It’s a mixed outlook for the major pulp and paper grades with tissue prices slated to rise for the first time in two years, but newsprint producers won’t have it easy
January 2008
By Pulp & Paper Week editors Chris Cook, Greg Rudder, Will Mies, Drew Miller and Bryan Smith
The mergers and acquisitions rush in the US pulp and paper industry since 2005 totaled more than $40 billion by the end of 2007. While less than the previous three-year high of $52.6 billion from 2000-2002, various analysts and company officials see a continuing onslaught of “merger mania” in North American this year.
A bevy of potential transactions are expected, including the sale of Weyerhaeuser’s containerboard, packaging, and recycling unit, that some say can fetch more than $5 billion.
Other potential M/A targets are newsprint makers SP Newsprint and Catalyst Paper, bankrupt tissue maker Marcal Paper, bankrupt pulp producer Pope & Talbot, market pulp and newsprint maker Tembec, and the AbitibiBowater newsprint mill in Snowflake, AZ, that the US Department of Justice has ordered the newly formed company to sell.
The AbitibiBowater merger last year was one of the largest deals, valued at $1.6 billion, along with Brookfield Asset Management’s $2.15 billion acquisition of containerboard and kraft paper maker, and timberland owner Longview Fiber.
Two other deals announced last year should be completed early this year: NewPage’s $2.52 billion purchase of Stora Enso’s North American (SENA) assets, and the $1.75 billion merger of Graphic Packaging and Altivity.
This wave of consolidation is caused by various factors, including global competition that requires US companies to bulk up and cost down. There’s also a growing interest and available cash from private equity companies.
Private equity continues growing its share in the pulp and paper industry in North America, with Apollo Management acquiring International Paper’s coated and supercalendered papers unit in 2006. Others are said to be on the hunt for deals.
One draw may be the increased capacities held by fewer companies at the top of major sectors such as uncoated freesheet (UFS), and coated printing and writing papers.
In newsprint, coated printing and writing papers, uncoated freesheet, and coated folding boxboard, the top three North American producers in each manage 62-70% of total capacity in the sectors.
In containerboard, if the Weyerhaeuser deal occurs, possibly by mid-2008, a Weyco-Smurfit-Stone Container combination would create a company with about a 40% share of North American containerboard capacity and US box shipments. By shipments, containerboard is the largest paper and board sector in North America. With Georgia-Pacific, the combination’s share would be about 30%, and with Temple-Inland or Packaging Corp of America, the share would be 25-30%.
Uncoated freesheet has the largest capacity share for its three largest producers at 69%. The key was the $3.3 billion Domtar deal with Weyerhaeuser’s fine papers unit. International Paper is second in capacity, followed by Boise Cascade.
At RISI’s 22nd annual North American Forest Products Conference held in October 2007, Deutsche Bank analyst Mark Wilde opined that the chief goals of consolidation are to remove excess capacity, carry out a disciplined capital spending program, and reduce earnings volatility.
He said consolidated companies still face competitive challenges from new company entries or those companies that can make competitive substitute grades.
“In my mind, consolidation is not the holy grail,” Wilde said.
MARKET PULP
North American NBSK prices spike
The North American market pulp industry enjoyed strong demand and an ongoing threat of supply disruptions, and a weaker US dollar led prices to eclipse a decade-long high during 2007. A stronger-than-expected global economy coupled with lower availability in Europe and Asia followed an earlier period in which a reduction in market pulp capacity in North American led to prices rising on the softwood kraft market throughout the year. Worries that a “tsunami of eucalyptus” from Latin American capacity additions tapered off as hardwood prices resumed their rise during the second half of the year.
The North American market stayed robust throughout 2007, as buyers scoured the market for supplies after producers including Bowater, Fraser Papers, Georgia-Pacific, Tembec, Western Pulp, and Weyerhaeuser permanently or indefinitely closed market pulp mills from 2005-2006, the biggest restructuring the pulp industry in the US and Canada had ever seen; an estimated 2.3 million tonnes/yr shut on a permanent or indefinite basis. The decline in available market pulp, a continual-rise in production costs due to expensive fiber and energy, plus a sharply stronger Canadian dollar led benchmark northern bleached softwood kraft (NBSK) pulp prices to rise above $860/tonne by the end of 2007, surpassing the cyclical high of $860/tonne recorded in January 1996, according to Pulp & Paper Week.
US list prices for benchmark NBSK opened the year by rising $20/tonne to $790/tonne, and levels never declined over the course of the year, eventually rising to as high as $870-880/tonne by December – a 13.6% rise over 12 months during a period of strong demand. Worldwide market pulp shipments of 33.4 million tonnes through October 2007 outpaced the 32.4 million tonnes shipped during the same time in 2006 by 3.0%.
Despite the decline in North American capacity in 2006, demand growth to the North American market outpaced global growth, rising 4.5% year-over-year to total 7.4 million tonnes through October. Shipments to Western Europe meanwhile rose 1.1%, while Asian deliveries declined year-over-year in all key regions except China, where shipments continued to flourish, posting a 14.8% gain to 3.8 million tonnes.
Looking to 2008, most analysts began revising upwards their pricing projections due to stronger-than-expected demand, a trend among Latin American producers to produce in line with expected demand, and continued growth in China, where papermakers have new capacity in a country that has little pulp capacity due to depleted timberlands. Major eucalyptus ramp-ups including 425,000 tonnes/yr at Arauco and 780,000 tonnes/yr at CMPC were absorbed by the market during 2007, and an influx of new capacity including Suzano’s new 1.1 million tonne/yr line in Brazil and Botnia’s greenfield one million tonne/yr mill in Uruguay are also expected to get absorbed by the market without prices toppling, because the strong loonie will likely result in more Canadian market pulp mills closing this year, which would partly offset the rising capacity of their Latin American counterparts.
Another factor leading to a likely decline in Canadian market pulp capacity is the weak lumber market, which has reduced fiber availability and further raised production costs for market pulp mills. While the North American industry could again see mills close and a market share loss to offshore competitors, it will lead to strong prices once again in 2008.
NEWSPRINT
Has the tide turned?
As the year drew to a close it seemed the tide of misfortune that had engulfed North American newsprint producers in 2007 might finally have turned. Although the recovery was in its early stages, a return to supply-side discipline and higher prices could be in the cards for 2008.
Producers will not be sorry to put the old year behind them. With energy and fiber prices rising and the price of newsprint in freefall during most of 2007, most mills in Canada and many in the US were losing money on each and every tonne they sold in the second half of the year.
Despite growing oversupply throughout the year, the merger announced January 29, 2007, between Abitibi-Consolidated and Bowater had convinced many second and third tier producers that the combined companies would rationalize sufficient capacity to let them off the hook.
However, waiting for AbitibiBowater to shutter enough mills to save the entire North American newsprint industry became increasingly painful as months wore on and the decline in North American newsprint consumption accelerated towards 10%.
In the first half of the year, producers sought to compensate for shrinking margins with improved efficiency, accomplished by increasing production. But this strategy became untenable as declining demand and growing oversupply led to ballooning newsprint inventories and even weaker pricing.
At the same time the Canadian dollar moved inexorably higher, surging past parity to reach almost $1.10 against its US counterpart and leaving companies with significant capacity north of the border looking at a revenue drop of more than 15% from US dollar-denominated newsprint sales.
Producers announced a September 1 $25/tonne newsprint price increase, but little was implemented until well into the fourth quarter when, with the price of 30-lb newsprint $560/tonne on the US East and West Coasts at $115/tonne or 17% off its cyclical high of the summer of 2006, Catalyst, Kruger and Tembec announced newsprint capacity closures totalling a combined 314,000 tonnes/yr.
By October production cutbacks and seasonal demand pickup had slashed inventories 242,000 tonnes, or 18%, and at the end of November AbitibiBowater announced mill and machine closures in Canada totalling 400,000 tonnes/yr in the first quarter of 2008.
Nevertheless, if producers are to achieve the 95% operating rates that historically lead to higher prices, more cuts may be necessary, because the US economy is sagging and the outlook for newspaper advertising is looking increasingly gloomy.
UNCOATED FREESHEET
Shuts will affect supply
Consolidation and capacity management that were the hallmarks of 2007 look as if they will provide a supply/demand balance and pricing stability in 2008.
Major Canadian uncoated free sheet (UFS) producer Domtar successfully merged with Weyerhaeuser’s Fine Paper Division in a deal finalized during first quarter 2007. At the time, the resulting mega-producer - named new Domtar - became North America’s largest producer with about 5.2 million tons/yr of capacity and a 34% domestic market share.
During mid-summer, in response to tepid UFS demand coupled with excess capacity, the new Domtar announced that it would permanently close 285,000 tons/yr of capacity, although much of the capacity had already been idled or represented coated free sheet (CFS) paper capacity.
In the coming months, several other mills, mostly non-integrated facilities, struggling with high market pulp prices, closed facilities.
During first quarter, International Paper (IP), North America’s second largest producer, began the shutdown and subsequent conversion of a 350,000-ton/yr UFS machine to lightweight linerboard at its Cantonment mill in Pensacola, FL.
These capacity cuts, coupled with supplier discipline in managing supply with demand, helped keep the North American UFS market relatively tight despite lower shipments throughout much of the year.
The result was that operating rates remained in the mid-to-low 90s and pricing stabilized and, in most cases, increased since December 2006.
Despite continuing demand weakness (down 3% year-to-date through October), emboldened producers continued to manage supply and implement a series of price increases (of about $60/ton) for most benchmark grades such as 50-lb offset and 92 bright cut-size, as well as for converting grades like 20-lb forms bond, 20/24-lb Magnetic Optical Character Reader (MOCR), and 24-lb white wove envelope. Yet despite the increases, the differential between offset and cut-size pricing levels was still nearly twice the historical average of $100/ton.
Pricing is expected to remain stable into 2008 as capacity continues to be curtailed and producers maintain pricing power.
US demand for UFS in early 2008 is forecast to drop about 2.2%, but could drop even further if the US economy continues to sputter, according to RISI’s Paper Trader.
Mill inventories for UFS offset and opaque grades receded by 3,000-4,000 tons towards the end of 2007 but were still at higher levels than during 2006. Inventories will likely rise into the first quarter of 2008, continuing an historical trend.
COATED PAPERS
A better year ahead?
North American coated papermakers can look forward to 2008 with more optimism than they have felt for a long time, thanks to massive capacity cuts in the third quarter of 2007 that removed better than one million tons of coated freesheet (CFS) and coated mechanical (CM) production.
Many publishers and commercial printers were initially untroubled by the closures announced by UPM-Kymmene (Miramichi, NB), Tembec (St. Francisville, LA), Fraser Papers (Madawaska, ME) and Domtar (Gatineau, QC). North American coated mills had not been running at anywhere near full capacity and the expectation was that additional imports from Europe would mop up any shortfall.
But with soaring fiber costs in Europe and the US dollar’s weakness against the euro, US deliveries were not appealing to European producers, and when this finally registered there was a frenzied scramble for tons that by the fourth quarter had lifted non-contract prices $200/ton higher. Rampant grade switching by printers turning to supercalendered papers (SC) as an alternative to coated quickly pushed up SC prices too, and as 2007 drew towards its close, more $60/ton hikes were slated for December and January.
These publication paper markets could ease in January if delayed delivery of orders intended for the busy catalog season swells commercial printer inventories. However, as capacity that was shut for only part of 2007 will be closed for the whole of 2008, it is more likely that supply shortages will persist throughout the year.
Although market headwinds have eased for coated paper producers, next year will not be without its challenges.
A slowing economy, higher postal costs and sharply higher paper prices will all take their toll on demand. The lifting of countervailing duties (CVD) and anti-dumping duties (AD), resulting from the International Trade Commission (ITC) ruling that subsidized Asian CFS imports had not harmed US producers might prompt China, Indonesia and Korea to increase shipments again. US imports of lightweight coated paper (LWC) are also expected from Japan next year, courtesy of the recent startup of 700,000 tons/yr of new capacity by Daio and Nippon.
Nevertheless, RISI economists believe the likelihood of continued supply shortages in 2008 is high, and that demand would have to fall 5-10% to produce a significant loosening of the markets.
BOXBOARD
Look for a weaker 2008
Throughout much of the summer, operating rates for US folding carton producers averaged in the very high 90s and, in some cases, exceeded 100%. This robust operating environment occurred despite domestic demand trending down gradually over the period.
However, offsetting this environment and building upon the weaker US dollar, exports surged for many grades, especially solid bleached sulphate (SBS), which helped spur upward price movement.
Pricing for other boxboard grades - coated recycled board (CRB), uncoated recycled board (URB), and unbleached kraft board (CUK) - moved up as well during 2007, due to strong seasonal demand and higher input costs.
In spite of higher prices, escalating costs significantly eroded margins, especially for CRB and URB producers. Compared with third quarter 2006, the price of old corrugated containers had risen 44% in third quarter 2007.
Domestic boxboard demand is expected to weaken modestly during 2008, due to both the projected slowdown in industrial production of processed foods and some pressure for substitution in response to the increase in board costs during the last year, according to Ken Waghorne, RISI’s vp, packaging.
Production of boxboard is projected to decline about 1.5% next year due to the higher US boxboard prices that will likely lead to a modest increase in offshore imports, according to Waghorne. With the higher costs of CRB, some domestic converters have started looking overseas for their supply.
Last year, SBS, CRB, URB, and CUK prices all increased in the US, against pressure from higher energy, raw material (at least as of third quarter in the US), and transportation costs. By the end of third quarter 2007, SBS pricing was up 6% year-over-year, CRB and URB up 10%, and CUK up 5%, yet were only able to stay marginally ahead of surging input costs.
Building upon strong demand, both domestically and offshore, prices for all boxboard grades are expected to move upward during 2008. If OCC prices continue to remain at historically high levels, there will likely be some upward price pressure for CRB and URB grades.
CONTAINERBOARD
Beginning of a new era?
Containerboard producers will enter 2008 in surprisingly strong shape despite sluggish box shipments and slowing US economic growth: the usual warning signs of a market downturn.
The reason is that rollstock inventories at box plants and mills in October dropped back to post Katrina low levels — without the hurricane that in 2005 closed mills and disrupted the supply chain. Inventories dropped 179,000 tons to 2.19 million tons, showing the market was tighter than most buyers, even sellers believed.
That raised chances that producers might try for another US containerboard price increase sometime in the first quarter, following their successful $40/ton price hike last August, which took the transaction price of benchmark 42-lb unbleached kraft linerboard to $550-560/ton (before discounts) in the eastern US, according to Pulp & Paper Week.
Producers also reported success in pushing through most of the board price increase in finished box price hikes. But even with prices at current lofty levels, some major integrated producers were still struggling to achieve a satisfactory return on investment.
Whether producers can raise prices again this spring, though, remains to been seen. The first quarter is normally a seasonally slow period and this year could be particularly weak because of expected slowdown in the economy. Box shipments are expected to be relatively sluggish in the first half of the year, after declining 0.5% for all of 2007, according to RISI’s Paper Packaging Monitor.
Exports have been the main driver keeping the US containerboard market tight this year in the face of lackluster domestic corrugated box shipments. US export shipments through October were up 12.6% from a year ago, boosted by strong global economic growth and the weak dollar.
But in late 2007, there were growing signs of pressure on US unbleached kraftliner prices in key export markets such as Latin America and southern Europe. The main cause was too much supply from heavy shipments earlier this year and possibly because some mills were attempting to place tonnage before the seasonally slow first quarter.
“We fought to get $20 (of the announced $40/ton increase) in export markets and now we are fighting to keep it,” one trader remarked.
But overall some analysts expect the containerboard industry to benefit from the combination of the weak US dollar and consolidation over the next several years. “The strong dollar really hurt this industry between 1998-2002, but now the weak dollar is going to really help the industry,” one said.
Consolidation will ratchet higher if Weyerhaeuser moves ahead with the sale or combination of its containerboard division with another producer. Smurfit-Stone, Packaging Corp. of America, Madison Dearborn (with or without PCA), and Georgia-Pacific have been mentioned as the most likely suitors, according to industry speculation. “It’s a pretty short dance card,” one analyst said.
KRAFT PAPER
Global demand tightens market
North American kraft paper producers were hoping to enjoy another good year in 2007 even in the face of weak demand.
Producers increased prices by $40-50/ton in the spring on extensible sack kraft paper, natural multi-wall, retail bag and converting kraft paper grades. In the fall, northern extensible sack kraft paper producers such as Longview Fibre, Canfor and Tolko hiked prices again by $30-50/ton.
The market for extensible sack kraft has been strong due to robust global demand, the declining US dollar, intense cost pressure on Canadian and European producers, and capacity curtailments. The biggest end use market for extensible sack kraft is packaging cement and demand is strong from major infrastructure projects in emerging markets.
But southern US producers left prices unchanged on natural multi-wall kraft as well as retail and converting grades of kraft paper this fall. The main reason was sluggish demand, particularly for multi-wall shipping sacks, with sack shipments through October down around 5%. Total US unbleached kraft paper shipments, however, were down only 1%, helped by surging exports and weaker imports.
The weakness was mainly in housing-related end use markets for sacks as well as intense competition from cheap imported woven polypropylene sacks from China (which have been taking a large bite out of the pet food sack market).
There has also been no pickup yet in shipments of kraft paper for retail bags despite ordinances passed in San Francisco and a few other cities banning or restricting use of plastic retail bags.
Another price increase on kraft paper is likely this year as North American extensible producers try to catch up with prices of European suppliers in global markets and US southern mills try to close the gap with extensible. But for Canadian mills it has been profitless prosperity due to intense cost pressure from the rising loonie and woodchips prices.
TISSUE
US consumer tissue prices to rise
Coming out of a rise in capacity from the largest producers during 2007 including Georgia-Pacific (G-P), Kimberly-Clark (K-C), and Procter & Gamble (P&G), the industry saw a rise in consumer tissue prices for the first time in two years during the first quarter this year, after major producers P&G and K-C implemented increases to counter escalating costs for fiber such as market pulp, energy, and freight. P&G planned to raise prices on its consumer tissue and toweling products in the US, including Charmin bath tissue and Bounty paper towels, an average of 5.5%, while K-C slated price increases of 4-7% on products such as Cottonelle and Scott bathroom tissue, Viva and Scott paper towels.
The price increases came after a year in which the three firms raised capacity an estimated 215,000 tons/yr. Georgia-Pacific had an estimated 88,000 ton/yr paper machine at its Wauna, OR, mill, that was expected to ramp up by the end of 2007, while Kimberly-Clark started up a 65,000-ton/yr line at its Beech Island, SC, mill during the second half of 2007, and P&G started a new line at its Green Bay, WI, with capacity of 75,000 tons annually last summer. In addition, P&G said in late 2007 that it plans a new tissue plant in Utah, with 80,000 tons/yr of capacity and a planned startup of early 2010. That would buoy its exposure in a region that is seeing population growth and also allow it to ship more product in the western US. All of the companies planned to make their signature brand names with the additional output. Most industry contacts believed that prices would rise in the notoriously difficult consumer tissue/toweling market, where major retailers typically try to push back any rise in prices.
But with fiber costs skyrocketing since 2005 – benchmark northern bleached softwood kraft (NBSK) pulp jumped nearly 14% last year alone – most industry participants believe that 2008 is the year that tissue producers must recover some of the cost inflation, and that they would aggressively drive through higher prices. The timing of the price increase also comes as demand is rising, according to RISI, which forecasts that US tissue production will total 7.8 million tonnes in 2008, up from an estimated 7.6 million tones in 2007 on that back of a larger rise in apparent consumption. Also, the year will likely see two rounds of price increases on the away-from-home (AfH) market, in the seasonally strong periods of spring and fall. If so, that would continue a trend of bi-annual price increases proposed for the AfH market, where producers typically implement half or less of their price increases due to push-back from buyers and discounting.
RECOVERED PAPER
China's thirst affects US
US recovered paper prices were at their second highest level ever last year. Only in 1995 was average US recovered paper pricing higher for domestic mills and for exports.
The main driver for the higher pricing was continuing export demand, mainly from China as well as from India. The additional demand helped push up prices for exports, which in turn yanked up domestic prices.
Last year, bulk grade prices for US mills first spiked in March, with old corrugated containers (OCC) rising $30-40/ton, and OCC spiked again in July. From there, pricing for bulk grades changed or declined little by yearend while levels for high grade deinking materials and pulp substitutes remained high the second half of the year.
Contacts believe the high pricing will stall with some declines on some grades in January and February before up again thereafter, mainly driven by export demand for US recovered paper. US mill pricing is largely influenced by major US export market players such as America Chung Nam and Ralison, the buying arms for China's largest containerboard producers, Nine Dragons Paper and Lee and Man Paper, respectively.
Also, some contacts expect US pricing for materials such as sorted office paper (SOP), a key stock for recycled content tissue and deinked market pulp mills, to remain high most of this year, if not all. Top quality SOP ended last year at about $190-220/ton at the FOB seller's dock across the country. Three new deinked pulp lines started or restarted in 2006, and export demand also rose especially from growing tissue capacity markets in Chile and Mexico.
Many US contacts see China as the next big SOP buyer. Shandong Chenming this spring is to open a 180,000-tonne/yr Andritz deinking line for its newsprint, printing and writing papers mill in China. The DIP line is to be fed US SOP.
In 2007, US mills remained consistent, on track to consume 34.7 million tons of recovered paper. Exports were on track to jump 6-8%, to 18 million tons, including a 10% jump in exports to China.
US demand for recovered paper since 2004 grew 3.9 million tons, with China's demand increase alone accounting for 4.6 million tons.
Pulp & Paper magazine is FREE to qualified subscribers. Click here to find out more.
