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Uncoated Freesheet in Freefall

Australia manufactures about 0.6% of the world's uncoated freesheet (UFS) paper, an amount almost insignificant in the more than 53 million metric tons globally consumed each year. It was therefore surprising to see Australian Paper (owned by Nippon Paper) named and shamed as one of the companies accused of dumping into the US market. It is also a matter of some irony since Australian Paper had filed an ultimately unsuccessful action with the appropriate Australian federal authorities accusing the very same co-defendants in the US action of dumping into Australia! In fact it is looking toward re-launching that action.

So what are the facts of the matter? In January this year The United Steelworkers and four U.S. paper manufacturers (Domtar, PCA, Finch Paper, and P.H. Glatfelter) announced that they had filed anti-dumping petitions with the U.S. Department of Commerce and the U.S. International Trade Commission (ITC). Targets of the complaints were what the petitioners said were unfairly priced imports of certain types of uncoated paper sheets from China, Indonesia, Brazil, Portugal and Australia. The plaintiffs also filed countervailing duty petitions against subsidized imports from China and Indonesia. The absence of International Paper (the second largest manufacturer of UFS in the USA) from the list of companies bringing the action might seem surprising. Some industry commentators ascribed this to the fact that one of the identified suppliers of allegedly dumped products is International Paper Brazil. That said, it has been reported that IP merely tranships this product through the USA and does not sell it domestically.

The basis of the complaint was that imports of these products from the five identified countries increased more than 44 percent from 2011 to 2013 and another 40 percent from January-September 2013 to January-September 2014. The increases came despite declining U.S. demand over that period. In their January 2015 report on Printing and Writing Statistics, the American Forest & Paper Association notes that imports of UFS increased year-over-year in December for the fourteenth consecutive month and finished up 20 percent for the year compared to 2013. Imports into the USA from Asia seem to be the component that has been ramping up. Presumably, imports from more traditional sources (such as Portugal) have responded to hold onto their long term market share. In any event, an affirmative vote by the U.S. ITC has signaled that there is a reasonable indication that imports are injuring or threatening injury to the domestic industry and paper workers' jobs. Accordingly, the petition will be investigated.

Looking at US import statistics over a number of years, it seems that UFS imports from "traditional" sources had not actually changed a lot through the end of 2013. But it seems the targeted countries have increased their sales and that is certainly so for Australian Paper. As noted earlier, imports did indeed go into overdrive in 2014, especially in the cut-size sector. According to reports attributed to the PPPC, imports accounted for 12% of the market in 2014 against 8.5% in the previous year. They singled out Indonesia for special mention (a threefold increase).

The dilemma faced by the USA and Australia is that while the paperless office may not have finally arrived, there is a definite trend in that direction. Australia has seen its apparent consumption of freesheet grades fall by some 25% over the last decade, to just under 350,000 metric tons annually. In the USA the market has declined more significantly over the decade to 8.25 million metric tons, from about 14 million metric tons annually.

The problem for the USA and Australia is that other countries want more of that declining market. In Australia, domestic production has declined in proportion to demand but imports make up a greater share of domestic demand and now represent about 57% of sales. The net result of all of this is that Australia exports about half of its production - around 150,000 tpa. The largest component of both imported product and exported product is cut-size sheets. And here is where it gets interesting: Australia's largest export market is the USA. In fiscal year 2014 about 67,000 tpa of Australian cut size sheets found their way into homes and offices of the USA, a seven fold increase since 2011. About 25,000 tons of other freesheet products also were exported to the USA.

The USA imports about the same as it exports (a bit over a million tons annually) so the Australian component, while significant, is less than 10% of the total. But it is increasing and, with the depreciation of the Australian dollar, has the potential to become more significant.

The reality is that there are a number of countries where UFS production is geared to export. Of the more than 53 million metric tons of UFS manufactured globally each year, about 15 million tons is exported somewhere. The largest exporters are Indonesia (about 2.3 million tpa), Portugal (1.5 million tpa), China (1.3 million tpa), Brazil (0.9 million tpa) and Thailand (0.5 million tpa). China's internal demand is large and growing, but as in much of the Chinese industry, demand always seems to lag capacity and what is not consumed domestically is exported. The situation is more complicated than the simple statistics, since there is a strong commercial nexus between Indonesia and China in freesheet manufacture. Freesheet manufacture in Indonesia is substantially in the hands of two companies - APP and APRIL. These two companies are also owners of significant freesheet capacity in China.

In 2011, confidentiality restrictions were imposed to prevent disclosure of the details of freesheet paper exports from Indonesia and China to Australia. Industry Edge, which provides analysis of Australian statistics, has probed behind the available information. In the decade to 2014 the combined Indonesian and Chinese tonnage of cut size sheets has increased by 27% (to well over 100,000 tpa) but the Indonesian component has declined to 35% from 68%. The step change coincides with the increase in Indonesian tonnage sent to the USA.

The bottom line is that mature markets are under attack from imported products and in return have to export an equivalent quantity since they have sufficient manufacturing capacity to satisfy all of their domestic demand. We know where surplus Australian production is going (much of it to the USA) and US production is going to markets where local production is deficient and other imports are being displaced. In recent years there has been "exchange" of tonnage between the USA and Canada (presumably capacity and freight optimization) and Latin America (particularly Mexico) has been the main market with significant tonnage going also to Europe. And so the cycle continues.

Whatever the merits of the claims made by the US manufacturers and Australian Paper in Australia, the reality is that that demand for this type of paper is declining faster than the rate at which capacity is being adjusted. It is being exacerbated by new capacity continuing to come on line, particularly in Asia and additional new capacity in the pipe line.

Perhaps as a sign of the desperation that prevails and certainly to reinforce it, Australian Paper recently confirmed that its 60-year-old specialty paper mill at Shoalhaven (south of Sydney) will close permanently this year. OK, it's a small mill and the closure announcement was anticipated. The markets for products like check paper and other security papers are shrinking radically. The chilling announcement from Australian Paper that followed soon after announcing the closure of Shoalhaven caused real reverberations. The thrust of the announcement was that, after four years of losses at their Maryvale Mill in the State of Victoria, the viability of the mill is in question unless significant changes can be made to ensure its competitiveness. This is the mill that manufactures all of the uncoated freesheet,as well as bag papers, sack paper and linerboard. Now, it is also true that this announcement was made as prelude to bargaining negotiations, but internal announcements at the mill also state unequivocally that there will be many fewer employees by the end of the year.

If the U.S. antidumping petition is successful and the action in Australia continues to be unsuccessful, there may be many fewer employees at Maryvale than even the most pessimistic outlook would suggest.

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