Bouncing Back

The global paper market has undergone one of its worst downturns in the past 60 years. As a matter of fact, prior to the current down cycle, world demand for paper and board had dropped only three times since World War II: in 1975, in 1982 and in 2001, according to market research firm RISI, Bedford, Mass.

Global paper and board demand was negative in 2008 and is likely to be so again in 2009 when figures are finalized, marking the first time in decades that demand for these products has fallen in two consecutive years. Specifically, RISI predicts that world demand for paper and board will be shown to have fallen 3 percent in 2009, following a 1 percent decline in 2008.

It is quite possible that 2009 will represent the single worst year for consumption growth of paper and paperboard in the past 50 years. Although the severity of the global recession is clearly a major contributing factor to the paper market’s woes, the current downturn has been exacerbated by the ongoing collapse of print media, primarily in North America and Europe. Increasingly, newspaper and magazine publishing is shifting toward online sources, consequently reducing the demand for graphic paper and wood pulp. At the same time, however, consumption of print media is increasing in "maturing" countries like India and China, so it’s still far too early to write off (pardon the pun) the global publishing industry.

That being said, there is an undeniable structural shift away from print media, a trend which we conclude will continue to lead to the closure of pulp and paper mills in Canada and the U.S.

Despite the paper industry’s troubles, its future isn’t necessarily as bleak as it might appear.

Looking to 2010, for example, RISI forecasts an initial recovery in the global paper and board markets, with demand reaching 391 million metric tons, a 3.2 percent increase from 2009. From the projected trough in 2009, RISI predicts average annual growth of 3 percent through 2013—a pace only slightly below average estimated global economic growth of 3.8 percent per year during the same time.

The projected upturn is based primarily on growth in the packaging markets, which will account for an estimated 76 percent of the world growth in paper and board demand through 2013, according to RISI.

Tissue paper also is likely to show solid growth once the anticipated up-cycle begins in 2010. RISI points out that "tissue, like packaging, is very closely related to economic development and disposable personal income…there are very few substitutes for tissue, electronic or otherwise, and demand will soar in Asia."

Not surprisingly, the economic recession has hit the recovered paper market hard, as reduced (or negative) economic growth has sharply reduced demand for recovered paper and board. Amid the gloom, one bright spot is China, which has returned to the market by buying significant quantities from North America, Europe and Japan.

The return of China to the recovered paper market has helped improve prices, which plunged at the end of 2008 when it seemed the global economy was headed off the proverbial cliff.

RISI forecasts that when final tabulations have been completed international recovered paper demand will have declined in 2009 to an estimated 206.1 million metric tons, down 1.2 percent from 2008. RISI then projects demand rebounding by 4.4 percent in 2010 to an estimated 215.2 million metric tons.

RISI’s forecast is based primarily on the assumption that various government stimulus programs will begin having their intended effect starting in 2010. As economies improve, recovered paper demand should, too.

We note that RISI anticipates that "Chinese papermakers, along with producers in other parts of the developing world, will be installing more capacity based on recovered paper, the primary fiber source" in 2010 and 2011.

Considering that paper has been around since the early second century, it must qualify as one of the most "mature" products in existence today. The country that invented papermaking is also the place that is expected to experience the highest growth in paper consumption. That country is China, of course, but other emerging Asian countries, such as Taiwan, Thailand, India and Indonesia, also are likely to generate above-average growth in paper consumption, according to our research.

To put the issue into perspective, consider that China is expected to overtake the United States as the world’s largest paper consumer in a matter of years. (China currently ranks second in paper consumption on a global basis.) Today, the average Chinese citizen consumes approximately 6.6 pounds of household paper (toilet, tissue and kitchen towels) per year. By contrast, the average American consumes approximately 11 to 13.2 pounds of paper per year, according to estimates in the Taiwan-published newspaper, The China Post. In addition to household paper, China has a very large appetite for other kinds of paper.

ON THE REBOUND

Industry estimates place overall Chinese demand for paper at about 66 pounds per person per year. This compares with approximately 440 pounds per person per year in Western countries like the United States.

Throughout the past 20 years or so, annual household paper consumption in China has spiked from 1.3 pounds in 1990 to nearly 6.6 pounds last year. That’s more than 400 percent growth in the span of 19 years. In terms of total tonnage, household paper consumption in China reached 3.91 million tons in 2008, up from 3.57 million tons in 2007, again using estimates provided by The China Post.

As the number of Chinese "urbanites" (younger, better paid workers) continues to grow, demand for household paper products should follow, in our view.

The trends occurring in China—urbanization and increasing standards of living—are taking place in other developing Asian countries.

The authors are with Canaccord Adams (www.canaccordadams.com), an independent financial services firm based in Vancouver, Canada.