By Based on various reports and forecasts of RISI's economists and analysts
BRUSSELS,
Jan. 3, 2011
(RISI) -
In part I of a two part series, Graeme Rodden, Executive Editor of PPI and Mark Rushton, Editor take a look at what the next year has in store according to RISI economists. In Part I, we focus on the outlook for tissue, pulp and recovered paper, in Part II we will be looking at the outlook for graphic papers in the major papermaking regions. Part II will be published next week.
Based on RISI's estimate, the world paper and board industry is about to post the biggest growth year in 26 years. Some of this 6.7% increase is surely an inventory rebound 2009, a year that posted the biggest decline the world has seen in 35 years. Thus, the puffery surrounding the growth in 2010 needs to be taken with a grain of salt. Nonetheless, world demand was expected to reach a new record in 2010, surpassing the previous peak in 2007 by nearly 2 million tonnes. The demand upswing has pulled prices of all major products upward the lows reached in 2009, particularly raw materials, i.e., wood pulp and recovered paper.
Producers would be well advised to not rest on their laurels as 2011 approaches, however. Serious concerns surround the outlook for the general economic environment and, to some degree, within the industry itself.
Maybe the most important issue facing the general economy is the weakness of the US consumer sector, which is continuing to deleverage in the aftermath of the housing implosion and considerably higher unemployment.
Consumers in the other major developed economies, Western Europe and Japan, are also keeping a tight hold on their purse strings, which will tend to undermine the continuing recovery of world demand.
A significant part of the rebound in the general economies has been due to inventory rebuilding following the extensive drawdown in late 2008 and early 2009. This inventory replenishment looks to be coming to an end; in fact, the latest data on the US economy suggest that inventories were overbuilt once again by the third quarter of this year. Therefore, it appears that there is a good chance industrial production will weaken in 2011, compared to the strong performance registered in 2010, in conjunction with much slower growth, or even a drop, in inventories. The industrial sectors in the developed world will likely be most susceptible to this slowdown, but it will affect the developing world also.
Another potential problem for the general economies in 2011 is the growing movement to reduce government fiscal stimulus, particularly in the developed world.
The aforementioned headwinds are expected to result in slower economic growth around the world in 2011 compared to 2010. However, continued strong performances in the developing world will mitigate the slowdown. The economies in the developing world will continue to be affected by the weakness in the developed world, but not as much as in the past. Countries such as China, India and Brazil appear to be able to generate autonomous growth even as the developed countries flounder. It is still too early to believe that the world has changed so dramatically compared to history, but the experience of the last two years presents a powerful argument for this change.
Perhaps the most important factor affecting the pulp and paper market internally in 2011 will be the winding down of the positive effect of inventory changes that have occurred in 2010. Many grades did not see much of an inventory build in the current year, but they did experience at least a stabilization after the huge drawdowns that characterized 2009. The above-GDP growth in world paper and board apparent consumption in 2010 can be traced to this positive inventory swing, which will be largely absent in 2011. Another negative factor for demand in 2011 will be reduced paper usage in the face of substantially higher prices relative to the average for this year.
In total, we are looking for the growth pace of world paper and board demand to decelerate to a little under 3% in 2011, or less than half that of 2010. Demand growth in the developed world is predicted to come to a screeching halt in 2011 after bouncing up by 5% in 2010, and will still be 30 million tonnes less than the peak reached in 2006. Demand growth in the developing world, on the other hand, is forecast at 6% in 2011, down only modestly 9% in the current year. Paper and board usage in the developing world in 2011 is projected to be 50 million tonnes higher than in 2006.
Tissue
World tissue demand has grown steadily at an average annual rate of 3.6% since 2000 and grew another 3.8% in 2008, but it increased only 1.1% in 2009 thanks to the impact of the severe recession. North America, Europe and Japan experienced negative growth, and Latin America and Africa substantially slowed their expansion pace. However, the strength of demand growth in developing regions should push demand back onto its normal expansion path in 2010. Tissue demand also bounced back quickly after the 2001 recession, with annual growth falling below 3% in 2003 before rebounding to 4.3% in 2004.
As the global economy heats back up, tissue demand will increase 4.1% in 2010-2011. This will be supported by a recovery in the Away--Home (AfH) sector, as the At-Home sector is less sensitive to economic cycles.
Quality upgrades and product innovations will drive demand growth in developed countries, but population growth, improving infrastructure and rising incomes in developing countries will be the main drivers for global increases.
Growth will be led by gains in China and the Far East (excluding Japan), Latin America and Eastern Europe.
Per capita tissue consumption in the US was 24 kg in 2009, while in China it was just over 3 kg. This large gap in per capita consumption between developed and developing countries, as well as the continued growth of mature markets, indicate the likelihood of steady long-term growth, which has attracted new players and new capacity to the sector. Global tissue demand is expected to increase annually at an average rate of 3.9% in 2012-2015.
Three-quarters of world tissue consumption is estimated to occur in the consumer sector, also known as At-Home.
However, some businesses may make their AfH purchases through typical retail channels, so this proportion may be slightly skewed toward the At-Home sector. Toilet tissue accounts for 58% of world tissue consumption, followed by toweling. Facial tissue's share is relatively large due to intense usage in several Asian markets.
The 32 million tonne global industry remains fragmented, as the top three suppliers control less than 32% of global tissue capacity. Despite tissue's bulk, trade is rapidly becoming more prevalent, and high levels of investment activity are expected in low cost regions such as China and Latin America, although the popularity of tissue investments may begin to overcrowd the market.
Pulp
As a result of the worst recession in the developed economies since the Great Depression and electronic substitution negatively affecting graphic paper consumption, wood pulp consumption dropped 7.5% 176 million tonnes in 2007 to 162.8 million tonnes in 2009. World wood pulp demand was projected to reach 167.7 million tonnes in 2010. Our macroeconomic forecast shows no recession over the next five years and for this reason we expect world demand to grow in each year through 2015.
World market pulp demand fell by only 2.1% in 2009, far less than may have been expected given the dire economic climate at that time. Based on our macroeconomic scenario, in which the next economic cycle bottoms out in 2016, we project at least five consecutive years of solid demand growth for market pulp. If there is a substantial drop in the shipment to capacity ratio, it will have to be caused by rapid capacity expansion rather than a sharp drop in pulp consumption.
The future of the world pulp industry is and will become increasingly more driven by developments in China.
Net imports of market pulp in China soared in 2009, rising by 43%. The 2009 surge was due in part to a number of one-offs, which led us to project a drop in pulp imports into China in 2010, despite rising levels of paper production. That forecast has been validated and pulp imports into China in 2010 were projected to drop by 17%.
This is the most important source of softening in the pulp market in mid-2010. Looking forward, pulp imports into China are projected to grow by an average of 8.9%, or 1.05 million tonnes, per year 2011 to 2015.
World market pulp capacity in 2009 was 59.7 million tonnes, or 30% of total wood pulp capacity. Market pulp capacity fell by 2.2% in 2009. Capacity fell not because of weak prices, but because of the sharp drop in consumption of pulp, brought on by the collapse in graphic paper demand and production in North America and Europe. As it turned out, the reduction of capacity overshot the decline in graphic paper demand, which bounced back more strongly than expected in both Europe and North America in 2010. This has brought many of this mills closed in 2009 back into operation in 2010.
In terms of market share, market pulp production will continue to shift away the once dominant "Norscan" countries (Canada, the United States, Sweden, Finland and Norway) to the non-traditional, primarily southern hemispheric countries. In 2009, we estimate that 42% of world market pulp capacity was located inside of the Norscan countries. By 2025, our projections show the Norscan share falling to just 26%, based again on capacity, meaning that more than 100% of the growth in world market pulp capacity will be accounted for by suppliers outside of this group of countries. Most of the new, large-scale market pulp capacity additions for the remainder of this decade will occur in Latin America.
Recovered paper
Recovered paper will gain more share of the world's total fiber furnish over the next 15 years. Corporate and governmental efforts to bolster their environmental image by purchasing more recycled-content paper and paperboard will put upward pressure on recovered paper demand. Further advances in the deinking and processing technologies in the papermaking industry will also allow a wider range of recovered paper grades to be utilized. However, recovered paper consumption growth will be constrained by limited supply and higher recovered paper prices on a worldwide basis. We expect to see the world recovered paper utilization rate reach 65% by 2025, up 56% in the current year. World recovered paper demand is predicted to register 4% annual gains in 2011-2025, after registering a 2% decline in 2009 and 7% gain in 2010. Recovered paper consumption is forecast to be about 400 million tonnes by 2025, compared with 206 million tonnes in 2009 and our estimate of 220 million tonnes in 2010.
Our analysis indicates that the developing world will account for most, if not all, of the demand growth, with China at the forefront. China is expected to account for more than 60% of the worldwide demand growth between 2011 and 2025. Chinese total demand is expected to approach 184 million tonnes by 2025. The Far East outside of Japan and China will register the second largest growth in recovered paper consumption, with regional demand jumping to 60 million tonnes by 2025. Other developing regions, such as Latin America and Eastern Europe, will register significant demand growth. As for the developed world, North American and Western European demand for recovered paper will increase by 3 million tonnes and 5 million tonnes, respectively, between 2011 and 2025.
Japanese demand, however, will register no gains due mainly to the decline in paper and board output.
The explosive growth in recovered paper demand in the developing regions means further import expansion as the local collection cannot meet the fast growing demand. The Far East outside of Japan, especially China, will lead in the development of recycled based paper and board capacity. North America and Western Europe will continue to provide recycled fiber to support the continuing number of world-class paper and board machines located in this region. China will continue to be the largest net importer of recovered paper. We expect to see China's imports reach about 45 million tonnes by 2025, up 28 million tonnes in 2009 and 30 million tonnes in 2010. North America will remain the largest net exporter, increasing 20 million tonnes in 2010 to 24 million tonnes by 2025. Western European exports are predicted to increase 11 million tonnes in 2010 to 14 million tonnes by 2025. Our forecast indicates that net exports Japan and Oceania will remain fairly flat.
Although we expect to see the quantity of trade in recovered paper to expand over the next 15 years, the share of trade in total recovered paper demand is predicted to decline, because limited supplies and high prices the developed world will force developing regions to recover more.
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