The National Association of Paper Merchants

Paper Price Outlook

NAPM Forecasts Further Price Increases for 2007

Ian George, President of , reflects on the current general market place for fine papers – made up of coated woodfree and uncoated woodfree qualities.

Improving the bottom line figures is essential for paper makers and merchants to enable them to invest in the future of their business and to be able to supply the growing demands of their customers.

March has seen leading papermakers and merchants implementing an increase of up to 7% in a much needed bid to boost profitability.  However the National Association of Paper Merchants is warning that further increases for 2007 cannot be ruled out as the inevitable consequences of the challenging manufacturing environment paper suppliers are operating in globally, combined with resulting consolidation and closure of UK and European mills. Merchants will have little to no control over these further increases predicted for the papermaking industry.

Such news will not be welcomed by many printers who are struggling to achieve pre-tax profits and are facing customers who are continually resisting the prices increases.  However, set against a continuing background of rising production costs, increasing global demand, reduced supply, poor financial performance and mill closures there would appear to be little alternative if the paper industry is to survive as few would argue that current levels of profitability are insufficient to sustain any real long-term investment.

General Background:

The fundamental problem is the in-balance of supply and demand in Europe combined with increasing costs.

The four largest European manufacturers of fine paper are UPM-Kymmene, Stora Enso, M-real and Sappi. In the 90’s these mill recorded good performance but have suffered with significantly lower profit levels in the early years of 2000, with most having suffered losses in 2004, 2005 and 2006.

  Key reasons for these declines have been:

Ø       structural over capacity in Europe – supply and demand balance

Ø       traditional markets having become mature

Ø       downward trends in real paper prices

Ø       rapidly increasing cost of production and materials.

Supply and Demand

Let us consider both the uncoated and coated woodfree markets.

Taking the uncoated paper market first – this is divided into cut size for office use and graphical paper.

1. Uncoated cut size consumption has continued to grow steadily year on year – which compensates for the reduction in the use of uncoated reels (continuous stationery) and uncoated sheets.

There has been no significant investment in Europe for some years and the new production in South America and the Far East is mainly being used to satisfy the rapidly increasing demand in their emerging economies. The balance between supply and demand of uncoated and cut size is currently very tight and will become tighter.

Many mills have seen closures, eight in total in the UK in 2006, representing 600,000 tonnes of capacity.  Recent UK closures included Fort William Arjo in Scotland, Edward Thompson – Sunderland in England and Sappi Nash England with European closures of Maresquel – International Paper in France, Kuusankoski – UPM in Finland. Further closures in 2007 will happen with Berghuizer – Stora Enso in Holland and Wifsta – M-real in Sweden.

In total Europe has seen a reduction of 2.5 million tonnes of capacity in the last 18 months with inevitable consequences of reduced global capacity.

The next increase in capacity is the new machine planned for construction at Portucel in Portugal but this will not come on stream until 2009.

2. Coated woodfree paper - the key four manufacturers, UPM-Kymmene, Stora Enso, M-real and Sappi, represent 60% of European production. The dramatic expansion of capacity at the end of the previous decade in Europe, and more recently in Asia, added enormous over-capacity, but this has now been followed by a period of capacity closure in North America and in Europe, and a lull in the construction of any new machines leading to a tighter balance of supply and demand.

The capacity closures in Europe have not so far been on the same scale as uncoated but recent announcements have been significant, such as from M-real, including 210,000 tonnes at Sittingbourne in England and 100,000 tonnes at Gohrsmuhle in Germany.

There are no new major machines coming online before 2009 and so the supply-demand balance will become tighter – having improved over the last 12 months.

Other factors and trends in the industry compounding the issues include:  

Ø       Traditional markets have matured, and so the expected growth to utilise the new capacity did not materialise, causing price pressure in the market hence a downward trend in real paper prices

Ø       Rapidly increasing manufacturing costs of production and materials over the last 2 years. Pulp prices have reached their highest level for 5 years with further increases expected in 2007. Dramatic increases in chemical costs such as coatings and bleaching also continuing to rise.

Not surprisingly the economic performance of these big groups has suffered. They have concentrated on streamlining operations and improving cost efficiencies, investing in the most competitive units and growing business. However these steps have not resolved the problem and inevitably the final step of closing uncompetitive capacity has occurred.

The future

There are some signs of a recovering market with improvement in the operating rates of coated paper machines and the immediate outlook is improved, reflected in the paper companies share prices.

However with mills still reporting poor financial performances and pulp and chemical prices set to increase, the overall outlook is that the industry must continue to restore acceptable margins to enable paper makers to invest in the future of their business and to be able to supply the growing needs of customers.  Paper Merchants also need the stability of acceptable margins, recognising that their real costs such as distribution, etc have also risen over the recent years.

Historically the industry has experienced violent swings in prices, which at the high end, undermined growth of the business and at the low end put severe pressure on papermakers and forced machine closures. The NAPM believes that it is essential, that the market should now see steady, measured price increases, with all parties working together to manage the inevitable in a stable and consistent way.