Twists and turns ahead for paper demand

By An IFPTA Journal Special Report

BEDFORD, MA, Sept. 6, 2011 (RISI) - Debt problems in Europe and the US are certainly having an impact on the worldwide economy, but it's unclear how these issues are affecting the pulp and paper industry. Talk of continued growth in Asia has kept the industry from sliding too far, but how much can one region support a global industry?

In this interview with the IFPTA Journal, Rod Young, Chief Economic Advisor for RISI, explains how the general economy is affecting demand in the paper industry and that growth in the developing world may have more surprises than expected.

At this year's PPI Transport Symposium 19, Young will present the RISI Outlook Presentation: Forecast for the Global Pulp and Paper Industry. Based on RISI's industry-leading forecasting and analysis, this opening day session will examine the general economic trends over the next two years and the potential impacts for the global forest products logistics industry.

IFPTA Journal: Rod, thank you for taking some time with us today. What are some of the things you think we can expect to see from the general economy? How are current commodity prices impacting the forest products logistics industry?

Young: The world economy has hit a rough patch over the past couple of quarters and that has shaken confidence in the durability of the recovery from the deep recession of 2008-2009. Rising commodity prices, especially for oil, led to a run-up of inflation in the developing world and sapped the buying power of consumers in the developed world.

Monetary authorities in many developing countries started to tighten their policies to combat inflation, which undermined the most robust part of the world economy, while governments in the developed world ran out of options to support their flagging economies.

Now, commodity prices have succumbed to the slowdown in general economic growth around the world. Consumers in the developed world, particularly in the US, will be able to spend more money on discretionary items while continuing to see only modest inflation.

Inflation in the developing world will step downward, also, allowing monetary authorities to loosen their policies once again. Along with continuing accommodative monetary policies in the developed world, these actions should allow the world economy to reaccelerate by the end of this year and continue upward through 2013.

Paper demand is still driven by the developments in the economy, but the connection between paper and the general economy is being frayed, to the detriment of paper.

IFPTA Journal: Would you share a preview of your general outlook for pulp and paper demand? Some analysts say there's a disconnect between certain parts of the pulp and paper industry in relation to the general economy?

Young: Paper demand is still driven to a large extent by developments in the general economy. However, the connection between paper demand and the general economy is being frayed, to the detriment of paper. The last decade has seen the growth rate of paper demand fall well below that of the general economy, at least when looking at paper demand in tonnage terms. This compares to a nearly one-to-one relationship between paper demand and world GDP growth in the 1980s and 1990s.

Still, the growth that we foresee for the general economy over the next two years should be sufficient to pull world paper demand up by 3% annually in 2011-2013, translating into 12 million tonnes per year of tonnage growth. Containerboard and tissue will lead this expansion, with the graphic paper grades, especially newsprint, lagging badly.

IFPTA Journal: What are the expectations on some of the major paper grades, short-term and long-term? How does the outlook for the general economy affect these grades, for better or for worse?

Young: Containerboard and tissue will be the stars of the paper market, at least from a demand perspective. Containerboard will cement its position as the largest sector within the world paper industry, while generating growth rates consistent with the general economy.

The competitiveness of the corrugated container and its strong ties to industrial production, particularly with respect to packaging for international trade of consumer products, will provide the support for containerboard usage. Also, the exemplary recycling credentials of containerboard, with almost 80% being collected for recycling on a worldwide basis, will be a major factor favoring this product.

Tissue will also grow at the same pace as the general economy, although not being tied as directly to economic growth as containerboard. Tissue usage will be driven largely by rising incomes in the developing world and the associated opportunity to upgrade living standards.

There is a strong tie between per-capita incomes and tissue consumption, particularly when a country reaches a certain threshold of economic development. China, for instance, has reached this stage and is registering extremely rapid growth in tissue usage. The low basis weights of tissue mean that tonnage figures will continue to pale in comparison to most of the major grades of paper, but the growth rate will outpace all but containerboard.

The connection between graphic paper grades and the general economy has been almost completely severed, at least in the developed world. The most glaring example is in the North American newsprint sector, where demand has plunged 57% over the past 10 years while the general economy has grown 20% during the same period.

Newsprint demand in the remainder of the world has managed to remain stable over the last decade, but that is still a poor performance relative to a growing general economy. Printing and writing papers have fared somewhat better but growth in demand for these products has also fallen well behind that of the general economy due to stiff competition from electronic alternatives. The disconnect between graphic paper demand and the general economy will continue, both in the short and long term, leading to disappointing growth rates for these grades.

"Recovered paper has become the premier source of fiber supporting the growth in world paper production."

IFPTA Journal: With continued growth expected in the demand for paper and board, how do you view the prospects for the fiber supply to meet this demand?

Young: Recovered paper has become the premier source of fiber supporting the growth in world paper production. Papermakers in the developing world, where most of the growth in paper production is occurring, have been attracted to recovered paper for a number of reasons. Some of these reasons include a lack of virgin fiber within most of these countries, extensive availability of recovered paper in the developed world, relatively low prices for recovered paper compared to virgin fiber, advances in papermaking technology allowing the production of higher quality papers using recovered paper, and lower capital costs associated with recovered paper. Recovered paper usage has also been spurred by the strong growth in containerboard, which is being produced almost entirely using recovered paper in most of the developing world.

Virgin fiber is still being used extensively in printing and writing papers, along with consumer grades of tissue and high-quality boxboard. Growth in virgin fiber demand will be limited by its concentration in printing and writing grades due to their poor prospects. The vast majority of virgin fiber pulp will continue to be produced from wood due to the large supplies available in many parts of the world, especially hardwood in South America. But usage of non-wood fiber pulp will be constrained by continuing problems with cost-efficient production processes for these materials.

IFPTA Journal: With the demand of recovered paper expected to dramatically increase, where will we find the necessary fiber sources for the industry?

Young: The limits of recovered paper supplies are being tested already. Prices of recovered paper have trended upward for the last decade, except for a short, albeit violent, drop during the recession of 2008-2009. Strong demand from the developing world, especially China, has resulted in recovery rates rising to very high levels in the developed world.

Even strong support from European and the Japanese governments on the supply side of the market are not keeping recovered paper prices from surging. More supplies of recovered paper will have to come from the developing world, where recovery rates are still very low compared to the developed world.

High prices for recovered paper will encourage rising recovery rates as will support from governments in countries reaching a higher level of economic development. In the longer term, there is a good chance that virgin fiber will start to replace recovered paper in parts of the world where wood costs are relatively low.

IFPTA Journal: Rod, thank you very much for your time. We look forward to hearing more from you in Amsterdam.

PPI Transport Symposium 19, organized by RISI and the IFPTA, will take place October 11 - 14, 2011 in Amsterdam, the Netherlands. For more information, visit www.transportsymposium.com.