Recently, I attended the 2015 Australasian Paper Markets Outlook Forum where one of the keynote speakers was Martin Glass from EMGE & Co. His is one the foremost global consulting companies in the field of graphic and communication papers. His message was powerful.
If we think the rate of change over the last decade has been rapid, hold onto your hats for the next decade. In 2013 the amount of digital data created annually was 4.4 Zettabytes - and yes I had to look up the definition of a Zettabyte (a trillion Gigabytes). By 2020 this will increase tenfold to 44 Zettabytes, driven by consumer expectation that everything is available, everywhere, all the time! Mobile internet traffic in the same seven year span will increase 29 times, a 60% per year growth rate. And the advertising money will follow the trend. In the last 15 years, print advertising has fallen from nearly 60% of total expenditures to half of that and all the rest has migrated to "the Internet."
In case the reader is about to fast track an exit from the paper industry, there is some good news - or perhaps more accurately, less bad news. It is true that world printing and writing paper demand is projected to continue its decline, but a little less precipitously than it has done. From 2007-2015 the decline has been about 2% per year. Over the next five years the decline is estimated to be about 1.5% annually, but that statistic masks growth in developing countries and larger declines in traditional markets.
At the same Forum, Sappi presented some stark statistics. In the period from 2007 to 2014, the European market suffered declines in consumption of 29% for newsprint, 29% for LWC and 31% for coated freesheet. Those small annual percentage declines certainly add up to significant numbers over time. World demand for printing and writing grades peaked at 105 million metric tons in 2007and by 2019 will have declined by 20 million metric tons. From now to 2019, forecast demand in North America will decline by 4.7% yearly and in Europe by 3.9%. China's demand will grow by 2.4% per year, but even in China there is a shift away from newsprint manufacture to other graphic grades, despite a stagnant market for uncoated grades in 2014. Demand for mechanical-based papers will decline much more rapidly than for freesheet (3.2% per years vs. 0.3%). According to the Pulp and Paper Products Council, coated paper demand in North America declined 4.7% in the first half of 2015, following declines of 3.4% and 4.3% in 2014 and 2013, respectively. Newsprint demand continues to fall dramatically - US shipments down 16.4% in this year to July. The demand for graphic grades is not being helped by the strengthening of the US dollar.
In my PaperMoney article a few months ago, I postulated that this situation was evidence of a seismic shift in the manufacturing center of gravity for paper, in which a declining market in the USA and other developed countries was being targeted by Asian countries that had built capacity ahead of expected local demand. The slowdown in the Chinese economy is exacerbating the overcapacity in China and causing significant grief in the USA as manufacturers struggle to implement an orderly realignment of domestic capacity. Accordingly Verso recently announced that it would trim production capacity by 430,000 tons of coated paper and 130,000 tons of dry market pulp.
A recent Memphis newspaper commentary noted Verso Corp.'s stock price has fallen to 25 cents per share from $3.43 at the end of December, "a fall so steep it's like an obituary for the Memphis paper maker. In an era when catalogs and magazines are moving online, Verso lives on a lifeline from its lenders after losing nearly $700 million over the last five years". While all this is going on, the acquisition by Verso of rival company NewPage, is being challenged with "public interest" hearings about whether the merger should be allowed, in response to a Union legal action appealing the acquisition. Will there in fact be anything left to challenge?
In the meantime, following hot on the heels of duties imposed on imports of Canadian super-calendered paper to the USA (on petition from Verso and Madison Paper), the plight of uncoated freesheet cut-size paper manufacturers in the USA has received significant relief from the US Department of Commerce (DOC) by its preliminary determination of anti-dumping duties (ADD) just announced. These are separate from, but also additional to, countervailing duties (CVD) imposed earlier. These findings reflect the tougher rules recently signed into law under the Trade Preferences Extension Act of 2015, which, among many significant changes, prohibits the US International Trade Commission (ITC) from making a finding of "no injury" merely because an industry is profitable. The bottom line is that the combined duties will make the import of paper from Australia, Brazil, China and Indonesia unsustainable. The final determination will not be made until early 2016 and requires a confirming decision by the ITC, but duties are payable immediately. On the face of it there may be some unintended consequences. According to RISI the decision affects more than 900,000 tons of import, which is almost a quarter of the market demand. RISI believes that less than half of this shortfall could be supplied domestically in the near term due to cut-size sheeting capacity restrictions. But it does promise price support for local producers and at least a temporary lull in the need for more mill closures.
The quantum of the duties imposed was significantly larger than might have been expected from any analysis of inter-country price differentials, prompting speculation that the duties will not be confirmed at the interim levels by the ITC. Ultimately however, the DOC decision may actually serve to accelerate the decline in US production as artificial support of prices in an oversupplied global market must inevitably be unsustainable.
European mills are also under pressure. Aylesford and Tullis-Russel have collapsed, UPM and Arjowiggins have announced mill closures and the industry is looking to ramp up prices. Metsa has converted a graphics machine to containerboard production, as have other manufacturers. This may help to stem the prospect of diverting European exports from traditional markets to the USA as the displaced tonnage resulting from the DOC decisions seeks to find an alternative outlet in Europe.
But Martin Glass says that not all the news is bad. There are a lot of digital "pure play" publications (such as The Huffington Post) and much of the traditional media is migrating into the digital space, particularly newspapers. However some digital publications are also backing into print and some are working in both spaces. Perhaps the most interesting publishing phenomenon in recent years, which has an Australian connection, illustrates the point. In 2011 The Writer's Coffee Shop, a boutique Australia-based e-book publisher published Fifty Shades of Grey -- and demand went viral as an e-book with a print on demand option and then quickly became a paperback before being published as a hard back, the very antithesis of traditional publishing. Although the book and its successors have had significant e-book sales, the printed versions have been in huge demand, representing more than half of the 125 million volumes sold. This column makes no comment on the literary merit of the publications and simply reports the facts. RISI reports that the digital share of US book sales appears to have stabilized at 21%. On the other hand they were negligible until the Kindle electronic reader was released in 2007.
Martin Glass calls this merging of electronic and hard copy the "digital whirlpool". Research shows that users not only want still to be able to buy traditional books but also want to be able to access mobile printing and the means to do this is going to be a big business opportunity for someone. Digital printing is the way of the future it seems.
So perhaps we are not quite at the end of the paper world as we know it but it is hard to be optimistic about it. Think about this - since 2000 North American consumption of UFS has essentially halved and newsprint consumption has fallen by 70%. These sectors may not be dead but certainly in the case of newsprint the obituaries are already being written.