My first column for PaperMoney gave an overview of the pulp and paper industry in Australia and New Zealand based on available information for the year to June 30, 2009, the business fiscal year in this part of the world.
Recently, the Australian Bureau of Statistics (ABS) released statistical data for 2009-2010 and the Pulp & Paper Strategic Review 2010 was published by IndustryEdge, employing ABS data as well as its own significant database to provide a comprehensive analysis of the Australasian industry.
Despite the long list of mills closed during or before the 2009-2010 year, the statistics revealed a somewhat positive picture.
Australia was the only Organisation for Economic Co-operation and Development (OECD) country to escape a technical recession (in large measure due to the continuing strength of the mining industry, which increasingly underpins the Australian economy), but it was not immune from the global financial crisis. Consequently, and unsurprisingly, demand for most paper grades fell in the 2008-2009 year, although far less significantly than in North America and Europe.
Australia also is not immune to technology changes sweeping the world in media and communications. Unexpectedly, newsprint demand in 2008-2009 seemingly was not significantly affected, but the 2009-2010 year reveals a much different situation, with apparent consumption falling some 12% year on year. Over recent years, about 40% of newsprint requirements have been imported (mainly from New Zealand) but lower import levels in 2009-2010 minimized the impact on local production. Because Norske Skog is the only manufacturer of newsprint in Australia and New Zealand, the company can effectively fine-tune the supply balance to optimize capacity utilization, but, as in other developed countries, the long-term outlook would seem to be depressing for this sector.
Demand for other printing and communication papers (mainly coated and uncoated freesheet) also trended negatively, although only by 4%. With closure of Australia’s only freesheet coating mills (Burnie and Wesley Vale) last year, locally manufactured product represents only 38% of supply in this sector now, down from more than 50% a few years ago. Nippon Paper, the new owners of Australia’s only freesheet manufacturer, have given priority to improving operational efficiencies and provided some modest capital funds that should see increased local net production of these grades in the years ahead. Nippon Paper also has indicated previously that they may install coating facilities “sometime” in the future. Statistics available since the end of the fiscal year show a steady and strong recovery, at least for imported printing and communications papers, which have now returned to pre-global financial crisis demand levels.
Despite trends overseas, IndustryEdge, perhaps courageously, forecasts that demand for these grades will increase by almost 20% over the next 5 years, based on long-term regression analysis, driven by coated grades. This increase is off the lower base resulting from the global financial crisis and it is likely that these markets ultimately will continue their long-term decline. This is one example where past trends are unlikely to be a portent for the future.
Tissue demand continues to increase, although at an annual rate of less than 1% over the last decade, with imports taking most of the growth. Against this backdrop, ABC Tissue, which commissioned its first new machine in 2007, is understood to be fast-tracking another two new machines. SCA also has confirmed a strategic review of its manufacturing operations, including the prospect of a greenfield mill to replace its existing mill in suburban Melbourne. This makes for an interesting outlook given that Australia already has significant tissue manufacturing overcapacity, a situation exacerbated by a strategy from the large supermarket chains to import and promote home brand converted tissue products. It seems that as much as 10% of the market has been replaced under this strategy. This about equates to the forecast market growth rate over the next 5 years.
Packaging grades continue to provide the bright spot, recovering most of the losses of the previous year. While demand has grown at a modest rate of less than 1% over the past decade, local manufacture has boomed, increasing by more than 20% over the decade, entirely due to the Visy Tumut kraftliner mill, which has increased annual capacity to about 700,000 metric tons since its start up in 2001. Consequently exports have risen about 75% in this period and will go higher as the new machine that started up in 2010 ramps up to full capacity.
On a tonnage basis, coated cartonboard is going nowhere, although it improved from last year. Local consumption finished the decade where it started. This does not tell the full story, however, as there is a continuing drive to reduce the thickness of board being used.
Total apparent consumption in New Zealand in 2009-2010 attained its highest ever level, estimated at just over 850,000 metric tons, representing a growth rate of about 1.4% per annum over the last decade. Demand year-on-year from 2008-2009 was positive across all sectors. Only printing and communication grades were below their all-time peak consumption. New Zealand is totally reliant on imports for these grades.
Interestingly, per capita paper consumption in New Zealand continues to increase (although erratically) and is now well above that of Australia, which continues to fall.
New Zealand is self-sufficient in newsprint and a significant exporter of the grade, but total production has declined significantly over the last decade, almost 25% from its peak.
Tissue products are manufactured in New Zealand (SCA) and local production increasingly is being diverted to local supply. About 30% of consumption is imported, mainly from Kimberly Clark in Australia, with some local production exported to Australia to supplement SCA Australia’s production.
While domestic demand for packaging grades continues to grow slowly in New Zealand, exports and imports are significant. New Zealand kraftliner has long been regarded as something of a benchmark in Asia and enjoys strong demand. The large import volume reflects a somewhat bizarre market situation in New Zealand. The corrugated market segment is split three ways between CHH, the local container grade manufacturer, and Visy and Amcor of Australia, both of whom apparently import all their New Zealand paper requirements from Australia.
In another trans-Tasman manipulation, CHH has agreed to sell its Australian and New Zealand cartonboard printing business to a medium-sized Australian competitor, Colorpak. The selling price of AUD 5 million plus assumption of large debt suggests that the business struggled in the Australian market even though it had a large market share. The effect will be to triple the turnover of Colorpak, making it the largest cartonboard converter in Australasia. The deal requires Colorpak to source its cartonboard from CHH’s Whakatane mill in New Zealand. This will be at the expense of purchases currently made from Amcor, so it is likely to be a net positive for CHH, although more than 80% of the Whakatane output will still be exported. Presumably, additional exports to Australia will return a better margin than some of the current destinations, such as China and Malaysia. In yet another packaging paradox, imports satisfy almost 60% of the domestic demand.
Reputedly, trans-Tasman shipping is the world’s most lucrative sea freight route and the volume of paper grades making the journey between the two countries will help to underpin that reputation.
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. However, significant factors could dampen that expectation, principally currency exchange rates, which have been very volatile over the last decade. Given that much international trade in pulp and paper products is transacted in U.S. dollars, exchange rate volatility, especially against the U.S. dollar, is a significant issue for Australia (and New Zealand). To illustrate the point, in 2001, one Australian dollar effectively purchased 50 U.S. cents. Today, the currencies are at parity, making imports much more competitive and exports less competitive, mitigating against investment in the Australian (and New Zealand) industry to further reduce long-term competitiveness. History predicts the exchange rate will retreat from parity, but slowly and probably not enough to provide the competitive edge to underwrite significant investment in the industry.
A more immediate issue in Australia is the weather, which been severely impacting the country. Coming off years of drought, which depressed demand for packaging due to lower than normal agricultural output, floods in the state of Queensland, which cover an area greater than that of Texas, have coincided to destroy what would have been a bumper crop.
So it seems there is no easy road ahead for the industry in this part of the world, despite recovery from the global financial crisis. In April 2010, the federal government established the Pulp and Paper Innovation Council to progress recommendations from the 2009 strategic review into the industry. However, the Council was not formally convened until October 2010, and so the blueprint for a sustainable pulp and paper industry would seem to be still some time away. The immediate priorities for the Council are twofold:
• commissioning and endorsing an R&D roadmap of the industry, and
• developing terms of reference for an appropriately-funded Biorefinery Research Institute.
These priorities would seem to be at odds with the recent closure of the pulp and paper research unit within CSIRO (Australian Commonwealth Scientific and Research Organization) by the same federal government department responsible for oversight of the Pulp and Paper Innovation Council.