The key trends in global paper

S. Vaidya Nathan

FOR the present, the global conditions are one of tough competition and soft trends in demand.

The demand for paper and packaging products has been adversely affected by the economic slowdown in the US and other global economies. The slowdown in the European economies is also expected to dampen demand levels further.

*The trends in prices of various categories of paper points to weakness in the July-September quarter, even when compared to levels of the preceding quarter (April-June 2001).

*The industry has operated for much of 2001 at operating rates of 85 per cent due to continued weak demand while inventory levels have been steadily limiting the scope for a price recovery.

*According to International Paper, the world's largest paper products manufacturer, there is reduced demand for paper products used in advertising, print, packaging and construction. The company has placed a question on the outlook for 2002 in the wake of the events of September 11.

*Pulp was the only forest based product that bucked the downtrend in the aftermath of the September 11 terrorist attacks. This was due to the substantial cutbacks in production. But expectations are that negative factors could dominate the sector in the short term.

*As far as the industry structure goes, despite the big ticket mergers of the last three years, there is still a high degree of fragmentation. The small- and medium-sized units have made it tough for big players to avoid price wars when the demand levels have declined. But in specific product categories, the consolidation has given some pricing power to producers due to the concentrated nature of capacities with a few producers.

*Competition from lower cost producers in Asia and South America also pose challenges to the stranglehold of players in Scandinavia, Canada and New Zealand.

*Pulp and paper capacities are likely to grow only minimally based on the expansion plans of various companies. Consequently, prices and profitability should improve relatively rapidly when the demand revs up.

*After the bitter experiences of the late 1980s and 1990s, there is a higher degree of discipline regarding the creation of new capacities. In the most recent upward cycle for the industry in 1999 and 2000, the addition to capacity has been marginal. Earlier, producers in good times ramped up capacities triggering a quick reversal of good times and a protracted period of lower prices for various categories of paper.

*The big pause in capacity creation may ensure that capacity growth is below the long term growth for paper of around 3 per cent. Big companies are also moving towards focusing attention on products that make major technical demands and on high value printing and magazine paper products. The focus appears to be shifting from just volume growth and levels to profitability.

*At the global level, the big paper companies such as International Paper and Stora Enso are cutting their exposures to non-core businesses. This has helped free cash flows. Some of the companies are also shutting down select paper units at regular intervals on a permanent basis. For instance, in the July-September quarter, International Paper shut down its unit in Erie, Pa. Permanently. The reason: ``To better utilise more competitive pulp, paper and converting capacity within the company and also focus on cash flow and debt reduction.''

*If the lack of fresh capacity creation on a significant scale in the last five years holds, the next upturn in the paper industry may prove to be of a more lasting nature. But the kind of frenzied bullish trend in prices a la 1994 and 1995 appears unlikely. For the moment though, it is all about coping with slowing demand, soft price trends and stress on profitability.