About this time of the year, we take a look at how the pulp and paper industry in Australia and New Zealand has fared for the business fiscal year in this part of the world, the year to June 30, 2011.
Recently, the annual Industry Edge Pulp & Paper Strategic review for 2011 was published, drawing on Australian Bureau of Statistics (ABS) statistical data for 2010-11 and its own significant database to provide a comprehensive analysis of the Australasian industry. We very much appreciate permission from Industry Edge to reference their authoritative publication.
In Australia, apparent net consumption of paper and paperboard fell for the fourth year in a row, albeit only marginally from the prior year, and it might be that demand is now stabilizing. Over these four years, consumption has fallen by about 7% from what was the peak demand year in Australia (2007-08). Total production has been maintained over this period at near to 3.1 million metric tons, but has been accompanied by a significant rise in exports and imports. This apparently contradictory situation reflects significantly increased production of kraft linerboard by Visy Paper, resulting from a major expansion of their kraft liner mill in late 2009. At the same time, production of printing and writing papers was lower as a consequence of the closure of the Burnie and Wesley Vale mills in Tasmania as PaperlinX exited paper manufacture.
Looking at the key product classifications, the statistics show that newsprint consumption was marginally higher than for the previous year (up about 2.5%), with local manufacture providing the additional demand. Total imports were identical to the prior year, although imports from New Zealand were at their lowest level over the last decade. New Zealand, however, still has the largest share of imports.
Whether the current demand represents the stabilized long-term demand – it is about 20% below its peak – or the bottom has yet to be reached, it seems that the outlook remains challenging for this product. Strong rumors that had been circulating that Norske Skog, which owns all the Australian and New Zealand newsprint capacity, was looking to sell the business have come to nothing. Perhaps Norske Skog has concluded that a floor has been reached for newsprint demand and that the business is sustainable. In fact, Norske Skog has announced that it will submit plans to its board of directors for the installation of an AUD 60 million biomass boiler and steam turbine at its Albury mill.
Demand for printing and communication papers recovered slightly, but remains well below the peak demand in 2008. Locally manufactured product now represents only about 16% of supply in this sector, with imports now well over 1 million metric tons annually. A bit less than 60% of demand is coated and uncoated freesheet, and the balance is coated and uncoated mechanical papers. Norske Skog supplies some uncoated mechanical grades into this sector, but the category is predominately supplied by imports. The prospect of increased local manufacture probably rests with Nippon Paper, Australia’s only freesheet manufacturer, but there has been no indication of any progress towards installation of coating facilities that had been proposed for “sometime” in the future. If current rumors are correct, that UPM will partner with Gunns to build their large approved pulp mill in Tasmania, the prospect of an integrated freesheet machine could be an eventual outcome.
Industry Edge continues to forecast that demand for these grades will increase over the next five years by about 3% per annum. Global demand for such papers is forecast to be depressed, and there are strong views that alternative communications systems such as tablets and smart phones are likely to hinder growth prospects in developed economies. In any event, the significantly declining price expectations resulting from a simultaneous increase in capacity for such grades (principally in China) are likely to dampen enthusiasm for investment prospects in this sector.
The tissue business is depressed. Apparent consumption fell slightly and imports continue to grow at the expense of local production. Imports now represent more than one third of local consumption and significant roll stock is imported, predominately from China, and to a lesser extent from Indonesia, to satisfy the “home brand” market. The consequence of the depressed situation is that Kimberly-Clark Australia (KCA) has shut down two tissue machines and a pulp mill and SCA has permanently decommissioned one of its moth-balled tissue machines.
Prior to these closures, capacity utilization across Australia had fallen to below 70%, probably less for KCA and SCA. It seems that the strategic review conducted by SCA of its manufacturing operations, including the prospect of a greenfield mill to replace its existing mill in suburban Melbourne, have not been positive. In fact, an unexpected outcome has seen the creation of a joint venture between SCA Hygiene Australasia and private equity firm Pacific Equity Partners (PEP) to operate the Australasian business.
Demand for packaging grades reversed the recovery of the previous year, falling by more than 3%. This situation has been accompanied by creation of significant excess capacity. The expanded Visy kraft liner mill has added nearly 400,000 metric tons of additional capacity and a new AMCOR containerboard mill is under construction in Sydney. Although the two existing machines at Botany will be retired, and the Fairfield mill in Melbourne will close, a net increase in capacity is expected. Overall, from nearly 2.1 million metric tons of production, more than 900,000 metric tons are exported, mainly containerboard.
On a tonnage basis, coated cartonboard demand continues to be flat. Local consumption finished the decade where it started. Local production has been slowly declining, as have exports. Conversely, imports from New Zealand are growing and have doubled over the decade to about 40,000 tons/year.
On the subject of New Zealand, total apparent paper and paperboard consumption in New Zealand during 2010-11 built on the significant growth attained in the prior year to consolidate a modest growth rate of about 1.2% per annum over the last decade. Surprisingly, newsprint demand increased to record levels, and this offset small reductions in demand for other grades to provide the higher overall demand. Newsprint has enjoyed an annual growth rate of more than 3% over the last decade, a significantly different situation than in other developed countries.
Demand for printing and communication papers has remained flat in recent years, but over the decade, growth averaged 2.8%.
The gap between per capita paper consumption in New Zealand and Australia continues to widen. In 2000, consumption in both countries was similar, at about 186 kg/year/person, which is about where New Zealand is today. Australia has fallen precipitously to about 160 kg/year/person.
Demand for packaging grades in New Zealand is flat, having grown by an insignificant 0.1% per year over the last decade. Exports (at record levels during 2010-11) and imports are significant. Particularly significant is the export of coated cartonboard, which equates to virtually the entire output of the Whakatane mill. Australia, China, and Malaysia are the main destinations for the exported cartonboard. The Whakatane mill was part of a complex financial deal executed in late 2010, which saw the folding boxboard operations of Ranks group’s CHH Company sold off to Australian companies Colorpak and Amcor, in return for a supply deal for cartonboard from Whakatane.
Looking ahead, Australia is forecast to enjoy a steady if moderate economic growth rate over the next few years, which would generally imply a continuing improvement in demand for pulp and paper products. It remains to be seen, however, whether this will translate into a revitalization of the industry, even though Australia has abundant resources and the country enjoys the natural protection of long delivery distances for competitors. However, much of the industry is in urgent need of equipment replacement or upgrading. This has partly happened, but unresolved challenges remain with the printing and writing sector and with pulp manufacture. If the Gunns mill can be completed, it has the potential to provide the catalyst for a positive future.
For New Zealand, the opportunity rests, as it always fundamentally has, with export. It remains to be seen if there is a commercial appetite to grasp the opportunity provided by its significant softwood resource.
For both Australia and New Zealand, it will require a focus on those grades that can be competitive to supply local or export markets. That restructure has commenced, but is very much a work in progress.