Capacity and the Maturation of the Paper Industry

Transcription

1 Capacity and the Maturation of the Paper Industry By Rod Fisher, President, Fisher International Figure 1. Steady growth over the past 10 years reflects increasing global demand The trend in total paper, board, and tissue demand is generally up in Asia, Africa, the Middle East, and Latin America Everyone has a pretty good idea of what paper demand is doing in regions where population and GDP are growing. While there certainly are cycles with ups and downs, the trend in total paper, board, and tissue demand is generally up in Asia, Africa, the Middle East, and Latin America. Figure 1 shows how steadily total capacity has been responding to demand growth. But what about regions where growth has slowed or even turned negative? What will happen to investment and the stock of capacity we have now? Is investment in new capacity over? The answers come from an interplay of trends in demand between grades and Figure 2. Europe s distribution of grades is more even than North America s

2 There are significant differences between Europe and North America that will determine how capacity changes play out in the future Figure 3. North America s largest grades are containerboard and tissue the quality of existing assets, which will now be examined in more detail. First, a few facts: Figures 2 and 3 show how much capacity there is now in Europe and North America (U.S. and Canada) by grade. Figure 4. Europe will lose almost the same amount of capacity in some grades as growth replaces in other grades Next, it is necessary to look at how capacities are likely to change (in percentage terms) over the next 20 years. Figures 4 and 5 show that the capacities of some grades will need to grow and others will have to contract. What is interesting is how each region will make the required adjustments up and down. How much will come from new investment, how much from repurposing, and how much from closures? There are significant differences between Europe and North America that will determine how capacity changes play out in the future.

3 For example, Figure 6 shows the bias in Europe towards new capacity investment, even during periods of slow or negative demand trends. In the last 15 years, European paper companies built five times the amount of new capacity as did North American operators. One of the reasons for this difference is that the industry in Europe was built and continues to operate today on an export strategy. So, even if domestic demand in Europe declines, European producers still tend to expect to export and, therefore, to invest. Figure 5. North America has many repurposing opportunities for pulp mills that now serve printing and writing machines In the last 15 years, European paper companies built five times the amount of new capacity as did North American operators Figure 6. Europe has continued investing in new capacity even with declining demand

4 An obvious result is that the European stock of assets is considerably newer than that found in North America, as shown in Figure 7. The consequence of this, however, is that some European assets are considerably more competitive than others (Figure 8). This will be important, as will be demonstrated later. As demand growth rates in some grades decline, the need for closures in those grades increases. Which brings us to another factor determining the future of investment: consolidation. Figure 7. Continued European investment has made its assets more competitive Figure 8. The North American containerboard cost curve is flatter than Europe s As demand growth rates in some grades decline, the need for closures in those grades increases

5 Whereas large companies in North America have closed unneeded capacity for strategic reasons, European producers tend not to have that luxury Figure 9. Fragmentation impedes Europe s ability to adjust its supply-demand balance As Figure 9 shows, the European industry is significantly less consolidated than it is in North America. Whereas large companies in North America have closed unneeded capacity for strategic reasons, European producers tend not to have that luxury. Bankruptcies have been and will continue to be a relatively more common way for Europe to adjust its supply-demand balances. Figure 10 shows that North America has become less reliant on slow- or negative-growth grades. Where fibre is concerned, the North American industry is characterised by a heavier reliance on virgin fibre for the products it makes. Unless this were to change and there is intriguing evidence that it could the Figure 10. Europe relies more heavily on declining grades than North America

6 North American industry has more flexibility than Europe when it comes to repurposing its assets as demand patterns change. Figure 11 shows that there could even be a need for more virgin fibre than is made today. We will continue to see repurposing of pulp mills in North America from Printing and Writing grades into those such as fluff and dissolving pulp (where demand may grow); growth in imports of virgin fibre for tissue manufacturing; substitution of recycled containerboard for virgin; and a threat from FBB to SBS. Figure 11. In the long run, demand for virgin fibre in North America is likely to increase Lastly, it is necessary to mention the likelihood the need, even for some capital investment in North America. Despite low demand growth rates (low enough to justify disinvestment in new capacity), there will be new investment in the region. As Figure 12 clearly shows, a huge amount of North American capacity has reached Figure 12. A large portion of North American assets are nearing the end of their economic lives...it is necessary to mention the likelihood the need, even for some capital investment in North America

7 a critical age. In comparison, Figure 13 shows just how new the capacity is in the rest of the world. To remain competitive globally, and to maintain margins, there will be opportunities for North American producers to replace seriously ageing equipment with newer assets whose manufacturing costs are significantly lower. Figure 13. The rest of the world may out-compete North America unless its fleet is modernised...a huge amount of North American capacity has reached a critical age Figure 14. The bubble chart identifies assets most likely to participate in the next wave of investment FisherSolve measures the long-term staying power of every paper asset in the world, revealing that some assets will continue to get investment because they can remain competitive, while others will be allowed to close because reinvestment in them is no longer cost effective. Figure 14 shows how to think about which ones will get support in the future: those that are neither too new to need investment nor too old to justify it and, among them, those whose asset quality, competitive environment, and grade potential confer long-term viability. The paper industry is so capital intensive that every decision made by its managers can have large financial and strategic consequences. This means data-driven decision making is a critical component in maximising the value of the industry s assets. The examples and thought processes in this article should help inspire industry professionals to capitalise on the data, analytics, and expertise available in the marketplace today, in order to make the best possible decisions for the industry s stakeholders of the future. ABOUT FISHER INTERNATIONAL, INC. Fisher International supports the pulp and paper industry with business intelligence and strategy consulting. The data and analyses for this article were drawn from FisherSolve the paper industry s premier BI resource. For more information, please visit: