I have recently been talking to several suppliers and producers in the pulp and paper industry in Asia, and the good news is that it looks as if the Chinese pulp and paper market is on a fast expansion track again. There are new projects, big and small, signed or under discussion again in the recent months, after a quiet period since late last year.

Recent news shows that the big players are setting the trend, with Shandong Chenming Paper's confirmed vast expansion plans in pulp, fine paper, liner board and tissue at its greenfield and brownfield mills. In addition, Shandong Huatai has just ordered a 800,000 tonnes/yr machine scheduled for startup in December 2010.

APP has obviously made a comeback in China too, with resumed construction work for a new 1 million tonne/yr fine paper machine, PM 2, in Hainan. Various sources also reveal that other of APP's delayed projects have restarted construction too.

On the other hand, smaller players are also in discussions for new projects, in almost all paper grades. Meanwhile, the industry's production rate has increased and is becoming more profitable, according to a recent report by SYWG Research and Consulting.

Some industry insiders attribute the new wave of expansion in the pulp and paper industry in China to the government's economic stimulus packages and modestly loosened monetary policies. The policies were launched at the end of 2008 with an aim to lift domestic demand amid the world financial crisis and a slowing domestic economy.

"It is getting easier for paper producers to get loans from the bank," says one supplier.

In addition, companies can also benefit from the nationwide adoption of "VAT Transformation", starting from January 1 this year. The reform is a major tax cutting policy with an aim "to reduce the tax burden for investment in capital equipment, to increase the demand in the domestic market, to promote technological advancement, and to adjust the industry structure and the transformation pattern of economic growth", according to the official website of the State Administration of Taxation.

"It is worthwhile to invest now in new projects as the cost is lower compared to the past," said Li Hongxin, chairman of Sun Paper at the Fourth China Pulp and Paper Outlook Conference in Xiamen in April this year. Sun Paper ordered PM 23, a 350,000 tonne/yr uncoated fine paper machine, for its mill in Yanzhou city, Shandong province early this year. Startup is scheduled for the first quarter of 2010.

What's more, for some paper companies, especially the big ones, expanding capacity in different paper grades, or "to put eggs in different baskets", in order to minimize risks when the economy is turbulent has been on the agenda. For example, Shandong Chenming opted to tap into the tissue business, while the country's biggest newsprint producer Shandong Huatai went into fine paper production.

But still, securing forest and pulp resources is the key issue for the companies, as China heavily relies on pulp imports due to limited resources domestically.

"Our company has developed 600,000 mu (40,000 ha) of forest in Zhanjiang and 1.02 million mu (68,000 ha) of forest in Hubei. And for the next stage, we will further accelerate the construction of the raw materials base and try our best to create an integrated industrial chain of forestation, pulp and paper," says Chen Hongguo, Shandong Chenming's chairman, at a recent interview with PPI.

Furthermore, China aims to shut down 6.5 million tonnes (or even more) of polluted and outdated small mills by then end of 2010. Bigger players regard this as a good reason to expand and fill in the gap.

Last but not least, the new wave of investment shows that confidence has been restored and industry leaders show an optimistic outlook for the future in the country.

"It normally takes 14-16 months to build a new line, and it might take longer for some bigger lines, so most companies think the industry is looking good in 2010 and onwards," says one supplier.

"The Chinese economy appears to be recovering and may be the first major economy to be past the trough of this recession...Our conclusions are that China will be able to maintain positive, but unspectacular, growth of 7-8.5% in 2009-2010, but will not accelerate further until the US economy and other important sources of demand for Chinese exports recover fully," says RISI's Asian Pulp and Paper Monitor, June 2009.

However, not everyone expects the future will be rosy and some think it might just be a mirage. Some people believe that it might be an irrational boom, as the country's stock market and housing market goes crazy again this year. Others worry that more recent investment in some paper sectors, like containerboard, might not be wise under oversupply concerns.

"Anyway, in the end, the market will adjust itself and there's no need to worry," said Zhao Wei, secretary general of the China Paper Association at the recently held "2009 Paper Industry Sustainability Forum: Paper Contract with China" in Suzhou.

Industrial lumber includes Mldg&Btr and Shop lumber, grades destined for the moulding and millwork industries, out of which come windows and doors, finger joint mouldings and a host of other remanufactured products.

Two species form the backbone of the industrial lumber production side: Ponderosa Pine and Radiata Pine. Ponderosa Pine is the key domestic species associated with industrial lumber. Radiata Pine is entirely imported, some of it coming from New Zealand and some from Chile.

Over the course of the last three years, both Ponderosa and Radiata Pine have struggled with overproduction and the battle with low prices that overproduction brings. Since these two species compete in some of the same markets, understanding a little about how they relate is a key to understanding why they have rebounded so quickly in the last few weeks.

The years 2002 to 2006 were years of heavy overproduction in most industrial products. Both Mldg&Btr and Shop lumber prices struggled to achieve values implied by the grades of the lumber itself. The simple fact was that pine was abundant. Even though Ponderosa production was declining, Radiata imports increased.

From 2004 to 2006, according to Foreign Agricultural Service data, Radiata lumber imports from New Zealand and Chile increased from 347.6 mmbf to 481.7 mmbf, a gain of 28%. During that same period of time, single-family housing starts increased just over 6%, from 1.6 million units to 1.71 million units.

At this same time, imported mouldings were also reaching heavy levels of oversupply. From 2004 to 2006, imported mouldings increased 11%, from 1.164 billion linear meters, to 1.300 billion linear meters. This combination of oversupply in both lumber and mouldings subjected the industry to intense downward price pressure, resulting in weak prices for both lumber and finished mouldings. This weak market occurred before the U.S. housing collapse.

Thus, when other wood products were entering markets that had been eroded by construction weakness and struggling with oversupply of their own, industrial products were already depressed. Ponderosa Pine Mldg&Btr lumber, which might be expected to sell for $1150-1250 per mbf, flirted with numbers as low as $725. Radiata Pine Mldg&Btr lumber, historically valued near Ponderosa, also plunged below $800. Imported finger joint mouldings, which brought above $1500 in the early years of this decade, faded to levels near $800, C&F U.S. ports, often selling below that mark.

Despite extensive losses in both domestic and off shore suppliers, the industry was not able to achieve parity with a plunging housing market. More recently, that scenario has changed. Ponderosa Pine production will be well below a billion feet this year, according to some industry mavens. New Zealand and Chile have reduced their exports to the U.S. by over 40% and 50%, respectively, creating a situation in which the supply of lumber is very near current demand.

Thus, compression in both raw materials and finished mouldings created a Spartan supply side to fit the Spartan demand. This has been borne out by the relatively fixed levels of both Ponderosa Pine and Radiata Pine lumber and finished mouldings over all of 2008 and the months preceding this spring. The supply side was so lean that the smallest increment in demand could trigger significant price gains.

Buyers had been told that the supply side was changing, that suppliers were closing their doors, and that finding decent tallies of lumber or prompt loads of mouldings might become difficult. But with housing starts at such anemic levels, it was difficult to convince buyers of the reality of deprivation.

Prices, too, had been moribund for months, convincing buyers that change would not come until housing came back. Ponderosa Pine Mldg&Btr lumber sold for weeks in a range of $750-800, with some sand-kickers scoring even lower levels. Radiata Pine Mldg&Btr lumber languished for many weeks at $750-775, before inching its way above $800 in recent weeks.

Then spring sprung, and prices of Ponderosa lumber began to define new levels of prosperity for mills so long patient. The first week of April saw the price of 5/4 Ponderosa Pine Mldg&Btr vault $100, from $700 to $800. Succeeding weeks saw this pattern repeated to varying degrees, resulting in a level in late May of $1010, a gain of 31% in six weeks. Radiata Mldg&Btr showed its first stirrings a week ago, but this week it has moved from $825 to $900, capturing some of the distance needed to regain profitability.

Radiata Pine Shop, on the other hand, preceded Ponderosa Pine Shop in making its move, jumping from $475 in mid-April to its current mark of $640. Ponderosa has been more sedate in its move, but it has also recaptured much lost ground, rising to $600 from its low mark of $450.

Imported mouldings are less vigorous, because their markets are still dominated by the caution caused by credit questions and insecurity regarding housing. Having hit a low mark of $750 last winter, mouldings moved to $875 and are now represented by a range of $900-925 for most commodity items. The gain is substantial, but suppliers are anxious to see levels more representative of historical values.

Part of this recent move in industrial products has been the result of strong producer efforts to generate price gains, based on their knowledge that supplies are indeed short. For the short term, at least, this provides suppliers with the market leverage, and prices sweep upward. But until the demand picture deepens via an increase in housing, prices are apt to cap more quickly, as well. That alone provides incentive enough for producers to move as far and as fast as they can.

Returning to the US a few weeks ago, after being in Shanghai attending the RISI Asian Pulp and Paper Outlook Conference, I was honestly surprised at the polar differences in economic outlook between East and West. From the minute I hit the ground in New York, the myriad of opinions thrown at me on the current state of the global economy - and their magnitude and intensity - was staggering and bewildering, and horribly depressing.

Why is it that there is still no growing consensus on the economy? From green shoots to W's, from opinions that we've finally hit the bottom to those who claim this is just a lull in the storm. It's enough to make anyone go nuts.

But instead of focusing on why there is such limited disagreement in Asia on their outlook - nearly all forecasts call for Asia to keep growing, albeit at a less than withering pace, and for the region to be the first to emerge from the global recession - I kept wondering why no one seems to have the pulse on where the rest of the world is headed.

Case in point: The Organization for Economic Cooperation and Development (OECD) released their latest forecast last week, where they upgraded their previous gloomy forecast to something almost rosy, given the current climate; most notably for the US and Europe. However, instead of seeing this as promising news, the OECD was nearly vilified in some corners for ignoring the facts and putting on rose-colored glasses. Now, if we can't trust a group like the OECD for results, who do you call?

Forget about the news reports

It goes without saying that most of the major media outlets routinely focus on the wrong parts of the economy. In their defense, though, unemployment and inflation sells. Still, it's hard not to get wrapped up in the hype, especially when it fills the airwaves, and the Internet, and our mobile phones.

Another case in point: Nearly everyone, except your friendly neighborhood day trader that is, will agree that the Dow Jones Industrial Average (DJIA) is one of the worst indicators of where the economy is going. Nevertheless, it's always there, tick, tick, ticking away, minute-by-minute.

But as a quantitative number, it's erratic and often neurotic. And as for a qualitative assessment, its movement is anyone's guess - and it often is. There's a lot to be said for its historical perspective though, but as a beacon for future prospects, it's a complete failure.

There is an argument to be made that some components of the stock market are worth watching closely. The S&P500 seems a much more stable marker of how things are going, and investor confidence can sometimes feel like a magic lantern.

In favor of transports

Maybe not surprisingly, there's also a strong argument to be made that the Dow Jones Transport Average (DJTA or the Dow Jones Transports) is a much more informative indicator than the equally singularly focused DJIA or NASDAQ.

Consider who's a part of the DJTA, especially for forest products: railroads like CSX, Burlington Northern and Union Pacific; logistics providers such as JB Hunt, YRC Worldwide (formerly Yellow Roadway) and C. H. Robinson Worldwide; marine transporters Overseas Shipping Group and Alexander & Baldwin.

In its favor, the DJTA is the oldest of the stock indices, first developed by Charles Dow in 1884. On the whole, it's far less sporadic than it's brother, the DJIA; and because it isn't splashed across the screen every 20 seconds, its movements and reactions can be said to be a more authentic measure of where investors are looking and moving.

The drawbacks of the DJTA can also work in its favor. Because the economy has become more technology and service-based, the DJTA hasn't been subject to the devil of its own making, but relies heavily on the actual results and forecasts of the transport companies it represents; as well as the larger transport infrastructure of the economy.

And if the insatiable allure of the DJIA is too much, especially for historical contexts, consider that the DJTA has followed nearly the same profile as the DJIA for decades, but without the wide swings and gyrations that only a trader could love.

Getting moving again

Granted, looking at the DJTA is an understandably high-level macro-view of the economy. Nothing can replace the expert price data and forecasts that only industry-specific analysts can bring to the table. But transport can have more foretelling than you might imagine.

Final case in point: There is a general agreement that consumers must start consuming again for the economy to begin any long-term recovery. But many leading economic indicators, pointing to consumer spending, are misleading now, if simply because of high inventories and artificially low prices to eliminate stock. Even though consumers might be buying, until the manufacturers and producers start running at full-steam again, we're all going nowhere fast.

This is when transports become significant. Many transporters and logistics providers are now reporting the same bottoming-out other analysts have mentioned. They are, so to speak, dusting off the wheels and preparing for a much-improved fall and winter.

When inventories finally start running low, and orders pick up because demand improves, transport will start steaming again. And it's safe to say that those who work in, and invest in, transport are watching for that movement very carefully. When that starts to happen, my bet is that we are finally going to be out of the woods.

One option being pursued by some producers is to try and reverse a longstanding trend of increased offshore supply to the North American market. In the final quarter of 2008, offshore imports supplied 22% of US coated paper demand, more than any other paper or board product. This was split almost equally with an 11% market share for Europe and an 11% share for Asia. The European share of the US market has been flat or trending down as its share five years ago was 12%. However, the Asian share, which was only 5% five years ago, has been sharply increasing.

The imported tonnage was quite large in 2008 and represents a sizable opportunity for North American mills to take back some market share. North American buyers imported 1.1 million tons of coated freesheet and 900,000 tons of coated mechanical paper from offshore suppliers in 2008.

In the short term, US producers have been more successful than expected at combating imports. With the influence of a stronger euro and substantial capacity closures, European producers have cut back sharply on their sales into the US market. European coated paper exports to the USA through April had dropped 46% below year-ago levels, and the European share of the US market hit a lowly 6.5% in April, nearly half of its peak level. Yet despite this decline in European supply, US mills still operated at only 72% of capacity.

Surprisingly, US mills have also been successful at displacing some low-cost Asian tonnage in 2009. US mills have become more aggressive on pricing to meet the level of low-cost imports and have also touted environmental certification, customer service, payment terms, local warehousing and "Made in America" sentimentality whenever possible. One program with a US merchant representing about 100,000 tons has been switched from an Asian supplier to a US supplier and will likely result in lower offshore imports in the coming months.

The effort to reduce Asian imports will be increasingly difficult over the next few years due to the large amount of new Asian capacity coming on-line. Between 2009 and 2011, over 2.0 million tonnes of new coated paper capacity will come on-line in Asia with major expansions by APP, Chenming and Oji underway in China. While the Asian market is growing rapidly, it will not absorb all of this new capacity and Asian producers will be fighting aggressively to increase exports all over the world.

While there has been some surprising success at reducing offshore imports in 2009, we do not believe that US producers can solve the coated paper oversupply issue entirely by reducing imports. The battle to replace imports amid world oversupply and capacity expansion in Asia will result in lower coated paper prices in the market and will ultimately force more mill closures in North America as prices approach cash cost levels of some of the higher cost mills.

John Maine, RISI Vice President for World Graphic Papers and author of the monthly Paper Trader, works out of RISI's Charlottesville, VA, office.

Tel: 434 978 2927 Email: jmaine@risiinfo.com

Stay updated on graphic paper markets with RISI's industry news, prices, forecasts, analysis and mill intelligence. Visit www.risiinfo.com and click on "Pulp & Paper."

It is no news that Mexico has been suffering the consequences of the financial recession of its major trade partner. the USA. But a bad combination of weak local demand, global downturn, flu outbreak and timing of Easter week in April turned the mentioned month into the "black sheep" so far for the country's economic performance.

Most of the sectors that decelerated the most are related to the packaging paper end uses: appliances, electronic devices, automotive parts, and other products for shipment to the domestic market and export by "maquiladora" plants along the border to the USA. "There is no secondary fiber supply as the local market activity is down, pushed by the flu. Mexico 'stopped' during four days in late April early May because of the influenza and reduced wastepaper collection by 5-8%," a source reported..

Mexico's official statistics confirm what the local paper market says. The country's industrial activity dropped 13.2% in April from a year ago, the worst month of near-term industrial production in the country since 1995. In the first four months of this year, Mexico's industrial activity dropped 10.7% over the same period of 2008. The figure is also worse than 1995's performance when the country registered a decrease of 4.7% on the year-earlier period.

Going deeper into the country's official data, it is possible to see that the local manufacturing sector activity slumped 18% while manufactured products exports dropped 31.6% in April 2009 over April 2008 as US consumers pulled back on spending for "big ticket" items. The low expectations on Mexico's economic growth has deeply affected private investors' decisions to spend money in the country.

But what did really happen in April to ,make the Mexico economy struggle in these terms? The Easter week at the end of that month is when people traditionally take vacation. In a mostly Catholic country, it's time to relax and celebrate, not to consume paper.

When the Influenza A (H1N1) outbreak spread t in Mexico in late April- early May, the federal government formally asked companies, industries, restaurants and other public institutions to stop operating in order to avoid further contamination.

As people were already inclined to stay at home, the country's economic activity level consistently dropped in those months. Without consumer spending and labor activity, paper and board demand has consequently fallen. Consumer tissue was likely the only paper grade to report stable or increasing consumption as residents used more facial tissue and towels because of the flu outbreak. On the other hand, lower tourism, workplace activity and restaurant dining may have hurt demand for commercial tissue. For the remaining paper and paperboard products, the decline in demand has been dramatic.

May economic figures haven't been released yet by the Mexican government but local analysts don't expect a better economic scenario mainly due to a disappointing performance of the US automotive sector. Mexican auto production was down 41% in the first quarter compared with a year ago. Again, this is bad news for the local paper industry, which produces packaging paper for this industry.

It's difficult to predict what's going to happen in the coming months in terms of demand in Mexico. The only thing known is that the Mexican paper and board industry still has enormous obstacles ahead.

Ross Bradshaw, director of the of PEFC in the UK told the assembled audience of publishers, printers and important paper buyers, that not only is he a committed environmentalist, but he also the managing director of TSP, a supplier of specialist papers to book publishers and that paper has a fantastic record on the environment as an industry. Bradshaw went on to reel off a number of interesting statistics; for instance did you know that 54% of book lovers have thought about whether the book they are reading is printed on environmentally friendly paper?; or that 30% of them think about the carbon footprint of the book they are reading?; or how 90% of readers believe that books should be printed on environmentally friendly stock?

But the really interesting figures were left for a bit later when Bradshaw revealed just what advances were being made in reforesting, particularly in Europe where "forests are increasing by 6450 km² a year... that's the equivalent of an area 4363 football pitches a day!" he enthusiastically proclaims. Although on a worldwide basis he admits that there is still a long way to go adding: "The fact is that there is only 9% of the forests in the world that are registered under certification schemes, and the PEFC has the lion's share of those at around 200 million ha."

The PEFC certification scheme has had a lot of success here in Europe in recent times, particularly since the other chosen scheme - the Forest Stewardship Council (FSC) - has had accesses to much slicker advertising and PR opportunities via the ENGOs who choose to put their weight behind it. But the PEFC is really getting its act together and especially among the printing fraternity where it now has over 1100 registered PEFC chain of custody users in the UK alone. But as Bradshaw says: "What is the point in PEFC and FSC fighting over just 9%, there is another 91% of the world's forest out there waiting to be certified."

Before we answer this critical question, let us briefly recap how Chinese containerboard exports have been doing compared with those Asian exporting countries. Figure 1 compares Chinese containerboard exports (including both liner and corrugation medium) with those four traditional Asian exporting countries from 2005 to 2008. Please note that for those Asian nations, their export data are all from their national level paper associations, while China's data is based on RISI's own estimate. (The export data from the China Paper Association has been constantly bigger than RISI's estimation due to the use of a different HS code.) Chinese containerboard exports started from a very low base of just 40,000 tonnes back in 2005, but peaked at 460,000 tonnes in 2007, surpassing South Korea and Indonesia. We also observe that due to the world economic and financial crisis spreading since end of last year, most of these Asian containerboard nations (with the exception of Indonesia , where exports were up by 33%) witnessed some softness in the external demand for containerboard in 2008, with China leading this drop by a hefty 60% compared with 2007. Meanwhile, Taiwan, South Korea and Thailand were down by 28%, 16% and 5%, respectively, year-over-year. Figure 2 shows Chinese containerboard exports by destination country in 2008. At the country level, one-third of China's containerboard exports were traded within Asia, a substantial 27% was exported to Western Europe, 15% to North America, 9% to the Middle East, and the remaining 16% was distributed fairly equally around the rest of the major world regions.

This is an excerpt from a full story that is available in RISI's Pulp & Paper News Service.

With few exceptions, financial results have been abysmal. Over the past few years, losses of Canadian forest products producers have totaled in the billions.

The Communication, Energy and Paperworkers Union of Canada (CEP) claims that 50,000 industry jobs have been lost in the last two years. On top of a bad economy, the US black liquor tax credit seems to be the proverbial straw that broke the camel's back.

Marches by thousands of pulp workers in Canada's capital, Ottawa, in early June demanded the government wake up and see the harm that been done to one of Canada's flagship industries. In addition, sit-ins were held at several federal government offices across the country. Having seen the government help out GM's Canadian operations to the tune of $10.6 billion, the CEP also wants a slice of the bail out pie. The black liquor tax credit only makes a bad situation worse.

The tax credit issue could be one in which the employers and employees see eye-to-eye, although the union has called upon the Canadian government to enact similar legislation in Canada. In an interview with Business News Network (BNN), the Forest Products Association of Canada (FPAC) president and CEO, Avrim Lazar said the Canadian government cannot solve all the problems the industry faces; only markets can do that. But, he added, it is the responsibility of the government to create a level playing field. He claimed the black liquor tax helps subsidize US pulp producers in an incredible way, that it is worth up to 60% of the cost of producing a tonne of pulp. He called upon the government to contest the tax credit.

Help may be on the way. The tax credit is due to expire at the end of the year. However, two high-ranking US senators, Max Baucus (Montana) and Charles Grassley (Iowa) have already released draft legislation to stop alternative fuel black liquor funding earlier. They plan on taking comments from the public until July 10.

Echoing this cautious optimism are the words of RISI's Asian CEO of the Year, Chen Hongguo, chairman of China's Shandong Chenming. In an interview in the June 2009 issue of PPI magazine, Chen stated that "generally speaking, the Chinese paper industry is still on the developing track at the moment. The paper industry has started to stabilize... paper product prices will reach a reasonable profit balance point."

Such mildly positive words would have been anathema to most in the industry just a few short months ago, as some previous RISI polls help illustrate. For instance, as recently as March 30, visitors to the RISI website were asked to say when they thought the downturn would bottom out. At that time, more than half (52.2% of respondents) predicted this would happen sometime in 2010, with one in 10 pessimistically suggesting it would be ‘2011 or later' before we reached the nadir.

This latter sentiment chimed with the views expressed by Powerflute chairman Dermot Smurfit that very same day (March 30) during the CEO panel at RISI's 11^th European Pulp and Paper Outlook Conference in Berlin, an event sub-titled "Papermaking in a post-crunch world". Referring to the difficulties in securing credit and credit insurance in the industry, he said: "My personal prediction for you? It's going to get worse."

Guest speaker at the conference, David Kern, chief economist at the British Chambers of Commerce, also saw little sign on an immediate upswing: "We have to do things in the short term which will make things worse in the medium term."

Rewind to November 2008 and the sentiment in the industry even more pessimistic. When asked in a RISI Poll, "Do you expect there will be any job losses at your company in the coming year?" A total of 74% of respondents said ‘yes'.

The price of recovery?

North American producers are not only faced with the collapse of their domestic market, but are also contending with the inability to redirect excess tonnage overseas as the global economic downturn undermines worldwide demand for newsprint. North American offshore shipments dropped 44% in April with year-to-date levels down 31% compared to the same period last year. Despite extensive downtime, the rapid descent in both domestic and export demand has overwhelmed producers' efforts to maintain market balance, resulting in severe excess supply, high mill inventories and increased desperation to move tonnage.

The battle for share of the relentlessly shrinking North American market has put newsprint prices into a tailspin. Following a record-breaking single month decline of $65 in April, the RISI average US East Coast price index for 48.8-gram newsprint dropped another $62 per tonne in May. Compared to the previous record level hit in November, the US East Coast price has dropped 26% or $201 per tonne, effectively erasing the differential with West Coast prices along with most of the gains made in the last upturn.

Following the rapid descent of the past two months, the collapse of US newsprint prices could actually accelerate as the market enters the summer months. Fierce competition to secure orders and move tonnage out of overcrowded warehouses has producers making incredible offers at rock-bottom prices. One such offer sent major tremors throughout the newsprint industry when Boise informed customers that they would be slashing newsprint prices to $430 per tonne in June for clients in the five-state region surrounding their DeRidder mill.

This is an excerpt from a full story that is available in RISI's Pulp & Paper News Service.

• 1.9 billion people read a paid daily newspaper every day
• Newspapers reach 41% more adults than the world wide web
• More adults read a newspaper every day than people eat a Big Mac every year

The theme here is not dietary habits or the world's largest hamburger chain, but what O'Reilly called a mistaken chorus from commentators that the Internet will be the death of newspapers.

"If we are a declining industry, the definition of declining is a strange one," he said, citing WAN data that global newspaper circulation rose 1.8% last year, thanks to gains of 6.9% in Africa, 2.9% in Asia and 1.8% in South America.

He acknowledged that circulation also fell 3.7% in North America, 2.5% in Australia and Oceania, and 1.8% in Europe, but said newspapers in these areas had "embraced digital technologies to further improve their audience reach."

That's little solace for newsprint makers in North America, where according to Pulp and Paper Products Council data and industry veterans, domestic consumption and offshore exports are experiencing unprecedented collapse.

• Total US newsprint consumption declined 4.8 million tonnes between 2004 and 2008, a drop of 48% in four years.
• In the first four months of 2009 total US newsprint consumption dropped more than 600,000 tonnes, or 26%.
• Total North American exports are off 230,000 tonnes, or 31%, year-to-date.
• May was the 72^nd consecutive month of declining consumption and the 14^th consecutive month of double-digit declines.
• Mill operating rates in May of 61% on a shipments-to-capacity basis were 33 percentage points lower than year-ago levels.

No surprise then that the price of newsprint in North America is migrating south faster than anyone expected. It is already around breakeven point for a good many mills, and there is no indication it will stop falling until a substantial part of the industry shuts down.

A North American newsprint industry can undoubtedly thrive once it is ‘right-sized', but at this point neither publishers nor paper producers know what that size will be, because as creator of the "disruptive technologies" concept, Clayton M. Christensen, pointed out in his 2003 book The Innovator's Dilemma, large corporations' assets are really managed by customers, not their own managers.

Or as John Lennon put it: "Life is what happens while you're making other plans."

The former movie star, who's delighted children as old as 12 with flicks such as Kindergarden Cop and Jingle All the Way, plans to phase out textbooks in schools and use the internet and digital textbooks instead.

He wants to save millions of dollars in annual state spending on education by cutting out what he calls "antiquated" and "heavy" books that cost the state nearly $350 million last year. This is the kind of figure he can no longer afford, with the state's budget deficit standing at $24.3 billion.

Schwarzenegger originally set out the idea in the San Jose Mercury News newspaper on June 6. "Today, our kids get their information from the Internet, downloaded onto their iPods, and in Twitter feeds to their cell phones. A world of up-to-date information fits easily into their pockets and onto their computer screens. So why are California's public school students still forced to lug around antiquated, heavy, expensive textbooks?" the governor of the State of California asked.

From the beginning of the next school year in August, maths and science students in the state's high schools will have access to selected online texts. "By frequently updating texts as they are developed, rather than continuing to teach from outdated textbooks, we will better prepare our students," Schwarzenegger said.

He is quick to dismiss those who defend the status quo, claiming his vision of providing learning materials to students for free would risk a high-quality education. "That's nonsense," he said. "As the music and newspaper industries will attest, those who adapt quickly to changing consumer and business demands will thrive in our increasingly digital society and worldwide economy. Digital textbooks can help us achieve those goals and ensure that California's students continue to thrive in the global marketplace."

Ebook readers are gradually gaining in popularity. Apple recently unveiled an upcoming application for its iPhone, which allows users to buy books, including textbooks, on their phones and copy and email large chunks of text.

What does this mean for the paper industry? Many children first come into contact with books and paper at school. Getting them to read and pore over their schoolbooks is surely creating the readers and book buyers of the future.

What do you think? Does Schwarzenegger have a point? Should schools switch to using online resources? Are schoolbooks set to go the way of vinyl and VHS tapes?

Questions abound in this subdued city, a quieter Shanghai from previous years. Perhaps taking a breather between the mayhem of the Olympics last year and hosting the World Expo next year, or laying low in the wake of the global recession, China feels quiet. But underneath, there is a simmering undercurrent; an almost imperceptible belief in what is still to come.

photo: conference hall at the Four Seasons

Presenting the keynote for the event, "The Asian Pulp and Paper Market in Today's Economy," Dr. Cao Zhenlei, president of Chinese National Pulp and Paper, portrayed a promising outlook for the industry in China. "China is stable for further growth for the next 5 - 10 years," said Cao. Domestic demand, driven by domestic paper consumption and packaging components for consumer exports, will keep growth rates high for pulp and paper.

Can China maintain this high-growth rate, with capacity still over-exceeding production? Despite a restructuring of the industry, including some consolidation and capacity closures due to recent policy effects, there are still seven producers (including Nine Dragons and Shandong Chenming) with over 1million tonne/yr capacity. The domestic market will grow to meet this capacity, according to Cao, in part because most paper grades in China are domestically consumed. "With a population of over 600 million on the east coast," said Cao, "China will become the biggest consumer in the coming one to two years."

photo: CEO/Executive Panel - A Round Table Discussion With The Region's Leading Executives

Taking the view of the industry from the financial sector however, was Xu Jun, a chief analyst for CITIC Securities Co. "Global commodity pulp output registered slow growth, whereas China, the biggest pulp importer in the world, presented soaring demand that outpaces the world's commodity pulp output growth," said Xu. "China is becoming the one key factor driving up global commodity pulp prices."

Fueling Asia's appetite

Draw a line from Brazil to China, noted Evandro Muzilli, of VCP Asia, and you'll find a pulp pipeline from South America to Asia. "China is the most important market for pulp import in the world," said Muzilli. And Brazil is uniquely suited to feed this pipeline, with yields of 45 - 50 m³/ha/year and a seven-year harvest cycle. Since 2001, Brazilian pulp exports to China have grown 23% per annum.

Russia is another growing source of pulp imports for China. Brian Neil McDonald, Deputy CEO of the Ilim Group, highlighted the benefits of Russia's renewable forest resources to help satisfy growing market demand. Proximity to China also weighs heavily to Russia's favor for growth. A key differentiator, though, is available pulp from softwood. "North America, Europe and Russia have most of the available softwood growing stock, while the hardwood growing stock is concentrated in Latin America, Africa, and Southeast Asia," said McDonald.

Both agree that sustainability is a key. "Global wood pulp production has to be based on sustainability," said Muzilli, "and China needs sustainable suppliers." Only through sustainability can pulp production continue to increase, and hope to answer China's growth in paper production.

India and Vietnam

India might soon be called the new sleeping giant for the pulp and paper industry. With 16.5% of the world's population, but only 2% of the global consumption for pulp and paper, R. R. Vederah, Managing Director, Ballarpur Industries, reiterated the feeling that India is poised to become the second largest pulp consumer in the world after China. With greater than 9% growth in the GDP in the last 3 years, extended government initiatives to combat illiteracy, and a youth population (under 25) totaling 50% of the country's population, these strong fundamentals point to demand growing by 7% and production growing by 8% for the next five years. "The challenges are for raw materials, just like China," said Vederah.

photo: Chairperson Annie Zhu

And Vietnam has designs on increasing it's pulp production to nearly eliminate imports and begin exports by 2015, according to Vu Ngoc Bao, Secretary General, Vietnam Pulp and Paper Association. Currently, the present situation in Vietnam is struggling to meet demand, but the opportunities for investment are substantial. But the risks are substantial too: serious corruption, poor infrastructure and high environmental requirements stand in the way.

Winter passing

Although consolidation is helping eliminate over-capacity in China, "the industry is still quite fragmented compared to the US and Japan," said Xu. Changes in emission and energy-saving standards will go further, shutting down 1million tonnes/yr of production capacity from small to medium-sized mills. These policies will, in turn, accelerate upgrading the industry, allowing for future production growth.

However, this may not be enough to turn the tide yet. "The sector's general climate turned positive this year," confirmed Xu, "but there are different stories for different paper types: fine paper, ivory board paper and enamel paper present fairly strong momentum, while newsprint paper and carton paper are at the bottom. After all, there are no notable signs of recovery."

Latin America relies heavily on imports to supply domestic newsprint consumption, with over 60% of regional demand being met by imports. Chile is the only significant exporter of newsprint in the region, responsible for over 95% of total Latin American exports, with the majority of its exports being delivered to neighboring South American countries. The only other major producing countries, Argentina, Brazil and Mexico, are net importers of newsprint, as their domestic production capacity falls short of meeting their demand requirements.

Capacity closures in North America and Europe have increased concerns among Latin American consumers. Many price hikes were implemented in 2008, which led publishers to build inventories mainly in the first half of the year. However, the financial and credit crisis, and the resulting reduction in North American newsprint consumption, have been leading suppliers from several parts of the world, including China and Russia, to redirect volumes to other markets, particularly Latin America. According to our 5-year forecast for Latin America, net imports are predicted to drop 127,000 tonnes to 1.1 million tonnes in 2009 following the reduction in regional demand. The net import share of newsprint demand will decline from 58% in 2008 to 45% in 2013 as investment in newsprint capacity makes the region more self-sufficient.

This is an excerpt from a full story that is available in RISI's Pulp & Paper News Service.

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