By PPI Special Report
BRUSSELS,
Jan. 31, 2009
(Viewpoint) -
The economic crisis that hit the world in the second half of 2008 has no doubt hit the global pulp and paper industry. This can be seen in the following synopses of various regions and sectors.
This report was put together by PPI’s editorial staff: Graeme Rodden, Mark Rushton, Felicia Willis and Annie Zhu. But, the real credit goes to the RISI economists and analysts who did the work to put together the various forecasts, analyses and reports from whence these synopses came.
Pulp
November saw more volatility in many financial markets, as well as another major bank rescue in the US and close to one trillion additional dollars pledged by the US government to shore up asset prices and reliquify markets. China is working on a domestic stimulus plan that could approach or exceed one trillion dollars, although there are questions about the workability of a spending program this large. Governments around the world are taking unprecedented steps to prevent a continuation of meltdown in markets. Inventories of graphic paper at Chinese paper mills remain quite high, with prices continuing to decline. There will be a substantial amount of downtime taken at Chinese paper mills in the months ahead, along with closures of smaller paper mills and paper prices have farther to fall.
If anyone still believes that pulp prices have to go up for paper prices to increase, their attention should be pointed to what has happened to the price of coated woodfree (CWF) paper in late 2008. CWF prices in Europe moved up for the first time in years in October and November, even as pulp prices were starting to dip (in euros).
This rise in CWF prices is not demand driven, as demand remains rather weak, but is instead due to aggressive capacity closures by European papermakers. This is the type of supply management that is not seen in the pulp market and is a key reason that paper and pulp prices can be expected to diverge at times in the future. The important point here for market pulp participants is that the uptick in CWF prices is good news for European papermakers but should not be seen as a positive development for the pulp market.
A wave of pulp mill downtime was announced for November and December, 2008, and it will continue into the first quarter of 2009. We believe there is also a considerable amount of unannounced downtime being taken in the form of “slowbacks” at mills.
Worldwide, closures could total two or three million tonnes. RISI’s new five-year forecast, which factors in the effects of the financial tsunami, is still under construction, so we do not have final numbers for production or demand for graphic paper in 2009. Our preliminary forecast is that production and demand will be down in 2009 in both the US and Europe. Under these conditions, our preliminary forecast for pulp is that two to three million tonnes of pulp capacity will come out of the market in 2009 and into 2010.
As to pulp demand, consumer inventories will be a key driver of volatility in 2009. Consumer inventories are being pulled down on average across the world. Our forecast thesis is that consumers will restock after a substantial number of mills are idled and closed. This will set up an inventory-related bounce in pulp demand in first half 2009. Given our current assumptions about pulp demand and capacity closures, our view is that this bounce will be sharp but relatively short-lived. A more sustained rally in prices is expected in 2010 and into 2011, based in part on the postponement of a number of large pulp mill projects due to the uncertain economic outlook and disruptions in financial markets.
Recovered fiber
Conditions in the recovered paper market deteriorated significantly in late 2008, with prices down sharply across all grades and markets.
The US financial turmoil and high probability of a further weakening of the economies of the developed world does not bode well for the old news and mixed paper market. The faltering US economy will continue to punish the newspaper markets with both ad spending and lineage expected to post another year of double-digit declines in 2009. This, coupled with a major round of consumer inventory liquidation, will drag newsprint production down in 2009. Consumers in the boxboard sector will suffer a similar fate as weak consumer spending leads box demand on a downward path into 2009.
The forecast calls for recovered paper consumption in North America to climb just 0.1% per year in 2008-2012. Average growth for the forecast period just keeps pace with the forecast for paper and paperboard production in 2008-2012, as the aggregate recovered paper utilization rate cycles around 36% over the next five years. Because of limited gains in usage, consumption of recovered paper in North America will account for 15% of worldwide demand in 2012, down from 17% in 2007.
Tissue
RISI has just completed the new global tissue demand forecast, Outlook for World Tissue Business. Despite the global economic crisis, the outlook is positive worldwide, with emerging regions increasingly contributing to the global tissue business growth. But there will also be respectable growth in the traditional consumer regions, including North America and western Europe.
The crash of the stock markets worldwide in early October 2008 will have consequences for practically all business branches, including the tissue business. It is likely that the tissue industry will find financing new investments increasingly difficult, and companies close to their credit lines may need to have renewed discussions with banks about their obligations towards creditors. RISI would not be surprised if some companies below or close to the breakeven mark need to strengthen their financial basis, which would eventually result in ownership changes or, in the worst case, filing for insolvency proceedings.
On the other hand, there are some positive signs for the tissue industry, which are at least partly related to the financial crisis. Firstly, the price of oil has returned to a more “normal” level and it can be expected that natural gas and electricity prices will also gradually fall. Secondly, raw material prices (market pulp in particular) are already on the move downward and the current financial turmoil is likely to accelerate the price decline. And thirdly, we may see fewer investments in the tissue sector as a consequence of financing difficulties and the supply-demand situation is likely to improve. This will benefit the business of established tissue companies and facilitate an improved price discipline – which is particularly needed in Europe.
World tissue demand is forecast to grow by an average 3.9% annually between 2006 and 2016. This strong growth rate is mainly impacted by the high-growth forecast for China, where recent years have shown an explosive growth in total tissue consumption. Apart from China, the growth in relative terms is expected to be fast in eastern Europe and the Near and Middle East.
Volume growth over this period will be 12.5 million tons, corresponding to a growth rate of 1.25 million tons annually. China will account for a third (35%) of this growth, followed by western Europe (15%), Latin America (14%), eastern Europe (10%) and North America (9%). These five regions will account for 83% of global tissue business expansion.
Europe
According to RISI economists, fall out from the credit crisis continues to have a negative effect on the European region, which is now considered to officially be in recession. One of the unfortunate occurrences in a recession is that paper gets hit from all angles as advertisers pull in the reins on magazine spending, and companies generally cut their marketing budgets which affects sales of magazine, graphic and high quality papers. Our economists predict that the decline will continue through 2009, but see an upturn in the latter part.
Newsprint producers are hoping to increase prices by as much as 15-20% in the early part of the 2009, and are trying to avoid over-producing in what is becoming a rapidly declining market area. Last year around 900,000 tonnes of capacity was taken out of the market, and more downtime is expected to be taken in 2009.
Again, in the printing and writing area, there were major capacity cuts made in 2008, and producers are determined to get price rises of up to 8% in early this year, but the benefits of the rises will be outweighed by the fact that demand is looking to reduce substantially as the recession in the area takes a hold. One publisher has made the gloomy prediction that paper consumption in the magazine sector is set to reduce by 10-20%.
On the packaging front RISI economists are again pessimistic as the industrial sector is set to contract by 2.6% in the first quarter of this year. However, there is a glimmer of hope in the long view with the prediction that there will be an upturn in 2009, which will lead to solid growth in 2010.
RISI economists’ near-term outlook for the containerboard market include an initial contraction of box shipments due to the global downturn in early 2009, but improving toward the middle of the year as inventory reduces and the economy begins to go forward.
Asia Pasific
Recent deterioration in the outlook for the world’s largest developed economies has increased the likelihood of a protracted global recession with only mild recovery built in for 2010.
China’s reaction to this deteriorating outlook has been decisively strong. Although we now know that China’s announced stimulus package included previously planned spending and that new spending is likely to total between RMB 600 billion and RMB 1,000 billion.
Nevertheless, RISI Asian analysts expect the effects of increased government spending to provide a necessary boost to the Chinese economy next year. The strong financial position of the Chinese government will also make it relatively easy to raise capital for additional spending if it sees fit.
Expectations are that newsprint markets in most of Asia will remain quiet for the next few months, with no real activity until after the Chinese New Year Holiday. Any pick-up will likely depend on the state of the regional economies and how well they are weathering the recessional storm rocking the US and Western Europe.
Entering into 2009, RISI Asian analysts are predicting coated and uncoated woodfree paper prices will experience further downward pressure as the full extent of the weakness in global economy becomes more apparent. The prices might pick up in the fourth quarter when demand starts to respond to a strengthening economic picture.
Extremely weak demand and an oversupplied market are behind this latest round of packaging paper prices’ free falling. Prices for all packaging grades are forecast to remain soft in the remainder of 2008 and throughout 2009 because demand continues to be forecast as weak as customers gradually digest their inventory.
Prices of containerboard are predicted to remain low in the first half of 2009 and then increase mildly in the second half as demand picks up with the overall economy.
North America
The US economy is officially experiencing the worse recession since the early 1980s, and has been on the verge of recession since 2007. But the economy is not the only component to blame. Consistently rising energy costs and inflation must also shoulder some of the blame for the bleak outlook in the North American paper and board making sectors. Through all of this, the economy is expected to remain dismal for several more quarters before a sustained recovery begins to take root in the second half of 2009.
Virtually all of the news on the external front during the last month had negative implications for demand. The collapse of the world fiber markets are the only positive factor that emerged for the industry during the last year, since this provided substantial relief on the cost front. However, this is expected to be a bit of a double-edged sword. Packaging buyers have started to demand that producers pass these cost savings along to final product prices. Forecasters anticipate that prices for all grades of paper packaging will fall substantially during the next six months.
Latin America
The global crisis continues to be felt around the world and Latin America is no exception, although being an emerging nation growth is still expected to continue, albeit at a lesser rate than experienced over the past few years.
Newsprint producers rode on a wave of optimism in the early part of 2008 with demand rising by 5% as advertising expenditure ramped up, especially in the retail, real estate and automotive sectors.
In the long-term, demand for newsprint in the area is expected to average 2.8% annual increases up to 2011 before coming back down to 1% due to cyclical weakness in the general economy in the region.
In the printing and writing sector, 2008 saw accelerated demand in the early part, but like newsprint, growth has slowed and will continue at a reduced rate going forward. Economists predict that this slowdown will be due to the fact that there will be limited activity in the advertising and business end-use markets. Latin American demand growth in printings and writings is expected to average 2.3 annually in the period 2009-2012 before accelerating to 6% in 2013.
In containerboard, a growth rate of as much as 6% was experienced in the early part of 2008 due to general credit availability and financial strength in the region, however, what with the global crisis and a weakening in the region, the second half of 2008 is not as bright. Economists state that in the latter half high consumer inventory levels started declining and will remain in a downward trajectory through the major part of 2009. They added that demand growth in the region is expected to decelerate to 2.3% average annual pace in 2009-2013.
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