Making a Comeback

The global paper market is currently undergoing 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.

Global paper and board demand was negative in 2008 and is likely to be so again in 2009, 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 fall 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 global 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 in that year reaching 391 million metric tons, a 3.2 percent year-over-year increase. 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 frame.

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 next year. 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.”

REBOUND PROJECTED
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 last year when it seemed the global economy was headed off the proverbial cliff.

RISI forecasts that international recovered paper demand will decline in 2009 to an estimated 206.1 million metric tons, down 1.2 percent from the prior year. The research firm then projects demand rebounding by a solid 4.4 percent in 2010 to an estimated 215.2 million metric tons.

RISI’s forecast is based primarily on the assumption (a reasonable one, in our view) that various government stimulus programs will begin having the intended effect starting next year. As economies improve, recovered paper demand should too, boosting global consumption. 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.

GROWTH DRIVER
Considering that paper has been around since the early part of the second century, it must qualify as one of the most “mature” products still in existence today. Ironically, the country that invented the papermaking process centuries ago is also the place that is expected to experience the highest growth within the industry in the years ahead. 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 China Post. In addition to household paper, China has a very large appetite for other kinds of paper.

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. The rise of China’s paper industry is nothing new, of course. 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. Throughout the years, Chinese consumers have been buying more toilet paper, facial tissues, sanitary napkins, diapers and paper towels. And as the number of Chinese “urbanites” (younger, better paid workers) continues to grow, demand for household paper products should follow, in our view.

Papermaking equipment manufacturer Metso Corp. sums up the trend succinctly: “Paper consumption [in China] is increasing in pace with the rise in the standard of living.” The same trends occurring in China—urbanization and increasing standards of living—are taking place in other developing Asian countries as well. RISI forecasts that total paper and board consumption in the Far East (excluding Japan) will be flat this year at 121 million metric tons and that it will increase to an estimated 153 million metric tons by 2013. If that projection is accurate, it would represent a compound annual growth rate of 6 percent—double the rate of estimated growth in global paper consumption over the same time frame.

The two authors work for Canaccord Adams (www.canaccordadams.com), a independent financial services firm based in Vancouver.