Director's Industry Blog - Paper Prices: A Brief Analysis of Supply & Demand
Paper manufacturers announced three price rises in 2017 and have already increased prices again early this year with indications that this upward trend is likely to continue. Merchants have to pass these increases on to end users in order to stay in business and many of our customers are understandably concerned to know more about the reasons for the somewhat unprecedented frequency and magnitude of paper price increases and are asking what the future holds. Will paper prices stabilise or continue to rise? Or will prices soften, maybe with a return to the cyclic rise and fall scenario familiar to those who have been in the industry long enough to remember this phenomenon? In this short article we will look at some of the factors that affect paper prices, always bearing in mind that we are living in turbulent times marked by significant political and economic change and uncertainty, making it very difficult to make reliable predictions as to the future.
Recent price increase letters received by us from paper manufacturers emphasise their rising input costs, with particular reference to pulp, energy, chemicals and transportation. Some letters refer to currency fluctuations. We will now look at some of these factors in more detail.
Globally, pulp stocks are at a 20-year low following hurricane damage in 2017 to pulp mills in USA, earthquake damage to pulp production in Chile, and timber shortages in northern Europe, Russia and other countries following difficult winter conditions in 2015/2016. China, the second-largest paper manufacturer in the world, is still experiencing growth in demand for cut-size, uncoated paper. China has always suffered from a shortage of wood pulp, due to her limited forest resources and imports very large tonnage of pulp from Canada, USA, Indonesia, Russia and Chile plus waste paper for recycling. The Chinese government is currently under pressure to conform with international environmental standards and this has resulted in a major ‘clean-up’ in several industries, including the pulp and paper industry, with many Chinese factories being shut down where emission standards have been flouted for years, resulting in pollution of watercourses and the atmosphere. The Chinese government has recently banned the import of mixed-waste paper and this too has added to the demand for imported pulp to meet the healthy demand for paper. These are some of the factors putting upward pressure on pulp prices on the global market and hence on paper prices. Another factor affecting pulp prices is that, unlike the market for paper, the market for tissue is still growing globally and the demand for wood pulp from tissue mills is very strong. This also is forcing up pulp prices in a restricted supply situation. As pulp is a major input cost for paper manufacturers, paper prices have tended to increase globally in line with pulp prices.
The production of 1 tonne of copier grade paper typically uses 10,000 to 11,000 kWh of energy and the dramatic increase in energy prices throughout Europe has resulted in the European paper industry being at a competitive disadvantage in relation to some of its global competitors. This also has contributed to paper price increases in the UK market, as much of the office grades of paper used in UK comes from European mills. Making the situation even worse, steep rises in crude oil prices are continuing to push up freight and transportation costs.
Since the BREXIT decision in June 2016, the Pound‘s value has fallen significantly against the Euro (down over 11%) and other key currencies and several price increase letters mention these currency pressures as a further reason for raising prices to enable overseas mills to avoid low and unsustainable returns from the UK market. When and if all the current uncertainties are resolved and settled about how the BREXIT referendum decision will be finally implemented, it would be a very long shot to attempt to predict how the Pound will perform against the Euro and other key currencies in the years ahead.
SUPPLY AND DEMAND
Back in the 1990s when paper mills were expanding their production capacity to meet growing global demand for uncoated paper, prices fell due to over-supply. But from the late 1990s onwards, two very significant changes occurred simultaneously:
- as digital technology became established, the demand for uncoated paper in developed countries reached its peak, plateaued and then started a slow but steady decline.
- consolidation through merges and acquisitions has resulted in a small number of large global companies gaining increasing control of paper manufacturing.
For example, in Europe the five largest paper manufacturers (Navigator, Mondi, IP, Stora-Enso and UPM) now account for 58% of production capacity. In North America there is even greater consolidation with the five largest paper manufacturers (Domtar, IP, PCA, GP and Nadfelter) accounting for 83% of capacity and in Latin America the corresponding figure is 72% (shared by IP, Suzano, Scripe, Copamer and Carrajab). It is interesting to note that, in the Asia-Pacific region (where demand is still strong and has not yet peaked), the corresponding figure is only 24% (shared by APP, Nippon, IKPP, Chenming and APRIL).
This illustrates a phenomenon experienced in many other industries. As a market matures and growth rates become static and then falling, companies consolidate in order to continue to grow and survive. It could be some time yet before developing countries, mainly in the Asia Pacific region, reach a peak in demand and new capacity (typically based on the latest technology in fast, highly efficient machines) is still being built in this region while producers in Europe and North America are shutting down mills and taking capacity out of the market as they fail to find sufficient export growth to offset their declining domestic/regional demand. The high level of consolidation enables these producers to manage the supply situation effectively and paper manufacturers have demonstrated their willingness to close down capacity in order to maintain prices rather than sell at unsustainably low margins. As a result, supply and demand today are fairly closely aligned in these developed markets, even to the extent that merchants are sometimes experiencing shortages and extended lead times. A tightly controlled supply situation exerts a further upward pressure on prices.
We have attempted to provide some of the main reasons why a declining demand for cut-size uncoated paper has not resulted (as a simplistic view would predict) in falling prices but instead in increasing prices. With a very tight global pulp supply situation and steadily increasing input costs, a highly consolidated paper industry is demonstrating the effectiveness of its strategy to control supply by reducing production capacity. Looking to the immediate future it is hard to see any prospect of prices falling but we might see some stabilisation.
Written by John Coldrick | Director
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