The European paper market that has entered a shuffled state
Paper production is always about percentages and judgments. If the capacity can be kept above 90% (as long as the product produced can be sold), paper companies can make a profit. On the other hand, if capacity utilization declines due to falling demand, the industry can quickly become unprofitable. The paper machine, equivalent to an oil tanker, is a huge asset with a high efficiency of work, but still needs to be paid when not working.
Demand for printing paper in Europe is widely believed to have been slowly but steadily declining for most of this century since the 2008 financial crisis, leaving a growing number of "tankers" at sub-optimal levels of utilization. A large number of paper machines have switched to producing paper for processing corrugated cardboard, labels and folding cartons, which are expanding compared to printing paper.
The COVID-19 pandemic and its aftermath have added to the chaos in the overall paper market. During the epidemic lockdown, paper demand plummeted and production stopped, with paper companies reporting a 30% -40% drop in revenue. But as the economy began to open up, demand surged to meet the backlog of products that could not be supplied during the epidemic. Prices rose rapidly as demand outstripped supply, which led to shortages across Europe in the first half of 2022, exacerbated by strike action in Finland.
As the idea of on-demand supply collapsed, printers and traders filled up all the storage space they could find, so as paper demand leveled off and excess paper appeared in the supply chain, so did factory demand. That was the case this spring, causing paper mills to shut down for maintenance rather than pumping out products that might not be needed.
The new normal has not yet affected the paper industry. The question is when will supply and demand reach some kind of long-term equilibrium? Consultants and analysts at RISI Consulting said the impact of the epidemic will accelerate the decline in paper demand across Europe, with coated paper bearing the brunt.
This is likely because demand for newsprint, gravure and high-capacity web offset paper has already been hit hard. As a result, RISI no longer provides price tracking information for UK gravure paper. Its analysis of what is likely to happen over the next few years leaves paper producers with two options - either close factories, as ArjoWiggins capacity did last year, or shift production from drawing paper to more in-demand alternatives.
Where this is easy to do, however, conversion is already underway. The future viability of this approach depends largely on the energy mix and source. If renewable energy or on-site power generation is available, its viability is much greater than burning oil for power. Either way, the structural decline will continue.
Scandinavian paper groups have been leading the transition from drawing paper production to packaging paper. SCA has phased out almost all printing paper production. By 2025, it will no longer produce printing paper at all, a dramatic change from the 1.80 million tonnes produced in 2010. Instead, it has invested in machines for pulp production and corrugated paper production. The world's largest kraft machine, with an annual capacity of 750,000 tonnes, started production in Obara in October. Consumption in Europe is expected to exceed capacity by 900,000 tonnes by 2028, so investment is needed to boost pulp production for this material. Growth in home shopping, small households and differentiated products is creating this demand.
Stora Enso is not behind other Swedish competitors in converting its assets from printing paper to other uses. These assets include large tracts of forest, which can be converted into construction wood, furniture, and even fuel and clothing, rather than paper. This is in stark contrast to paper companies in Italy, France and Germany, which do not own the forests that produce the pulp they use. A prominent exception is Navigator in Portugal, which owns eucalyptus forests and power generation facilities for the production of uncoated paper.
Back in Scandinavia, Stora Enso is about to exit paper production. The company has sold three of its remaining five plants to the company that owns Lidl Supermarket, the Maxson plant that makes SC gravure paper, thus securing the supply of key raw materials. A machine in Oulu, which used to produce 1.30 million tonnes of coated paper a year, will now be converted to produce paperboard. "We see growth potential for high-quality packaging materials," the company said. "Paper demand in Europe has been declining for more than a decade and paper is no longer a strategic growth area for the group," it said in its annual report.
Its other former paper mill in Langebrugge, Belgium, which previously produced newsprint, will be converted to produce corrugated paper for the recently acquired De Jong packaging. The transition is already underway in the UK, with UPM's Shorten plant producing recycled newsprint turned into a corrugated paper mill owned by Turkey's Eren Paper. The company has announced plans to produce 750,000 tons of cardboard a year, 110,000 tons of corrugated paper a year, and 210,000 tons of household paper products a year.
UPM remains strong in communications paper, and while investing in packaging and labelling, production of graphic art paper has not been discontinued, but that doesn't mean it ignores structural changes: by the end of the year, for example, it will Stop newsprint production. Investments are focused on improving energy efficiency and production efficiency, not increasing production itself.
Arctic Paper is a very different business in Scandinavia, with only two pulp mills and three paper mills producing more specialty paper. The company recognizes that it has benefited from capacity closures by competitors, with its paper demand growing by 12% in 2021. This figure pales in comparison to the 200% sales growth in the packaging industry, noting that demand for fibers is rising as plastics will gradually withdraw from the market. It is investing in the use of molded fibers for packaging applications, and is not the only company in the business.
Italian paper group Fortegni has formed a joint venture with a start-up company, Tecnoform, and has established a division dedicated to innovative applications of pulp and paper.
If coated paper falls into the eye of a hurricane as demand falls, then Sappi will lose more than most companies. When it first came to Europe, the outlook was very different, and its strategy was to create the world's largest coated paper company, which it has achieved in Europe at least through acquisitions and investments. To celebrate this, it held a global design and printing competition and held a grand awards ceremony. Now, it is also selling or trying to sell unnecessary assets and converting others into higher-value packaging products. The company had an agreement to sell its Maastricht and Stockstadt plants to investment group Aurelius, but that agreement has been cancelled.
Investing in packaging and specialty paper is a strategic priority, which has led to the conversion of machines from glue-free coated paper to a certain packaging grade. One of its machines at its Somerset plant in the US will produce cardboard instead of CWF, increasing production from 240,000 tonnes per year to 470,000 tonnes. Its large Glatkorn plant in Austria, once the largest coated paper plant in Europe, started producing label paper in 2021, and further investments this year have increased production of paper suitable for wet glue labels such as beer bottles. Despite this, Sappi retains capacity of more than 3 million tonnes of CWF paper per year, as well as label and specialty paper.
The Lecta Group follows the same trajectory as the Perigord plant, using one machine for the production of label paper. Lecta said it is the leading producer of coated double adhesive paper in southern Europe, and tomorrow the group will mainly produce specialty paper, namely labels, cardboard and thermal paper for car park machines and supermarkets. In the short term, it will choose to temporarily suspend production while the destocking activity is underway to bring production in line with demand. Shipments in the fourth quarter of last year were 705,000 tonnes, compared with 1,097,000 tonnes in the same period a year earlier. It is said to be a "sudden and brutal drop in demand".
Burgo has paper mills across Italy, including one in Belgium, producing various grades of paper. Production of coated double-adhesive paper stabilized last year, while demand for uncoated paper fell. The company sold the Verzolo plant, which had been converted into wrapping paper production, to the Smurphy Capa Group, while launching a larger volume of mechanical-grade products and Burgo Evo (its inkjet-optimized coated paper).
The Mondi Group is also transforming, investing in the growth of the packaging market, whether it is corrugated paper, flexible packaging with barrier coatings, sacks and luxury packaging. This recently affected the Neusidler plant in Austria, where a paper machine was shut down and the processing division was realigned as production shifted from coloured uncoated paper to graphic paper and luxury wrapping paper.
Portugal's Navigator, the flagship of the country's industrial base with forests, power production, and pulp and paper mills, has also emphasized that it produces kraft paper materials for e-commerce applications, rather than non-coated paper, which accounts for 72% of its paper production, and is declining.
This is a major correction for the European paper industry, which will create shortages at certain levels amid supply and demand imbalances and make price forecasts more challenging than they were a few years ago.