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Australasian Pulp & Paper in 2015: More pain but perhaps some gain

As we do annually, this column reviews how the pulp and paper industry in Australia and New Zealand has fared for the Australasian business fiscal year to 30 June.

Industry Edge has just released its annual Pulp & Paper Strategic review for 2015. It draws from official Australian and New Zealand Statistics and its own significant data base to provide an authoritative analysis of the Australasian industry. We thank Industry Edge for permission to use information from their review.

Australia's apparent net consumption of paper and paperboard fell for the seventh consecutive year, to just over 3.18 million metric tons. However, the decline was statistically insignificant at less than 2000 metric tons. More positively, domestic production increased by about 2.7% to just under 3.04 million metric tons. (This does not reflect the closure of the Shoalhaven specialty mill in July 2015.) Sales of domestic production increased nearly 5.8%. Imports and exports declined as a consequence of this increased domestic placement. Exports were marginally lower at just under 1.2 million tons but imports declined over 7.0% to about 1.33 million tons.

Newsprint consumption continued its trend toward apparent oblivion with annual demand down 9% to about 350,000 metric tons. This was marginally higher than local production but less than half of what it was as recently as 2006. Local production declined 15% due to Norske Skog, the sole producer of newsprint, transitioning capacity to manufacture LWC following the successful rebuild of its PM2 at the Boyer mill in Tasmania. Production of LWC increased by nearly 100,000 metric tons, which translated to corresponding growth in local sales and a decline in imports of about half the growth in local sales. Overall demand for mechanical based papers was only marginally greater than the previous year, at about 0.1%.

New Zealand, once the principle source of newsprint imports into Australia, with more than 200,000 metric tons annually in 2006, is now a minor supplier. Korea is the principle source of import supply with France and Indonesia following up at a distance. Imports from Korea and France are subject to anti-dumping investigations on the submission of Norske Skog. India continues to be the destination for most of the export tonnage and exports are growing.

Consumption of uncoated free sheet papers increased by a respectable 4.0%, but consumption of coated free sheet papers continued the downward trend of recent years. This grade declined about 13% to just under 250,000 metric tons, a shadow of the 424,000 metric tons consumed in 2008. Despite increased sales of domestically produced LWC, imports still make up more than two thirds of the printing and communications paper sector. Finland and Germany were the big losers in the displacement of imported LWC.

The raw statistics do not include the consequence of duties imposed on cut-size free sheet exports to the USA from Australian Paper (AP), Australia's only manufacturer of this product. AP has recovered a significant part of the Australian market to offset some of the opportunity lost in the USA. It seems they will also appeal the duties determined by the US Department of Commerce, although a favorable outcome will take some time to achieve, if indeed it can ever be achieved.

Demand for once lucrative tissue products continues to grow, apparently substantially, over the last year at just under 10%. This has been a modestly growing sector, with a 10-year average compound growth rate of less than 2%. Over the decade growth rates have been lumpy, but this may have had more to do with timing of import product reporting rather than fundamental surges in demand. Although imports continued to grow, sales of locally manufactured product also increased as has local production, up about 7.5%. This was still below 2007 levels when local production and sales peaked. As in the previous year, much of the improved showing stems from a more aggressive strategy by Asaleo Care, the company reconstructed from the wholly owned subsidiary of SCA Hygiene. China has been the main beneficiary of the surging imports, accounting for more than two thirds of the over 100,000 metric tons of imports. But Indonesia has surged back with about 20% of the import market.

The strategy by Asaleo Care may not be totally about repelling imports, but also about strengthening its market share ahead of the new ABC Tissues machine slated for startup during calendar 2016. This will likely take ABC installed capacity to the largest in the country ahead of current leader Kimberly-Clark, with an additional machine announced by ABC for 2017.

Packaging papers remain significantly the largest sector of the Australian industry, but apparent consumption has declined modestly by about 0.3% per annum over the last decade. Production improved by about 2.2% to just under 1.37 million metric tons in 2015, but this was well below the peak demand of nearly 1.55 million metric tons in 2007. Local production was higher at well over 2 million metric tons, up from 1.9 million metric tons in 2007. This increase reflected the increasing output from the new PM 9 at Orora's Botany mill, offsetting the capacity lost from closure of the Petrie Carton board mill. Imports also increased slightly as did exports.

Containerboard demand was up nearly 4% to just about 1.07 million metric tons. This was still below the peak of over 1.1 million tons in 2010. Kraftliner continues to grow most strongly, up over 7% in the period. Kraftliner production has plateaued and exports have stabilized at just over 500,000 metric tons annually. Imports are growing (up 26% in the last year) and now comprise over 20% of demand. Over 75% of demand is sourced from New Zealand, mainly for Carter Holt Harvey--now Oji Fibre Solutions--corrugated box operations in Australia. In return, more than 40,000 metric tons are exported in the other direction to feed Visy and Orora box plants. China is significantly the largest export market for Kraftliner but (in order) the USA, Philippines, Bangladesh and Spain are all significant markets. Currency depreciation has ensured that prices to most export destinations are reasonably attractive.

Despite the two years since the closure of the Petrie mill, carton board demand has remained subdued and even lower than in the previous year at just over 120,000 metric tons. This was far short of its peak of over 200,000 metric tons in 2007. The dynamics of this difference are still not obvious, as Petrie inventory will have been substantially or totally consumed by now. The difference may be partly structural with the decline in manufactured consumer products. But increasingly, may be due also to the significant growth in pre-converted packaging, much of which unsurprisingly originates in China, with Taiwan and Vietnam growing strongly. According to Pulp & Paper Edge, this sector has continued to grow and almost 50,000 metric tons were imported in 2014-15, much of it for the wine industry. More surprising is the accelerating rate of imported corrugated containers, again predominantly from China, which has reached about 30,000 metric tons annually.

Corrugating medium exports are also significant, at about 340,000 metric tons, with New Zealand and USA being the key destinations. Some of this supply to the USA will be for Visy operations but currency rates are fueling the opportunity.

New Zealand demand resumed more normal trends in contrast to unusually high growth in the previous year, recording a 2.2% increase overall to over 760,000 metric tons. Newsprint demand reversed the apparent growth of the previous year, falling about 6%. Nevertheless, New Zealanders consume 80% more newsprint per capita than Australians. The secret to this would be priceless to newspaper publishers around the world! Printing and communication papers also fell by 6%, having plateaued for the previous three years. Tissue consumption again grew strongly by 8.8% to record levels, consolidating a change in the habits of New Zealanders.

Consumption of packaging grades grew strongly at 7.5% year-on-year, also to record levels fueled by strong dairy products exports.

Production of the three product grades manufactured in New Zealand continues to fall; by 1.3% for packaging grades, 1.4% for newsprint and 8.3% for Tissue.

However it is sliced or diced, demand for paper and paperboard is structurally declining in Australia and New Zealand. Packaging and tissue consumption have growth potential but there will be a significant offset in newsprint and other printing and communication papers.

Fundamentally Australasia is a minnow in the sea of world demand, consuming just 1.2% of the total, and swims against very aggressive and growing Asian producers with excess capacity. Australia and New Zealand have maintained sustainable operations essentially through access to quality domestic fiber resources, which are significantly exported as paper or pulp. Even though these resources contribute substantially at a national level, it is likely that both countries will regret not having maximized the opportunity to create large world scale facilities to add value to the resources that are still available. After the fiasco of the Gunns Mill in Tasmania, it is difficult to envision any company with deep enough pockets or the appetite to do more than fine-tune existing assets. Perhaps, however, China will surprise yet again and decide that their need for pulp overrides their fixation with domestic manufacture. The downside may be that they export it back again as paperboard.

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