Australasian Pulp & Paper – 2012 in Review

Again we thank our good friends at Industry Edge for permission to reference information from their authoritative publication, Pulp & Paper Strategic review for 2012 which draws on Australian Bureau of Statistics (ABS) statistical data for 2011-2012 as well as its own significant data base to provide a comprehensive analysis of the Australasian industry.

In Australia apparent net consumption of paper and paperboard fell for the fifth year in a row, and locked in an average annual decline of 0.3% over the last decade. Year on year there was a significant 6% decline. The total consumption numbers reflect the continuing dismal underlying trends for the printing and communications sector in particular, which we will examine in more detail.

Total domestic production has been relatively steady over the decade, reflecting a mixture of machine closures, but also new capacity coming on line. Production fell about 45,000 metric tons in the last year to about 3.04 million metric tons, close to 90% of total consumption. These statistics reflect a significant excess of packaging paper capacity and a major deficit in capacity for printing and communications paper.

Key product classifications statistics show that Newsprint consumption plummeted, reversing what appeared to be a glimmer of hope a year before when consumption was recorded as marginally higher than for the previous year. What a difference a year makes and Australian consumption declined 17% year on year. It may well be that inventory adjustments masked a more gradual decline over two years but subsequent decisions by Norske Skog, the sole newsprint manufacturer in Australasia, confirm the magnitude of the decline. Norske Skog recently announced that they would be taking out of production one of the two machines at their Tasman Mill in New Zealand. At the same time, they will convert one of two machines at their Boyer Mill in Tasmania to manufacture coated mechanical papers. This will serve to balance current newsprint demand and provide opportunities in a market that has been holding up and growing. Coated mechanical papers are currently supplied entirely by imported paper and have grown strongly over the last decade. The capital investment at Boyer will be in the order of AS84 million but supported by over A$40 million in grants and loans from the State and Federal Governments who no doubt see a cash injection as a more palatable alternative to the unemployment consequences, which may have otherwise resulted.

Demand for printing and communication papers also tanked, falling by 5.5%, of which coated freesheet papers consumption fell more than 20%. Uncoated freesheet demand also declined locking in a trend of modest decline, which accelerated in the last year. This market is characterized by significant export and import tonnage so that only a little over 50% of the market is supplied by locally manufactured paper whereas domestic capacity could supply over 80% of the market.  This paradox highlights falling prices and a lack of profitability for all suppliers into the market. Much of the imports are as cut size reams, with China significantly increasing supply to now surpass imports from Indonesia, which however remains a significant supplier. In the export equation the USA is now significantly the major market for Australian made cut size paper!

The decline in coated freesheet demand probably reflects some product substitution by coated mechanical grades. There is now no local production of paper in this segment and Asian suppliers dominate. Korea is far and away the largest supplier in this segment but Chinese supply is growing and history would suggest will ramp up rapidly.

Authoritative forecasts for global demand for such papers indicate a gradually declining demand for printing and communication papers, excluding newsprint. The long term outlook for newsprint is bleak to say the least. There can be no doubt that communications systems such as tablets and smart phones will significantly impact growth prospects in developed economies for all communication papers with newsprint the first domino to fall, due to rapidly declining advertising support and diminishing readership. This decline may abate as publishers impose charges for access to on-line formats but it would be a brave forecaster to see a bright future for printed media.

The tissue business remains challenging, although apparent consumption rose about 5%. However, over the decade average consumption has been virtually static. Imports continue to grow and local manufacture declined marginally. Imports now represent more than one third of local consumption and are predominately from China, which supplies more than 60% of imports.

The packaging papers segment is significantly the largest and most stable segment of the paper and paperboard industry. Demand for packaging grades, however, continued a decline, falling by more than 4% and 0.7% annually over the decade. Consumption of just below 1.4 million metric tons is the lowest for a decade. Whilst severe floods contributed to decreased demand a general decline in manufacturing is significant and likely to be ongoing, particularly while the Australian Dollar makes it more attractive to import than manufacture locally.

Production declined slightly but exceeds 2 million metric tons. Exports continue to grow and are approaching 950,000 tpa, more than 50% of it being Kraft Liner. The new AMCOR containerboard machine in Sydney started up recently. Even with the consequent planned closure of the Fairfield mill in Melbourne in the next month, the new mill is likely to contribute to more export capacity in time.

On a tonnage basis, coated Cartonboard demand continues to be flat. Local consumption finished the decade where it started. Local production has been slowly declining as have exports. Imports from New Zealand have remained steady at the sustained level generated by the sale of CHH packaging to Australian interests with a supply contract from the CHH mill in Whakatane attached to the deal.

Across the Tasman Sea in New Zealand, total apparent paper and paperboard consumption declined by a little over 4% year on year to about 750,000 metric tons. Demand in all sectors other than packaging declined. Production of paper and paperboard in New Zealand declined at a somewhat greater rate and is set to decline significantly with the closure of PM2 at Tasman, which has a capacity of about 150,000 tpa.

In New Zealand tissue consumption, as recorded, declined more than 10% but over the decade it has been growing modestly.

The future demand for paper and paperboard in Australia and New Zealand is, like all forecasts, at the mercy of a fragile global economy. Australia in particular survived the Global Financial Crisis in relatively good shape, thanks mainly to buoyant demand for iron ore and coal during the period but also a significant financial surplus. The surplus has now been replaced by debt and prices for Australia’s mining products do not look as attractive as they once did. There is agreement that a strong Dollar that has resulted from this situation is not positive for either mining or manufacture. Having lost manufacturing capacity it is unlikely to return and the Chinese have found alternative suppliers of minerals and coal to keep prices depressed. The old adage that the trend is your friend suggests that at best we will see a continuation of flat growth in demand even though the economic growth may continue at the 3% annual growth that it has experienced over the last decade.

With the apparent demise of the Gunns pulp mill opportunity, there seems little potential – or appetite, to make a significant reinvestment let alone target growth in the industry beyond the prospect of rationalization and perhaps moving some capacity to higher value added grades as has been the case at Norske Skog’s Boyer Mill.

For New Zealand the opportunity rests, as it always fundamentally has, with export. But with the contraction of newsprint manufacture this option seems to have retreated and a viable option to exploit its significant softwood resource seems to be a bridge too far, at least in the foreseeable future.

For both Australia and New Zealand, the challenge to utilize the significant available fiber resources poses a real dilemma.  Both countries have significant forest resources but no clear strategy for maximizing value from them. Australia was once the largest supplier of woodchips to the international market but competition has seen prices fall sharply. Forest resources are being disposed of with increasing frequency because there is no clear (or profitable) market for the wood. Most of the forests established by the Management Investment Schemes are now owned by the banks and looking for buyers. The bruising lesson from the Gunns attempt to build a world scale pulp mill is unlikely to create a rush of buyers anytime soon.