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New beginnings, positive vibes, a time of rebirth - the millennium may actually live up to all its hype in the paper world
By Rhiannon James
The end of the paper world as we know it
If you a natural pessimist, you will have already breathed a sigh of relief that the world did not come to an end with the start of the new millennium. But for many papermakers, 2000 will be the end of the paper world as they know it. That, at least, is the view of several industry commentators. As the new millennium opens its doors, prices are rising and demand is looking positive, but the industry has seen all this before. The main difference now is that attitudes have also changed in the pulp and paper sector.
The last decade of the old millennium saw drastic changes in the sector as the industry began to adopt new attitudes toward capacity growth and investment. Shareholder value became the focus, rather than market share, and the customers' needs became a priority instead of tonnage sold. For once, it seems possible to be both a papermaker and an optimist at the same time.
This, at least, is the opinion of the paper industry's top CEOs, analysts and consultants. According to a survey carried out by PPI, there is still a long way to go with the new look paper industry, but the right steps are being taken and at least the optimists have something to believe in going into the next decade.
"Reduction in investment is a reality. Increasing demand is also a reality"
Josmar Verillo, CEO of Klabin
Number crunching
Of course, the paper sector does not live in a little world of its own, isolated from the wider business environment. And the significant changes already made in corporate mindsets will not protect the industry's players from the economic world outside the sector. But even the macroeconomic situation is playing in the industry's favor this time. Despite the fears of many economists and the scare-mongering headlines of numerous newspapers, the US economic bubble did not burst in 1999. Neither did China devalue its currency, nor did Brazil's financial hiccup provoke a global meltdown. All in all, the economic situation doesn't look too bad at the start of the new millennium. Asia is well on the way to recovery, encouraging news is coming out of Europe and even Japan has perked up a bit.
As Thomas Souza at Merrill Lynch explains, "Merrill Lynch is bullish on global GDP growth for 2000, estimating a 3.3% expansion, versus 2.7% for 1999. We have become increasingly bullish as the recovery in Latin America, Asia and Europe seems to be occurring faster than expected. Not one country is expected by Merrill Lynch to show a recession for 2000."
Many analysts have raised their GDP forecasts for 1999 and 2000 on the back of this economic pickup. Among them is Stephen Roach at Morgan Stanley Dean Witter. "Our world GDP growth outlook for the year 2000 has finally hit the 4% milestone, an upgrade of one full percentage point from our above-consensus 3% prognosis prevailing at the start of this year. This latest upward revision reflects an upgrade of our Euroland growth forecast to 3.3% (from 3.1%). There seems to be no stopping the global economy. We are continuing in the long march to upgrade our above-consensus global growth forecast," he explains.
Although GDP forecasts for 2000 vary, the consensus among industry observers indicates growth of 2.5-3.5% in Euroland. Japan is set to see a 0.5-1.5% improvement, while the USA is expected to slow to 2.5-3.5% GDP expansion. Strong growth is also forecast in China and Korea, with GDP rising by well over 5% in both countries.
The global economy is not out of the woods just yet though, and there are still a few hurdles on the path to recovery. According to PPI's survey, most people pointed to China as a potential source of risk for the year ahead. As Richard Cockram of NLK Consultants puts it, "Destabilization in China is probably the biggest threat to our industry - we need China's pulp consumption and we need China to absorb the paper capacity increases of 1999."
Also, many industry observers warned the paper sector to err on the side of caution as far as Asia is concerned and not to expect too much from the region's budding economic recovery. As Roger Wright at Hawkins Wright warns, "It should be remembered that an Asian recovery is just that - a recovery. By the end of 1998, the southeast Asian economies were so crippled that even optimists thought full recovery would take several years. The fact that it has started sooner has perhaps been deceiving. Although Asian economies bottomed in 1998 and are expected to start to grow GDP by 5-7% in 2000 across the board, this growth is from a low base."
The message from both analysts and consultants in the paper industry appears to be that while 2000 will be the year of the Asian comeback, the industry should not expect full recovery to pre-crisis levels until at least 2001. The macroeconomic worries do not stop at the Asian borders either. PPI's survey also pointed to a weakening on Wall Street, problems in Russia and instability in Latin America as potential threats which could rock the economic boat this year.
"I strongly believe that if price increases get out of hand then the result will be long term damage to underlying paper demand"
Richard Harris, NLK Consultants
Ont the look-out for the future of paper
Out of stock
Putting these concerns to the back of their minds, industry observers still expect a strong economic performance to boost the sector's growth rates this year. It is well known that paper consumption follows GDP growth and this year will be no exception. On top of extra demand from the blossoming global economy, an added bonus for papermakers in 2000 will be the favorable supply situation.
The American Forest & Paper Association's (AF&PA) latest capacity survey released in December 1999 reveals that the US paper industry has entered a period of "ultra-slow" capacity growth. US paper and board capacity will edge up by just 0.7%/yr over the 2000-2002 period. Although capacity levels will advance more quickly in other world regions, the global picture is not that much different. Mark Blackburn, chief financial officer at Asia Pacific Resources International (APRIL), believes that, "The supply/ demand balance is at the strongest point in recent years."
Klabin's CEO, Josmar Verillo, also shares this optimism. "With reduced investments in the industry and demand keeping a strong pace, it looks like the equilibrium between supply and demand will be maintained," he says. "Demand will be a little bit higher than supply, so the price situation will be favorable. Reduction in investment is a reality. Increasing demand is also a reality."
It is not only the papermakers that are heralding a new period of low capacity growth though. Analysts are also upbeat about the lack of investments. A new capacity survey by Deutsche Bank points out that, "After perhaps the toughest decade in history, the supply side of the paper industry is not showing very much growth - anywhere. There simply is very little new money being invested in this industry." (See separate article on page 23).
But before investors crack open the champagne to toast the new leaner, meaner, paper industry, they would do well to remember the pattern that has dominated the industry for decades. While attitudes at the top of the industry toward capacity management may have improved, the worry remains that improving conditions and profitability in the paper sector could lead to another rash of new investments.
Resistance appears to be the buzzword among industry executives going into 2000 though. According to Miguel Rincon, chairman and CEO of Durango, the main challenge for papermakers in 2000 is to "resist the temptation of restarting facilities previously shut down in order not to affect market conditions". Or as Richard Youngberg, director of pulp marketing and sales at Kiani Kertas puts it, the biggest hurdle this year will be, "[to avoid] shooting our collective selves in the foot and keeping capacity additions under control".
Millennium madness
Even if the paper industry does manage to keep a handle on hefty new investments, today's tight supply situation is likely to ease in the pulp market. This, at least, is the opinion of Cockram at NLK Consultants. "The pulp sector is already tight, but will ease in the first half as new capacity reaches the market," he predicts. "Over 1.5 million tons of capacity is coming on stream in a five-month period. This will take some of the heat out of the pulp market and allow depleted inventories to be rebuilt."
It must also be remembered that this year is rather special in terms of supply and demand, if all the hype surrounding the millennium is to be believed. The verdict is still out on the true impact of the so-called "millennium effect" on the paper industry though. On one side, some producers are calling the millennium a "non-event" in terms of extra demand, while others have seen significant increases in orders which they attribute to the 2000 celebrations.
Sanna Päiväniemi at Opstock believes that the event has made itself felt in the paper world. As she explains, "In my opinion the sudden (positive) change in market conditions after summer is partly due to the millennium effect - new millennium products, more pages in printed media for the millennium, preparations for the potential difficulties (stockbuilding) etc."
But Jaakko Pöyry's vice president, Timo Suhonen, points to additional factors that may have caused the increase in orders. He explains, "We expect some positive impact on true demand. However, some of the present demand increases can be attributed to price speculation, the Y2K problem etc, which in turn may blur the true millennium effect."
Although papermakers have been spurred on by the millennium events, many are also on their guard for the millennium backlash, which could involve significant destocking in the new year. As Jorma Vaajoki, president and CEO of Metsä-Serla warns, "The order books are full on almost every sector of the paper and pulp industry. However we have to be cautious. There is a possibility that the "millennium bubble" might burst, meaning lower order in-flow in December and early in the new year. But in any case, the healthy economic growth will help and increase the consumption of paper, board and pulp."
Favorable economic conditions and tighter supply situations should leave suppliers in a strong position to boost price levels even further, or so the theory used to go. Although most industry observers fully expect the pulp price increase to sail through in January and take levels to $630-640/ton, paper price rises could be more difficult to achieve in the current non-inflationary environment. Pulp players may be facing the right conditions to send prices soaring, but they must be careful not to overshoot the mark.
According to PPI's survey, the meteoric rise in pulp prices could be stopped by two factors. The first will come from the papermakers, according to Andre Van Hattum, president and COO at Papco. "The inability of pulp consumers to pass on the cost increase to customers will put a stop to rising prices," he says. The second factor that will put a stop to price increases will come from the pulp producers themselves. As Souza at Merrill Lynch explains, "The main risk to longer term pulp prices is that a bullish series of forecasts for the industry becomes self-defeating if leading producers think that it is safe to commit to major new capacity investments."
The Outlook for 2000 is bright, but far from crystal clear
Even if the papermakers do manage to push through increases, they must be careful not to be too greedy. As Richard Harris at NLK Consultants points out, "I strongly believe that if price increases get out of hand then the result will be long term damage to underlying paper demand. The balancing act required with price increases is to introduce them at a rate at which the customer can absorb them. Remember, the paper industry is not the only one to have to grapple with problems of overcapacity - so does the printing industry, and probably at a greater level."
Looking good
Although the paper industry will have to face up to a number of challenges over the coming year, the outlook for the industry is better than it has been in a long while. Souza at Merrill Lynch is particularly enthusiastic about the sector's performance going forward. He believes that, "Limited supply and increasing demand will set the tone for a consistent recovery in prices for 2000 and 2001. After four years of low prices, it seems like the industry has changed a little and now is more focused on returns than production, suggesting increased discipline and returns for shareholders."
Souza's enthusiasm is shared by Durango's top management who believe that, "The paper industry is in a full recovery. The sun, moon and stars are positively lined up as we have never seen them before."
For the optimists out there, it looks as though all the positive indicators surrounding the industry's future in the new millennium are actually taking hold, with the future looking bright for a change. But for the eternal pessimists in the pulp and paper business, it is just another opportunity to ask, "A lot of hype is fine, but how long will it last?"
Aiming for a regional preference
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| While optimism may be in the air, industry players still have their favorite areas for growth. In geographical terms, most analysts and papermakers plumped for Asia as the most promising region in 2000. They also expect the region's encouraging performance to rebound onto other areas. As Jaakko Pöyry's vice president, Timo Suhonen, explains, "The Asian markets are recovering from relatively low demand levels. The recovering demand should reduce supply pressures from southeast Asia to western Europe and North America, for example, and increase demand for western pulp and paper exports."
Other industry observers chose more traditional papermaking regions as their favorites for 2000. Nicholas Spoliar at West Lb Panmure opted for the USA as he believes "it has made real progress in capacity closures and mothballing". Thomas Souza at Merrill Lynch is also fairly upbeat on the western economic powers, pointing to the favorable conditions in the USA and Europe as supply is constrained and demand growth should continue to be healthy. But he also adds, "Asia could surprise once again, especially if the Japanese recovery occurs more rapidly."
Going by grade
Unsurprisingly, most of the papermakers chose their own particular grades as having the most promising outlook for this year, but there was a clear preference for certain grades among the consultants and analysts. Pulp, coated papers and containerboard won favor with most of the industry observers, even among the companies not involved in these sectors.
Richard Harris at NLK Consultants is certainly upbeat about the outlook for coated printing papers in the year ahead, as he believes that advertising growth, more direct mail and a reasonably strong magazine sector are likely to support these grades. "Ironically, if any paper grades will benefit - at least short term - from the impact of electronic media, it is also likely to be these grades as a result of the 'click the website - send for the brochure' syndrome," he adds.
Uncoated woodfrees were also pinpointed as a future growth market, but the situation is not as clear-cut as for its coated counterparts. As Spoliar of WestLB Panmure explains, "There are problems and opportunities all round. Uncoated woodfree grades benefit from many new office applications and an Asian upturn, so there will be some reduction in pressure on woodfrees generally. But there is also the problem of new capacity [in this grade]," he comments. Another grade which may face capacity problems is the lightweight coated sector, where a number of machines will be starting up in western Europe.
On the packaging side, Dennis Christie at Warburg Dillon Read is particularly upbeat about the outlook for corrugated packaging. "Tightening supply from industry consolidation is playing in this grade's favor," he explains. Unsurprisingly perhaps, pulp is also high on the list of favorites for most industry observers. With rising prices and the tight supply situation, the outlook for 2000 is undeniably optimistic. But how long it can last is another matter (see separate article on page 31).
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Preview Putting the 'e' into the paper business
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| On top of the usual worries over demand, supply and price movements, producers face an additional challenge this year - the internet. While many pessimists have predicted the downfall of paper with the rise of the internet and other electronic media, the paper industry has so far proved the forecasters to be wrong - very wrong in fact. Indeed, the industry is gearing up to take part in the internet revolution, with many companies looking into developing an e-commerce strategy.
As Jorma Vaajoki, president and CEO of Metsä-Serla, explains, "Metsä-Serla most certainly has an e-commerce strategy as we believe that this new marketing tool will provide new ways of serving our customers better. Metsä-Serla has already had some pilot projects within paper merchanting and is about to expand this activity into other selected business areas in order to gather experience for future e-commerce applications."
Stora Enso is also taking a closer look at how the new media could be used to help the company. "E-commerce, which is already in general use in the merchant division, will be further developed. Internet will have a major impact on us by improving supply chain management and overall cost efficiency and by providing new tools for customer relationship management," a spokesman explains.
Other paper companies have also shown an interest in developing an e-commerce side to their business. CEO of UPM-Kymmene, Juha Niemelä, describes his company's strategy as "under development", while the chairman and CEO of Jefferson Smurfit, Michael Smurfit, explains that his group's plan is "at a formative stage".
Asian and Latin American companies are also keen to dive in at the deep end with e-commerce. According to Blackburn at APRIL, the company is already working on this area. As he says, "We are in the process of developing our e-commerce position on fine paper." But e-commerce is not for everyone, and at least one major Asian player has said that it intends to steer clear of the new technology with the comment, "We sell pulp the old fashioned way!"
Other IT developments on the agenda for 2000 will be further investments in supply chain management systems. From Asia to America, companies are making these investments a priority. Many groups are upgrading or installing new systems at their mills in a bid to reduce costs and streamline customer services.
The outlook for 2000 is bright, but far from crystal clear
Preview "The paper industry is in a full recovery. The sun, moon and stars are positively lined up as we have never seen them before"
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