A rash of capacity announcements in the coated woodfree market have set industry tongues wagging in recent months, but is the sector really on the edge of the abyss?

by Rhiannon James

Too many coats get the market sweating

Burgo's recent announcement that it plans to install a new coated woodfree PM in Belgium put a shiver up many a spine in the paper industry. Not only because the Italian company plans to start up a new machine in a sector where just about every Nordic player is scrambling to dominate, but also due to the sheer size of the new line. At 600,000 tonnes/yr, the scale of Burgo's new machine is certainly impressive.

So far, the reaction from Burgo's competitors has been divided. The Italian company's main competitors - Stora Enso, UPM-Kymmene and Metsä-Serla - all have plans of their own to boost their coated portfolio, either by switching or adding more capacity. The ‘coated switchers’ are playing down the impact of a new machine and pointing instead toward the growth forecasts for coated papers. After all, they claim, why are they moving over to coated papers if there is no future in the sector?

But peering over from the other side of the fence are quite a few 'coated skeptics' who believe that the sudden rush to switch to coated is bad enough, without the added pressure of a huge new machine from Burgo. Indeed, "Burgo is just adding insult to injury" was the comment of one market observer.

To be fair to Burgo the company has not yet finalized its plans in Belgium. Feasibility studies are wrapped up and technical work is at an advanced stage, but financing and permits still have to be obtained and the decision is dependent on market conditions. Also, you could argue that Burgo is simply planning ahead and signaling its intentions to the market by announcing a machine for startup in 2004-2005. Some competitors see it as a "pre-emptive strike" designed to make sure that no-one else tries to move ahead of the game with the same idea. After all, let's not forget that Burgo was just pipped at the post by Haindl when it announced plans to build a new lightweight coated line at Verzuolo in Italy.

That may be a bit harsh on Burgo though. Certainly, many of the companies advocating coated capacity increases are using pretty robust forecasts to convince their critics. According to figures from NLK Consultants in March 2000, for example, apparent consumption of coated woodfrees is expected to grow by 5%/yr from 1998-2004. Demand is also forecast to grow quite steadily with high capacity utilization rates, NLK believes. Based on those figures, the market will definitely need some extra capacity in the coming years. But the real question is whether the sector needs all of the additional tonnage, all at the same time.

Too much of a good thing

While a number of companies are adding a few hundred thousand tons here and there, Burgo's announcement for an enormous 600,000 tonne/yr machine certainly puts capacity overload at the top of the agenda. Several analysts are already pointing accusing fingers at the industry, saying that companies have failed to learn from past experience when expansion plans flooded the market. "We saw the same situation in coated papers in the late 1980s and early 1990s and it's taken 10 years to get the market more or less into balance," one analyst commented.

One producer that is adding coated capacity described it as "unfortunate" that several companies are expanding at the same time. But he was confident that the total end-use market for coated reels can stand the extra tonnage. He said, "We are not expecting a market collapse as there is also capacity disappearing from the sector. We are not worried about Burgo's machine either - it is not a reality yet."

But the problem is that although the market forecast looks good for the moment, history shows that it doesn't take much to push the sector over the edge. Any number of economic or political hot spots could flare up over the next few years to make the present crop of healthy demand forecasts redundant.

In addition, Asian producers are getting very competent at producing coated paper and some of their tonnage could eventually wash up on European shores. In fact at least one analyst believes that the Europeans have started to push toward coated production due to the prospect of future competition in the uncoated sector from Asian producers.

Only time - and the attitude of investment bankers - will tell whether all of the coated woodfree projects get the green light in Europe. But the fact remains that the uncoated market is proving less popular for many of the paper giants. The upside of this exodus is that uncoated suppliers can now consolidate their positions in the market. For example, Soporcel has clearly seen the gap in the market and should be able to cash in on this trend with its new PM in Portugal.

It would be nice to think that all the fans of new coated capacity will be as lucky and that their gamble will pay off in the long run. In the meantime, there will be many forecasters and corporate executives staking their credibility on the real growth in coated consumption in the years to come.

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