Tremors felt from paper earthquake will echo

The paper industry has faced multiple challenges for a number of years, only exacerbated by Covid. Paper is a high volume low margin commodity product that requires utilisation above 90% to achieve the returns required by investors. It is inherently energy hungry, so associated with high carbon outputs. And many paper businesses have substantial debts. It is a recipe for consolidation. And until last week that meant death by a thousand cuts, a machine here or there, a group of people shed, consolidation of support away from mills and countries to a central location to save money. Then came the news that Sappi and UPM Communication Papers were pooling their resources in a new 50:50 business. 

At a bound these companies were free. The low margin manufacturing operations moved away from the main business: shareholders happy as both can focus on higher margin growth business. A new business can and will have to manage the inevitable closures and reduction in overheads, because shrinking demand will not go away. Cash will be returned to the original businesses to help reduce the debt pile. Everyone is a winner it seems.

But what of the customers, the printers and publishers that retain a commitment to paper? The new business will need to raise €900 million, which should be possible with steady cash generation and synergistic savings of at least €100 million. Production will inevitably shift around and some established brands will be lost. The temptation for the new business to increase prices will be strong. This in turn may reduce demand for paper and accelerate the trend to shorter production runs. That said the creation of a stronger paper focused manufacturer is to be welcomed. The short term will be filled with uncertainty as the integration process rolls through. Beyond that there must be a hope that it will not be just Sappi and UPM’s shareholders that are happy with the deal.