Most industries have taken a dip on today's economic roller coaster, and the paper industry is no exception. The downturn has created consolidation in a fragmented industry — despite growth throughout the '80s and '90s. Nevertheless, paper markets are expected to improve in the future, once they overcome a few challenges.
Certainly supply and demand continue to affect the paper industry. For example, U.S. printers have generated 15 percent less waste paper in 2001 than in 2000, the second year of decline, according to The Peltz Group, Milwaukee. Similarly, manufacturers' output, boxboard consumption and newsprint use all declined throughout this two-year period. With no consumption increase in sight, supply likely will continue to be low throughout 2003.
The recovered fiber market also has affected supply because there haven't been as many consolidations among recyclers as there have been with mills, and this can cause smaller suppliers to become vulnerable. As large consumers demand more from suppliers, including improved inventory control, quality and logistics, the threat could continue.
|Finished Product||Industry Outlook||Dominant Grades of Recovered Fiber Consumed|
|Newsprint||5.6% capacity drop from 2000 to 2001. Another 4.6% drop is projected over the coming years.||Old newsprint (ONP)|
|Printing & Writing||4% capacity drop. Machine shut downs. Lowest level since 1996. De-ink pulp mills are shifting capacity.||SOP; other ledger grades|
|Coated Groundwood||Capacity expected to grow by 12% during the next 3 years.||Preconsumer groundwood grades; ONP|
|Tissue||Older machines shut down. Capacity growth expected to moderate during the next 3 years. Most stable sector.||Multiple grades|
|Paperboard||Capacity expected to remain flat.||Old corrugated cartons (OCC)|
The public sector affects supply, too. For years, municipalities have been instrumental in stimulating recycling awareness. However, in some cases, public spending and mandated recycling laws have stimulated supply beyond the demand. And without a large enough market for recycled materials, unnecessary supply could continue to flood the market.
Demand for recycled materials has decreased in recent years due to consolidations. Consider that in 1996, the four largest containerboard companies held 40 percent of the market, but by 2000, that number grew to 55 percent, according to a report from Pira International, Leatherhead, Surrey, England. Today, the newsprint market has five top producers that account for 67 percent of worldwide capacity. Three companies — Georgia Pacific, Atlanta; Kimberly-Clark, Dallas; and Proctor & Gamble, Cincinnati — control 75 percent of the tissue market.
According to the American Forest and Paper Association (AF&PA), Washington, D.C., although U.S. paper and paperboard capacity declined 1.3 percent in 2001, a 0.4 percent increase is expected during the next three years. This is good news, but compared to the 2.5 percent expansion rate in 1980 to 1997, the industry has not fully recovered.
Domestic paper levels are being reduced by machine shutdowns, imports and a maturing, consolidated industry. Each recycled paper sector paints a broader picture of industry changes.
According to an AF&PA study, this part of the industry declined 5.6 percent in 2001, largely due to newsprint capacity's conversion to ground wood. Machine shutdowns factored into this decline as well. And an additional 4 percent decline or more is expected in the coming years, leaving newsprint capacity at its lowest level since 1989.
With its capacity increasing rapidly in recent years and continuing growth, tissue is the most stable paper sector. However, AF&PA data shows that growth will become more moderate as 2004 approaches.
Printing and Writing Paper
This sector is at its lowest since 1996, with a 4 percent capacity drop largely attributed to machine shutdowns.
Paper consumption has experienced drops, too. In 2000, 35.7 million tons of recovered fiber were consumed domestically, a decline from 1999, states AF&PA. While domestic consumption rates are projected to grow modestly, if at all, the export market is faring well.
In China, imports have experienced double-digit growth rates for many years, making it the largest recovered paper consumer in Asia. China will continue to increase capacity, but it does not have enough domestically generated fiber, which means paper imports will continue at a high rate.
In the short-term, the paper industry's outlook for recovered fiber prices is positive. The formula is simple — with supply rates low, even a modest demand increase will create an equally dramatic price increase.
In the long-term, there are several issues that could affect the industry, including:
How the supply base reacts as the consumer base continues to consolidate;
Whether public policy will shift toward economically responsible recycling;
How the industry reacts as recovery rates outpace consumption;
How suppliers react as the industry continues to globalize;
How suppliers rationalize cost; and
How macroeconomics trends and any further destabilization affect the industry in general;
The recovered paper industry is improving, but it faces serious challenges to increase global demand. Fortunately, as the U.S. economy strengthens, domestic demand will improve. And with continued growth from overseas, the paper industry can be expected to strengthen and recover in the future.