Paper production has always been about percentages and judgement calls. If capacity can be kept above a figure in excess of 90% – provided what is produced can be sold – there are profits for the paper companies. If, on the other hand, capacity usage falls because the demand is in decline, the industry quickly becomes unprofitable. The paper machine is the oil tanker of the printing industry, a huge asset that when working is highly effective, but which still needs to be paid for when not in operation.
As it is accepted that demand for graphic paper is in Europe has been in a slow but steady decline for most of the current century, certainly since the 2008 financial crisis, more and more of those oil tankers are in sub optimal utilisation levels. A good number have been converted to produce corrugated boards, labels and folding cartons, sectors which in contrast to graphic papers are expanding.
The situation has been made more confusing by pandemic and its aftermath. During the lockdowns, demand for paper collapsed, likewise production ceased. Paper companies reported revenues falling by 30-40%. But as economies began to open up, demand shot up to satisfy a backlog for products that could not be supplied during the pandemic. Prices rose rapidly as demand was greater than supply and this tipped into the shortages experienced across Europe in the first part of 2022, exacerbated by strike action in Finland. As the idea of supply on demand collapse, printers and merchants filled whatever storage they could find, so that as demand levelled off there was excess paper in the supply chain and demand at the mills evaporated. This has been the situation this spring, leading to paper mills taking downtime for maintenance rather than pump out what could be unwanted products.
The new normal has not yet reached the paper production sector. And the question is at what point will supply and demand come into some kind of long term balance? According to consultants and analysts at consultancy Risi, the effect of the pandemic will be to accelerate the decline in paper demand across Europe, with coated paper taking the brunt of this.
This might well be because demand for newsprint, gravure and high volume web offset papers has already been devastated. As a consequence Risi is no longer providing price tracking information for gravure papers in the UK. Its analysis of what might happen in the next few years leaves paper producers with two choices: either close the mill, as happened with ArjoWiggins capacity last year, or convert production from graphic paper to an alternative that is more in demand. However, where this is easy to do, the conversion is already underway. Much will depend on energy mix and source in the future viability of this approach. If there is access to renewable energy, or onsite generation, the feasibility is much greater than if powered by burning oil. Either way, the structural decline will continue.
Scandinavian groups have been leading the way to converting from graphic paper production to packaging grades. SCA has already eliminated almost all graphic paper production. By 2025 it will be producing no graphic paper at all, a huge change from the 1.8 million tonnes produced in 2010. Instead it has invested in pulp production and machines for corrugated boards. The world’s largest kraftliner machine is the 750,000tpa capacity machine that began production at Obbala in October. There is investment to boost production of the type of pulp for this material driven by projections that European consumption will be 900,000 tonnes above capacity until 2028.
The growth in home shopping, smaller households and differentiated products is creating this demand.
Stora Enso is not far behind its Swedish rival in converting from graphic papers to alternative uses for its assets. Those assets include vast tracts of forest that can be turned into timber for construction, furniture, even fuels and clothing rather than paper. This is a contrast to paper companies from Italy, France and Germany which do not own the forests that produce the pulp that they use. The stand out exception is the Navigator Company in Portugal which owns the eucalyptus forests and the electricity generation that leads to uncoated papers.
Back in Scandinavia, Stora Enso is on course to exit paper production. It has sold three of its remaining five sites, the Maxam mill which produces SC gravure papers to the company that owns Lidl supermarkets, thus securing supply of a key raw material. One of the machines at Oulu, which used to produced 1.3 million tonnes a year of woodfree coated papers, will be converted to produce carton boards. “We see growth potential for high quality packaging material,” the company says. It has swallowed up what was left of a paper division which had produced 29% of revenues and was its largest division. “Paper demand in Europe has declined for over a decade and paper is no longer a strategic growth area for the group,” the company states in its annual report.
Another former paper mill at Langerbrugge in Belgium, which produced newsprint, will be converted to produced corrugated boards to be used by recent acquisition De Jong Packaging. This sort of conversion has already taken place in the UK where UPM’s Shotton mill making recycled newsprint became a corrugated plant under the ownership of Eren Paper from Turkey. It has announced plans to produce 750,000tpa of container boards, converting 110,000tpa into corrugated board, as well as 210,000tpa of tissue products.
UPM remains strong in communication papers and while investing in packaging and labels, graphic arts is not being dismantled. This does not mean it is ignoring structural changes: by the end of this year, it will have ceased newsprint production for example. Investments focus on improving energy efficiency and boosting production efficiency rather than increasing production per se.
Arctic Paper, while in Scandinavia, is a very different business, with just two pulp mills and three paper mills producing more specialist papers. It recognises that it has benefited from capacity closures by rivals, boosting demand for its papers by 12% in 2021. This is dwarfed by a 200% increase in sales from the packaging sector, noting that demand for fibre is rising as plastic falls out of favour. It is investing in the use of moulded fibres for packaging applications, and is not alone in this venture.
Italian paper group Fedrigoni has a joint venture with a start up company Tecnoform and a unit working on innovative applications for pulp and paper.
If coated paper is in eye of hurricane as demand drops away, then Sappi has more to lose than most. When it first came to Europe the outlook was very different and the strategy was to create the largest coated paper company in the world, making the acquisitions and investments to make this possible in Europe at least. It celebrated this with a global design and print competition with lavish award ceremonies. Now it too is selling, or try to sell, unnecessary assets and converting others to higher value packaging products. It had struck a deal to sell its Maastricht and Stockstadt mills to investment group Aurelius, but this has collapsed.
It is a strategic priority to invest in packaging and speciality, which is resulting in machine conversions from woodfree coated papers to packaging grades of some kind. A machine at the Somerset Mill in the US will produce carton board instead of CWF, increasing output from 240,000tpa to 470,000tpa. The huge Gratkorn mill in Austria, once the largest in Europe for coated papers, started to produce label papers in 2021 and further investment this year increases output of paper suitable for wet glue labels used on beer bottles for example. Nevertheless Sappi retains more than 3 million tonnes a year capacity for CWF papers along with labels and speciality papers.
The Lecta group is on the same trajectory with the Perigord mill converting one machine to production of label papers. Lecta today it says is the leading producer of coated woodfree grades in southern Europe, tomorrow the group will be led by production of speciality grades, that is labels, boards and thermal papers of the type used in carpark machines and supermarkets.
In the short term it is choosing to take temporary shut downs to bring production inline with demand while the destocking activity works its way through. Shipments in Q4 last year amounted to 705,000 tonnes compared to 1,097,000 tonnes the year before. This was a “sudden and brutal drop in demand” it says.
Burgo has paper mills across Italy with one in Belgium, producing a range of grades. Production of coated woodfree papers last year was stable while demand for uncoated papers fell. It sold the Verzuolo mills, which had converted to packaging board production, to Smurfit Kappa while introducing bulkier mechanical grades and Burgo Evo, its inkjet optimised coated paper.
The South African owned Mondi group is also in transition, investing for growth in packaging markets, whether corrugated, flexible packaging with barrier coatings, sacks and luxury packaging. This has most recently affected the Neusiedler mill in Austria where one PM is being shut down and the converting department realigned as production shifts from coloured uncoated papers to graphic papers and luxury packaging grades.
Portugal’s Navigator Company, a flagship of the country’s industrial base, with forests, power production as well as pulp and paper mills, is also emphasising its production of kraft materials for ecommerce applications over uncoated papers. Print accounts for 72% of paper produced and falling.
It is a great reset for Europe’s paper industry which will create shortages in some grades while supply and demand are out of balance and will make price forecasting rather more challenging than a few years ago.
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