I and others in Fisher International have spent considerable time over the last 35 years tracking trends coming over the horizon and predicting where they will take the pulp and paper industry.
We have published some such thoughts in this column and in other vehicles over the years. I thought it would be interesting to make a few new predictions, with the idea of looking back on them in a few years to see how they turned out.
Of course, one needs to keep a healthy dose of skepticism when using predictions as they often turn out wrong. After all, economies, the industry, and life in general are way too complex to be fully understood, never mind in advance.
There are some famous missed predictions, like the Western Union internal memo from 1876 which said, "This 'telephone' has too many shortcomings to be seriously considered as a means of communication," or the Decca Recording Company’s take on the Beatles in 1962, "We don't like their sound, and guitar music is on the way out." These types of predictions were based on knee-jerk, emotional decisions that lacked the insight needed to inform them. And it’s no wonder that, as a result, they were misguided – to say the least!
Forward-looking thinking is critical for companies in all industries, and the pulp and paper industry is no different. The investments the industry has to make to sustain itself are large and take a long time to pay themselves back. One could argue that the industry’s greatest challenge is reliably predicting pulp and paper market conditions anywhere near as far out as new assets will last, or even for the length of time it takes for them to return the capital invested. Without at least modestly trustworthy insights into the future, investing in new paper making assets would be close to pure gambling.
Reliable, forward-looking insights are not those that are based in emotion, but rather those derived from the strategic use of business intelligence. Data must meet certain known minimum quality standards; it can be measured against them to define the reliability of conclusions it will produce. Based upon models that incorporate past trends, math and feedback loops, it must be combined with expert, impartial understanding to extrapolate them forward to draw real-world conclusions.
It is precisely these capabilities that our FisherSolve Next™ platform provides, and what has made Fisher International a preeminent thought leader in predictive analysis for our industry. What follows are some examples of how we have used business intelligence to successfully predict today’s state of the industry, as well as an extrapolation of these findings to predict future outcomes.
Long-Term BHKP Growth Forecast
Fifteen years ago, while bleached eucalyptus pulp was still relatively early in its life cycle, a Latin American producer asked us to predict how much new bleached hardwood kraft pulp (BHKP) capacity would be built through 2020. We started by extrapolating total BHKP demand using reasonable economic growth factors, long-term trends in paper usage, and how integrated versus non-integrated consumers of pulp would likely survive or fail. We concluded that there would be a need for a total of 79 million metric tonnes of bleached hardwood pulp – in both slurry form as used in integrated mills, and dried form for the market.
Today, I was surprised to find through a query in FisherSolve Next, the world’s capacity for internal and market BHKP is… 79 million metric tonnes! It may be a little larger by next year in 2020 but, in this case, extrapolation worked for us because we had complete and accurate global furnish consumption data, and a complete picture of global supply and production costs from which to start. Our model correctly accounted for the impact of new capacity on closures and softwood kraft substitution.
Figures 1 and 2 show the same analysis, produced fifteen years apart. In Figure 1, the prediction was that in 2020, 57% of global BHKP production would be concentrated in low-cost, fiber available regions such as Latin America and Asia Pacific. Next, Figure 2 shows the actual BHKP production capacity today.
Pulp Mill Construction and Exchange Rates
Several years ago, we noticed that a large majority of big pulp mills were built during periods when the host country’s currency was relatively weak. We wondered if it was a reliable pattern. Figures 3 and 4 illustrate how weak currencies appear to have selectively stimulated pulp mill construction in the 1980s and 2000s. (The same was also true in the 1990s.)
So, to predict where the next pulp mill investments will be, one could ask which countries today have plentiful wood and weaker currencies. The list includes Brazil, Russia, Chile, and Uruguay, all of which have announced major new pulp lines for construction in the next five years.
Finland, an exception to the rule, also plans new construction without the Euro being especially weak. Mozambique also meets both criteria and has had an on-again/off-again project on its books for a new pulp mill. It shouldn’t be a surprise to find that future pulp mills will be built where wood is plentiful and currency rates make the wood inexpensive.
Machine Rebuilds in North America and Asia
In the late 1990s, demand growth for communication papers started slowing in North America right about the time the region built a significant amount of new capacity. As it became clear there would be a shakeout, most paper companies froze capital spending at maintenance levels or less. Major machine builders dramatically reduced their presences in the region. Many people wondered if the equipment industry would ever recover.
In the mid-2000s, capital spending was still low. However, North America’s fleet of paper machines was rapidly aging compared to other regions where investment continued. We noticed that there had been a “baby boom”-like effect of paper machine capacity built in the early part of the second half of the 20th century with a peak in the mid-1960s. We wondered if there had been a wave of rebuilding those machines once they had reached a critical age.
In fact, data in FisherSolve Next suggests that rebuild volumes mirror new machine construction some 30 years later. Extending the cycle of new machine construction to the present age, we concluded that rebuilds might be slower around 2015 and the few years after, followed by another, smaller “boomlet” of rebuilding in the next five years. Rebuilds were indeed slow in the mid-decade and spiked up significantly starting in 2018. Barring a recession, one could expect an increase in rebuild activity in North America.
Another interesting prediction would be an estimate of the timing and volume of rebuilds China will experience on the very large amount of new capacity it installed over the last 15 years. Figure 5 shows the outcome we predicted a few years ago.
Globalization of Pulp and Paper
We at Fisher believe the pulp and paper industry is – finally – globalizing. There are some long-term drivers of globalization and some interesting potential implications. One such driver is the low cost of ocean freight. Before the newly widened Panama Canal was opened in 2016, ocean shipping companies could not keep up with demand. In reaction, too many shippers built too many ships and worse, they built them bigger in order to capitalize on the wider Canal.
The result? Today there is a glut of shipping capacity that makes transportation so inexpensive that the cost of shipping from coastal mills to trans-oceanic destinations can be lower than shipping to domestic customers by inland freight. This allows world class producers to compete everywhere.
Technology and capital favor globalization as they have caused world class assets, particularly pulp mills, to be larger and larger, requiring global market coverage. Other drivers include low-cost Chinese capital, slowing Chinese domestic growth, and a national aspiration for ownership of production outside China. Chinese regulators are both motivating and forcing foreign investment through a combination of restrictive OCC policies and low-cost capital. In the last several months, large Chinese producers have bought paper company assets in Europe and North America in order to both participate in local markets and ship goods back to China.
What effect will globalization have on the industry’s future? One implication is that exporting producers increasingly develop direct customer relationships globally rather than rely on opportunistic spot export sales as in the past. The trend may be more pronounced in North America than Europe, as the latter has had a tradition of exporting for longer than most North American segments. We see packaging producers in particular developing international channels. Once direct channels are developed, it is less likely that the industry will return to the old days of opportunistic exports, even when shipping costs increase again.
Another implication will be pressure towards consolidation. High-cost assets no longer have to compete only with other local mills. High-cost mills today are increasingly at-risk to low-cost foreign suppliers located anywhere in the world due to their scale advantages and low shipping costs. In fragmented markets, where most high-cost mills remain, this will cause bankruptcies among higher-cost producers where previously it was possible to survive.
Where will these trends be strong enough to cause true industry consolidation? Most of the world’s paper industry is still fragmented. See, for example, Figure 6 comparing the concentration of containerboard in each region. The only truly consolidated large markets are in North America so far.
This example used linerboard but just as well could have shown North American uncoated woodfree, coated papers, other packaging grades, newsprint, and even tissue.
A few predictions about consolidation: the global hardwood pulp market will have true consolidation within five or six years; this will have important implications not only for BHKP producers, but also their customers, non-integrated papermakers in particular. China’s box industry, including both containerboard and converting, will consolidate rapidly in the 2020s, resulting in a much smaller number of very large producers.
Implications will reverberate globally. Large Chinese producers will have to expand internationally to keep growing. The Chinese government will support their growth with policy and low-cost capital. They will become formidable local and global competitors.
In response, western containerboard companies will seek to grow through downstream integration and the use of technology, making it harder for foreign competitors to compete on a commoditized basis.
The pulp and paper industry’s suppliers of capital equipment, consumables, and services will continue to consolidate in response to the growth of their customers, although many segments already have done so. Some Chinese suppliers will ride on their large Chinese customers’ backs to expand internationally. It will be increasingly important for all suppliers to learn to serve customers in every part of the world.
We at Fisher believe that forward-looking thinking – perhaps the most interesting use of business intelligence – can be one of the best strategic investments you make. The speculations outlined in this article were made possible by the three pillars of good forward-looking thinking: a large data set that meets the minimum quality standards for strategic analysis, models that attempt to simulate how the industry actually works, and the experience to ask good questions, build reasonable models, and interpret the results.
I hope you’ve enjoyed the speculation. Time will tell how good it was. See you in five years.
About Fisher International, Inc.
Fisher International, by virtue of its deep expertise in the pulp and paper industry, provides insights, intelligence, benchmarking, and modeling across myriad scenarios. By arming companies with the knowledge that will help them gain a better understanding of their strengths and help identify weaknesses, Fisher is helping businesses stave off challenges and better position themselves for long-term growth.
Source: Fisher International