By A PPI Special report
BRUSSELS,
Jan. 4, 2010
(RISI) -
As the industry slowly comes out of the global economic crisis that hit in mid-2008, there are signs of optimism for various grades and regions as can be seen in the following analyses. This report was put together by PPI's editorial staff: Graeme Rodden, Mark Rushton and Annie Zhu. However, the real credit belongs 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
The world economy is showing signs of recovering from the "Great Recession" of 2008/2009, and our forecast shows a significant rebound in 2010 and 2011. RISI's macroeconomic forecast shows no recession over the next five years, only a mid-cycle slowdown in 2013. Funding of new pulp mills remains quite difficult at present despite the movement in financial markets toward more normal conditions. This lack of funding means that there is likely to be a marked lull in pulp mill expansions (except in China) until at least 2012. This, along with the wave of pulp capacity closures in 2008-2009 will likely result in a period of protracted high pulp prices during 2010-2012, depending, of course, on the future course of the world economy.
World consumption of wood pulp was expected to drop quite sharply in 2009, reflecting the huge decline in the production of paper and paperboard currently being seen in Europe and North America in the wake of the financial crisis/severe recession that is centered in those regions. Worldwide, consumption of wood pulp was projected to drop by 7.4% in 2009, or by 13 million tonnes. Most (but not all) of this lost tonnage is expected to be regained in 2010 and 2011, as an economic recovery and inventory rebuilding by consumers of paper lead to a rebound in production of paper and paperboard. RISI's macroeconomic forecast shows no recession over the next five years
For this reason, RISI is showing world consumption of wood pulp growing in each of the next five years, with the strongest year-over-year increase in consumption coming in 2011 (+4.3%). The mid-cycle slowdown is projected to occur in 2013, with pulp consumption growing by just 1.5%.
The sharp decline in consumption in 2009 follows two relatively weak years for consumption in 2007 and 2008, with 2008 seeing a decline of 1.3%. World consumption of wood pulp in 2007 was 177 million tonnes. It will not be until 2012 that consumption again reaches this level.
RISI's long-term (15-year) forecast shows recovered paper continuing to displace wood pulp in the furnish mix, but at a slower pace than in the past 15 years, with nonwood fiber continuing to lose share as well. This means that over the 15-year forecast horizon consumption of wood pulp will not keep pace with consumption of paper, with wood pulp growing by 2.6% per year versus a 3.0% growth rate for paper consumption.
The world furnish mix for paper in 2009 is 44% recovered paper (adjusted for converting losses), 43% wood pulp and 5% nonwood fiber; the remainder is fillers and coatings. A number of factors will combine to raise the recovered paper share to close to 50% by the 15-year forecast period. Sources of risk include: The future of graphic paper: RISI"S forecast shows RISI's forecast shows a marked slowdown in the growth of world demand for graphic paper, averaging 0.6% per year over the next 15 years. That's down from an average of 2.3% over the past 15 years. The future of China: China will continue to have a relative scarcity of wood fiber compared to North America and Europe, so recovered paper will continue account for a higher-than-average share of China's overall furnish mix. If China turns out to be less self-sufficient in terms of paper consumption than projected (with a larger share of its consumption accounted for by imports than we are showing), then wood pulp consumption will be higher than our forecast numbers.
World wood pulp consumption in 2009 was projected to be 161 million tonnes. Within this amount, graphic paper (newsprint and printing and writing paper) remains the largest consuming grade, accounting for 47% of wood pulp consumption. Packaging follows at 41%, tissue at 9% and fluff pulp at 3%.
Recovered fiber
Recovered paper markets in most parts of the world continued to be under severe downward pressure in the first quarter of 2009, after starting downward in the last quarter of 2008. Extremely poor economic activity in developed regions has undermined paper and board demand and, therefore, production, resulting in much lower consumption of recovered paper. In addition, papermakers have reduced their inventories of recovered paper to balance them against their lower consumption requirements.
The bright spot in the recovered paper business has been China, where the economy is performing relatively well and paper demand and production has rebounded from the big drop sustained in the latter part of 2008. Chinese imports of recovered paper have bounced upward and have boosted exports from the developed world (North America, Western Europe and Japan).
RISI economists are looking for a strong cyclical upswing in the world recovered paper market over the course of 2010-2011. The basis for this forecast lies mainly with their assessment of the general economic situation, where they foresee the huge government stimuli from around the world igniting a solid recovery from the beginning of next year. Paper and board consumption will follow general economic activity upward, particularly on the packaging side, and total demand will be boosted further by inventory rebuilding on the part of end users.
Papermakers will run their mills at considerably higher rates and will be attracted toward greater usage of recovered paper by the relatively low prices for this raw material as compared to 2007-2008. In addition, Chinese papermakers, along with producers in other parts of the developing world, will be installing more capacity based on recovered paper as the primary fiber source.
Higher demand for recovered paper in 2010-2011 will, of course, be accompanied by increasing supplies as a result of the upturn in world paper and board demand, according to RISI economists. However, their analysis indicates that demand will rise at a faster pace than supply due to further investment in recycled-based paper and board capacity in the developing world and a modest increase in the usage rate of recovered paper in the developed world.
Also, the supply side of the recovered paper market will be limited by the poor prospects for usage of graphic papers in the developed world. The combination of these factors will lead to a steady rise in the worldwide recovery rate for recovered paper.
Tissue
RISI tissue economists predicted that 2009 was going to be the first year since 1991 that US converted tissue product shipments would decrease and RISI's World Tissue Business Monitor from the latter part of last year is reporting that this is almost certainly the case. There were some gradual improvements at the end of 2009 but they have been sporadic and related to inventories being down as opposed to new order intakes.
This highlights the point that even a "bullet proof" consumer product like tissue is not immune to the effects of a downturn, particularly in the mature markets. RISI's economists report that the tight situation in financial markets, the economic downturn and increasing unemployment influence consumer behavior in many ways. High unemployment rates discourage consumption - September 2009 unemployment rate was 9.8% (7.2% in December 2008) - and 7.2 million jobs have been lost since December 2007. Personal income did not grow in 2009 (-0.3%) and financial security is preferred to consumer spending - May 2009 saw the highest (+6.9%) personal savings rate increase in 15 years and the first half year of 2009 showed an increase of 5.7% (after annual changes of -1.5% in 2007 and -3.9% in 2008).
What has happened is that consumption is not necessarily down in the use of hygienic products in developed markets, but shopping behaviours have changed. Consumers in a recession are more likely to delay purchases, and buy in smaller amounts, as well as downgrade to less expensive products. They are also much more likely to make more use of promotional offers, for instance "buy one get one free".
All that said, the recovery in the US in this area will be slow, but it in no way corresponds to how bad the situation in graphic paper finds itself.
On a worldwide scale, global tissue consumption exceeded 27.8 million tonnes in 2008, up by almost 1.0 million tonnes from 2007. This corresponds to a global growth rate of +3.6%, slightly below the 10-year trend growth rate of +3.8% since 1998, but a slight increase from the three previous years.
RISI economists say that worldwide tissue consumption is benefiting from the strong growth phase of several emerging markets, and certainly not just China. Latin America, the Middle East, and even Africa are showing signs of strong growth. But of course China is of major importance, and is on its way to becoming the largest global tissue player both in terms of its production and consumption. Conservative estimates are that this growth will average an annual rate of 7.8% until 2015.
North America
Producers of North American paper packaging materials faced challenging conditions for most of the last decade. Total North American demand for these products peaked at 55.9 million tons in 1999, but the trend from 2000 to 2007 was decidedly downward. The demand figures for 2007 totalled just 52.5 million tons, yielding a 0.8% average annual rate of decline over these eight years.
RISI's projections showed total North American demand falling below 46.0 million tons in 2009, 12.4% lower than the 2007 level, and this figure incorporates the assumption that the markets should have recovered moderately during the second half of 2009. Demand should start to recover at a modest pace in 2010 and 2011, but this would only push apparent consumption back up to its 2008 level. North American demand for graphic paper was a growing market in the 1970s, 1980s and 1990s. This market hit its all-time peak at 50 million tons in 2000. The 2001 recession marked the beginning of a long-term structural decline for this market. The market dropped 8% in 2001 to 46 million tons, but then managed to avoid further declines for the next five years.
The latest collapse actually began in 2007, far before the economic malaise came to the forefront. This is an indication that the current drop in the market began more as a structural decline and was not related to the recession. The recession only acted to sharply punctuate a decline that was already in place. Demand dropped another 15% in 2007-2008 to 39 million tons, and was on track to plunge 19% in 2009 to a new low of 31.7 million tons. The last time North American graphic paper demand was this low was 27 years ago in the depths of the 1982 recession.
There is at least some cyclical element of the large decline in demand in 2009. Inventories have been reduced in a number of channels, and some end-uses have seen a recession-induced cut in advertising that will recover to some degree (namely autos, real estate and financial). Thus we will see some post recession bounce in demand in 2010 to 2011. The underlying structural decline will mute the recovery that may occur in some sectors such that overall demand for graphic paper will gain only about 1% over the next two years, essentially staying flat as it did after the 2001 recession.
Beyond 2011, the North American graphic paper market will resume its downward path. The average decline will be about 2% per year. By 2024, North American demand will have fallen to 24.6 million tons, 37% below the 2008 base. The total tonnage decline by 2024 will be 14.5 million tons, with 7.5 million tons of that decline occurring in 2009 alone.
Newsprint will account for almost 5.1 million tons of the 14.5 million ton drop in North American graphic paper demand through 2024. The newsprint market will decline 5.1% per year and suffer continuing losses of advertising and circulation, while publishers also reshape, reformat and redefine the daily newspaper market to be less than daily so that their printed newspapers use less paper while online formats expand.
Latin America
Paper and board markets: Latin American demand for newsprint showed remarkable growth of 6% in 2008, but the financial and credit crisis was predicted to minimize this gain and drive demand to a 10% decline in 2009. The recovery of the regional economies in 2010 will lead consumption to an upward trajectory over the next several years, however slower than the historical average growth, supported by the success of free newspapers and improvements in regional literacy.
The global economic situation was also leading printing and writing paper consumption to a 5% decline in 2009, but demand is expected to remain on an upward trajectory over the next several years. While the slowing economica growth moderated the gains in demand for printing and writing papers due to limited activity in the advertising and business end-use markets in 2009, Latin American demand growth is expected to average 4.4% annually in 2009-2014, reaching 6.7 million tonnes in 2014.
As for the other paper grades, demand for containerboard in Latin America was critically affected by the downturn in the regional economies in the last quarter of 2008. After growing 6% annually in 2006-2007, containerboard demand growth dropped to 2% in 2008 and was projected to fall a further 5% in 2009, reflecting the weak results of the largest consumers of containerboard, such as the automotive sector and appliances.
Boxboard, wrapping and specialty packaging papers are normally very slow growth markets. However, Latin America stands out as recording the fastest growth in the world for these grades. After presenting 3.1% annual increases in the past five years, demand was expected to decline 3% in 2009.
After presenting a slight increase in 2008, tissue paper demand in Latin America was projected to slow down to 2% of growth in 2009. In 2010 and 2011, RISI projects Latin American tissue demand to speed up to gains of 5%. The ongoing benefits of expanding per capita consumption and population growth in Latin America will maintain the long-term historical average.
Asia Pacific
The dramatically worsened economic conditions in Asia since the fourth quarter of 2008 dragged demand growth for Asian containerboard and boxboard down to the 4-6% range in 2008.
As the developed economies are still suffering their worst economic recession since WWII, RISI economists expect Asian boxboard and containerboard demand slowed down further to the 1-2% range in 2009, with China's growth rate between 4-7%. Excluding China, containerboard and boxboard demand growth in the rest of Asia was expected to contract by 3% in 2009, although trends vary by country.
In 2009, as Asian producers were still adjusting production to lower demand, Asian containerboard and boxboard production growth was forecast to soften further to 1-3%. The combination of weaker demand growth and rising capacity was expected to cause a reduction in operating rates to an average of 86% for both containerboard and boxboard in 2009. Asian operating rates for containerboard and boxboard are forecast to pick up to 87% in 2010 before reaching 88-89% for 2011.
The combination of the degree of overcapacity and the sudden decline of industrial demand for paper packaging grades, along with the dramatic freefall in both recovered paper and other production costs, caused prices for Asian packaging grades (both recycled and virgin fiber based) to plummet in the last quarter of 2008. Prices of all packaging grades continued to fall in the first quarter of 2009 before gradually picking up in the second quarter. For the second half of 2009, prices for all other packaging grades moved north slightly, mainly due to the recovery of the overall world economy as well as the expected recovered paper price increase.
RISI economists expect that prices should rise further in 2010, primarily based on RISI's macroeconomic forecast that the Asian economy will gradually strengthen in 2010, tracking the projected growth in the US economy.
Europe
It seems that the predictions of last year's PPI Outlook have come true. The year 2009 was a dire one for the European graphic paper business in particular, the latest figures we have are showing that demand was down by record levels at 4.7 million tonnes (12.5%). Unfortunately this is part of a downward trend that has seen demand dwindle by 16.5% since 2007, and clearly illustrates how the global turndown accelerated that decline.
Why has graphic paper been hit so hard? And most importantly will it recover? Again as reported in last year's Outlook, in a recession, marketing and advertising - staples of print and paper - have been hit very hard and as buyers budgets have been cut but at the same time their choices of where to spend their money have increased, particularly in the area of online and electronic media. This does not bode well for the medium term future of graphic papers, however our economists are predicting that some advertising money will come back into print, and are expecting a rebound of a modest 830,000 tonnes by 2012, an increase of 2.5%.
In newsprint and uncoated papers, the expectation is that the market will continue at the current level and then a downward slide will begin. Coated fine papers are likely to prosper from milder cost inflation than coated mechanical papers. RISI's economists report that industry operating rates in 2009 were 80-88%, around the levels of 2006 when capacity cutting was first needed.
The fact is, in the area of graphic papers, the industry in Europe is in desperate need of severe restructuring and badly needs to close five million tonnes of capacity, with coated grades and uncoated woodfree papers being in the worst situation. In the long-term, RISI economists are predicting that Western Europe might well turn from being a heavy net exporter of graphic papers to a net importer by 2024.
In the area of packaging, RISI's economists are reporting that conditions began to improve in the latter part of 2009 following the slowdown as exhausted inventories needed refilling. These conditions are expected to improve further in the first half of 2010 as inventory building continues. However, looking forward, new capacity is also entering this market, and there are questions as to whether recycled producers will be able to maintain their profit margins. These producers prefer temporary closures of permanent shuts. On the cartonboard side, price increases are expected to be more significant on the virgin side as producers tackle oversupply by making permanent capacity reductions.
Generally though, the 2010 - 2014 period as a whole is not expected to be epecially favourable for Western European producers of packaging grades. Domestic demand will grow at an annual pace of 1-2% but a significant drop in exports will offset much of the benefits. In Central and Eastern Europe, paper packaging use is expected to grow at a strong pace over the next five years, although not as fast as the last few years.
Pulp & Paper International is FREE to qualified subscribers. Click here to find out more.
