Annually at about this time of the year we look back at how the pulp and paper industry in Australia and New Zealand has fared for the business fiscal year, which in Australasia is the year to June 30.
Industry Edge has just released its annual publication, Pulp & Paper Strategic review for 2014, drawing on statistical data from the Australian Bureau of Statistics and New Zealand Department of Statistics and its own significant data base to provide an authoritative analysis of the Australasian industry. We thank Industry Edge for permission to reference information from their review.
Australia's apparent net consumption of paper and paperboard fell again for the sixth consecutive year, and quite significantly, with demand down by more than 100,000 metric tons (more than 3%) to less than 3.2 million metric tons. This is a far cry from the peak market of well over 3.9 million metric tons in 2008. Behind the headline statistics at least part of the decline over the past year is probably an aberration related to the closure of the Petrie Cartonboard mill, something I will try to explain elsewhere in this review.
With the closure of the Petrie Mill, total domestic production continued its downward spiral and for the first time in over a decade fell below 3 million metric tons. Exports continue to increase (by about 4%) and imports actually decreased slightly.
Newsprint consumption continued its all too familiar trend with annual demand now below 400,000 metric tons, almost in balance with local production but not much more than half of what it was as recently as 2006. At least the rate of decline eased and perhaps optimistically the market may be finding a new sustainable level - or not! Exports have increased about 15% and imports have declined.
New Zealand, once the principle source of imports (more than 200,000 metric tons annually in 2006) is now almost insignificant in the total. Korea is the principle source of import supply with France and Indonesia following up at a distance. India continues to be the destination for most of the export tonnage and growing.
There is some good news for Norske Skog, the sole producer of newsprint, with the successful rebuild of PM2 at Boyer mill to manufacture LWC. This not only helps balance decreased newsprint demand but feeds what is actually a growing market. This was the one real positive in the demand for printing and communication paper, which continued downwards although at a lower rate. Free sheets overall declined about 1.5% but included some measurable recovery in the coated sector. So it was also for LWC, which has averaged a more than 3% annualized growth over the last decade against a nearly 2% decline in uncoated grades, most significantly over the last five years. In fact consumption of LWC grew an impressive 9% last year. By international standards the 140,000 metric ton annual capacity of LWC grades may seem low but PM2 is optimized to manufacture basis weights below 65 gsm, which is where there is most growth.
The unspoken issue for Norske Skog is what happens if (possibly when) daily newspapers disappear and when that day will arrive. It is interesting that the decade covered by the Industry Edge review coincides with the evolution of Facebook, which arguably fundamentally changed the way we communicate, with essentially zero users at its inception in 2004 and something in the order of 1.2 billion and growing by its tenth anniversary this year. Internet users have tripled from less than a billion. Annual smart phone sales have grown from about 50 million units to more than 700 million. Tablets were in less than 10% of households in 2004 and now probably in more than 50% with more than 50% of US tablet users accessing news via their tablets. Newspapers need advertising to sustain publication. Advertising follows readers and is increasingly moving to the digital space, with ominous implications for newspapers.
Demand for tissue products continues to grow, albeit almost glacially. The big difference in the last year is the apparent success of a fight back against imports, which supplied about 36% of demand. This is significant but a huge turnaround from the nearly 50% of supply in the previous year. Partly this reflects increased capacity from ABC Tissues but may also signal a more aggressive strategy by Asaleo Care, the reconstructed company previously operated as a wholly owned subsidiary of SCA Hygiene.
Although the packaging papers segment remains significantly the largest and most durable of the Australian industry the statistics showed an ostensible downward trend in the year past. Lower overall production was expected with the closure of Petrie Mill, which had manufactured about 130,000 metric tons of Cartonboard annually. However the actual overall decline was only about 30,000 metric tons. Exports increased by a similar amount and imports declined about 15,000 metric tons. The wash out was a 6% lower apparent consumption, down to just under 1.34 million metric tons. So what actually happened?
Containerboard production was up about 1%, still averaging just a little more than 1 million metric tons annually. Yes demand for some of the other packing grades, such as sack kraft, did fall and logic would have suggested a large increase in imports to replace the locally produced Cartonboard. The collective wisdom of people in the industry is that the stockpile of Cartonboard in the supply chain system and board imported in anticipation of the Petrie mill closure was significantly greater than estimated and this inventory been worked off prior to ramping up imports that will be required for future supply. This conjecture is supported by the apparent fall in net consumption of about 50,000 metric tons of Cartonboard.
If this scenario was the case, actual overall demand probably did not actually change measurably. Whatever the final number, it is clear that the game has changed in one important respect with the significant growth in imports of pre-converted packaging. According to Pulp & Paper Edge, this sector has grown at around 8% pa over the last 5 years to nearly 100,000 mtpa, most significantly in folding cartons and the demise of domestic Cartonboard production may accelerate that trend.
New Zealand seems to exist in a parallel universe with overall demand up by about 4.4%. Even newsprint demand was higher than the previous year (which is ironical given that newsprint production declined to just over a third of what it was 10 years ago). Like all statistics it is sometimes about the timing and we can be pretty sure that tissue demand did not increase by the reported 45%, which is what the raw numbers would have us believe. As in Australia supply chain inventories seem to be the culprit.
Production of the three grades made in New Zealand (Packaging, newsprint and tissue) has fallen primarily due to the closure of a second newsprint machine at the Norske Skog mill. Tissue and packaging grades were just slightly above the previous year. The coated Cartonboard mill owned by Reynolds Group Holdings is ultimately a beneficiary of the closure of the Petrie Mill in Australia and sales did increase significantly but only back to historical levels.
The next year is likely to prove as interesting as the year that was, with significant changes in the Australasian industry. The rebuilt Boyer PM2 will bolster prospects of survival for Norske Skog's Australian operations but the future of the New Zealand operations is perhaps not as assured in the long term. Australasia has become something of a satellite to Japan. Nippon has had a significant position as a producer of packaging paper and communication papers for some years in Australia and Oji has now assumed ownership of what was most of the CHH business in New Zealand.
Will the historical contest between Nippon and Oji in Japan translate to this region? The new containerboard mill built by Amcor (but now operated by its spinoff company Orora) does underpin containerboard capability in Australia. This mill and the Kraft liner mill operated by Visy Industries are world class facilities that provide a good domestic base and significant export opportunities.
With the former Amcor packaging assets now a priority business of the spun-off Orora, a more determined defense of its market share might be anticipated at the same time that Oji will be looking to maximize the return on its investment in the Australasian packaging sector. Visy Industries will not readily surrender their market leadership so the scene looks set for an interesting year ahead.