paper

Pulp & Paper

Industry Insight

Date February 2017

Approximate net recovery on cost

Synopsis

Current Trends 

  • The market pricing for pulp remained relatively consistent during 2016 but rose modestly during the second half of the year. Northern and Southern Bleached Softwood Kraft prices averaged four percent higher during that timeframe compared to same period the prior year
  • Old Corrugated Container (“OCC”) prices increased notably in the fourth quarter and continued to rise into the beginning of 2017
  • Competition within specialty paper is expected to increase as companies repurpose print and writing paper machines to healthier sectors

 

Projected Values 

 

Northern Bleached Softwood Kraft

 

Southern Bleached Softwood Kraft 

 

Rising Input Costs a Concern: Relatively consistent pulp prices during the second half of 2016 added some stability to the industry albeit at slightly higher rates than the previous year. As a primary raw material utilized in many types of paper manufacturing, pulp prices are crucial to monitor as these costs impact the finished goods cost per pound and the potential recovery in the event of a liquidation.
 

However, be aware that the market for pulp can be very volatile. China is the world’s largest consumer of pulp, and its buying patterns impact pricing globally. Purchasers typically buy large quantities when prices are low and then cease purchasing when prices rise, which can create sharp fluctuations.
 

Meanwhile, the prices of some recycled fibers have been escalating, particularly in recent months. For example, the price of domestic, FOB, OBM, US New York of OCC was more than 60 percent higher in February 2017 than the same month the previous year. International Paper CFO Glenn Landau cited the increasing OCC cost trend as a concern in the company’s fourth quarter 2016 earnings call. Rising recycled fiber costs is one major factor underlying recent price hikes announced by paper manufacturers, particularly of packaging products.
 

In addition to rising material costs, manufacturers are also dealing with increasing energy and chemical costs, a trend that’s expected to continue in 2017. WestRock CFO Ward Dickson said inflationary pressures across energy, fiber, and chemicals “impacted us more than we expected in the December quarter.” He thought “the input cost inflation could be over the $200 million level for [2017].”
 

Shrinking Demand: The strengthening of the dollar along with the high cost of environmental regulation has made U.S. paper products less competitive overseas in recent years. Exports fell to less than 17 percent of industry revenue in 2016, according to IBISWorld. However, the value of imports is declining as well. Imports as a share of domestic demand are expected to fall from 19 percent to a projected 17.3 percent over the five years to 2016, evidence of the overall contraction in the industry driven in large part by growth in digital alternatives.
 

Sales-to-print media publishers, which currently represent the majority of the industry’s total revenue, are expected to drop over the five years to 2021, according to IBISWorld. These products are also vulnerable to imports, especially from countries with lower costs and developing paper manufacturing capacity, such as China, Indonesia, and Mexico. Paper mills in the U.S. may be forced to focus on higher-quality gloss paper products instead of bulk paper stacks, which account for the majority of industry revenue. Gloss paper products are still essential for photography, cards, and other materials presentational segments. Personal care products as wells as specialty and packaging materials have also been bright spots.
 

Consolidation and Competition: Driven by highly consolidated customers, investor expectations, increasing international competition, and high production capacity, large paper producers have increased their share of the market through acquisitions and mergers. The most notable recent example was International Paper’s $2.2 billion acquisition of Weyerhaeuser’s pulp business in December. The combined Global Cellulose Fiber business will have the capacity to produce 3.6 million tons per year of mostly fluff pulp grades.
 

By increasing capacity and market share, large producers hope to better control market prices. Furthermore, large producers increasingly own or manage significant resources, such as timberland or electricity plants, allowing them to control their own supply needs and/or increase product offerings.