stora Enso's acquisition of Consolidated Papers in the U.S., forming the world's largest coated paper producer (Table 3). In addition, one of the biggest mergers in U.S. history occurred when International Paper (IP) acquired Champion International by successfully out bidding UPM-Kymmene. Many observers believe the major reason for the acquisition by IP was Champion's coated paper assets.

In Europe, another mega-merger occurred in the rapidly-consolidating paper industry in the region. Metsa-Serla launched a two-pronged strategy that led to a major consolidation of the fine paper business-both coated and uncoated. First, the company acquired Modo Paper, followed in the autumn of 2000 by the acquisition of Zanders Feinpapier from IP.

A new name in the European coated paper business is Lecta, which is the holding company for CVC's fine paper assets. The group acquired Torraspapel of Spain, making it the third-largest coated woodfree producer in Europe with a capacity of 1.2 million tpy. Lecta previously had acquired Condat in France and Garda in Italy.

CAPACITY CONSOLIDATION. Mergers have led to a major increase in industry concentration (Figure 2). The share held by the top five producers almost doubled in five years, while that of the top ten approaches two-thirds of total capacity. In 1996, 11 producers had over 1.0 million mtons of capacity, and the largest, UPM-Kymmene, had global capacity of 2.6 million mtons.

At year-end 2000, the top producer, Stora Enso, had a combined coated paper capacity of 5.1 million mtons. The number of producers with over 1.0 million mtons of capacity actually decreased from 11 to 10. In 1996, only one company had capacity for over 2.0 million mtons per year while five producers are now at this level.

MANUFACTURING TECHNOLOGY ADVANCES. Among the key advances in manufacturing technology is the continued rise in operating speeds and output. One record was achieved on UPM-Kymmene's new Rauma, Finland, paper machine when it operated at 1,712 mpm, setting a 24-hr speed record. The machine produces lightweight-coated (LWC) grades.

Figure 1. Global production in the last decade has grown strongly in Europe and Asia.

A second standard was set for off-machine coaters when Metsa-Serla's Kirkniemi, Finland, mill ran its No. 3 coater at 1,700 mpm on double-coated woodfree grades. Another benchmark was achieved with startup of the world's widest off-machine coater, installed at Asia Pulp & Paper's Gold East Paper Mill in Dagang, China. With a 9.77-m web width, the Valmet coater has capacity for 600,000 tpy of double-coated fine papers and a design speed of 2,000 mpm. The capacity is also a record for a single coater. Similar gains in scale have occurred in coated groundwood papers, as new state-of-the-art machines such as Haindl Papier at Augsburg, Germany, and UPM-Kymmene in Rauma, Finland, can produce 400,000 tpy.

The number of large machines continues to increase, but it's notable that all of these are located outside North America (Table 4). At least four lines have annual capacities exceeding 400,000 tons and eight exceed 300,000 tpy.

All of the largest production lines are located in Europe or Asia, with the vast majority in Europe. What this means for the long-term health of the North American market is uncertain, but it certainly doesn't look promising.

GRADE-BY-GRADE GROWTH AND WORLD OUTLOOK. The world outlook for coated papers continues to be positive, but growth rates are slowing.

Asian demand will continue to expand at strong rates over the long term if the huge Chinese market continues to expand. Growth is unlikely to match that of the 1990s, however. Reasons for this slowing include protracted problems in Japan's economy and slow growth in some other markets.

In the future-as has been the case in the last decade-the strongest gains globally will be for coated freesheet grades. Coated groundwood long-term demand and output are likely to grow more slowly due to a maturing of key markets such as inserts and mass market magazines in big markets such as the U.S. In addition, market penetration by grades such as improved SC papers, lightweight-coated free-sheet, and niche products are taking growth away from traditional coated mechanical papers.

Most analysts and forecasters peg world coated paper demand growth in the next 10 to 15 years at 3.0% to 3.5% for coated mechanical grades and 4.5% to 5.0% for coated woodfree. While these rates of growth may be down considerably from the high rates of recent years, it continues to place coated papers at the top of the growth rates for pulp, paper, and paperboard grades.

Figure 2. Coated paper capacity is much more concentrated now than five years ago.

According to Pulp and Paper Forecaster, coated woodfree demand in the U.S. should expand by 3.7% annually over the 2001 to 2005 period, with coated groundwood demand rising just 0.6% annually over the same period. In the U.S., demand has grown slower in each five-year period since 1990.

LONG-TERM THREATS. Threats to coated paper, notably the notion that the Internet would drastically lower or even eliminate the use of magazines, direct mail, and similar products remains a far-fetched notion. However, major threats to growth remain. For example, the boom of Internet-driven advertising drove up coated paper use in 1999-2000. But with the crash of many dot.coms, advertising is contracting this year and pulling down coated paper demand as it shrinks.

Distribution costs are also a major issue. The postal rate increase that took effect in 2001 will slow growth in direct mail and catalogs if history is any indication. The U.S. Postal Service (USPS) is also facing a crisis caused by a drop in first-class postage, largely attributed to increased use of the Internet for email, billing, etc. This is putting pressure on the USPS to raise rates again which would have a chilling effect on the use of many print products.

Data and analysis in this story are largely based on 2001 International Coated Papers, a market report recently published by Pulp & Paper Forecaster.