Pick your mood...optimistic, eh, or pessimistic...and you can find it in the pulp and paper industry right now. There are some glimmers of hope--containerboard seems to be rebounding. The long term integrated and non-integrated pulp market seems to depend on the region and the grade for its mood. Tissue goes along with steady increases tied to population growth in first world countries and adoption in third world countries.
Packaging seems to be an opportunity, with plastics being on the decline or outright banned. Yet the oversized corrugated container (think Amazon) appears to be on the way out, too, at least at the mass retail level. On a positive note, intercompany container shipments, B2B, seem strong and growing.
The containerboard folks continue to be burdened with an opaque pricing index system, especially on the waste paper side but also on the market side. I have been closely watching this condition for thirty years and it has barely budged, definitely not improved. An opportunity for AI to disrupt?
We have been through a bit of a downturn which is always healthy for efficiency practices. Boom times bring on fiscal sloppiness that downturns remove. In tight times, we insist video conferencing is just as good as face-to-face meetings we did when the coffers were full.
I like to look at the first derivative of the business, that is the equipment suppliers. If the equipment suppliers are holding steady, that indicates the pulp and paper business is growing moderately. If the equipment suppliers are experiencing their own growth spurt, that means the pulp and paper business is booming. If the equipment suppliers are declining, the pulp and paper business is in a serious decline.
Right now, it appears the equipment suppliers are holding steady to slightly growing in North America, in decline in Europe. This is consistent with the headline news about the industry. Net zero carbon machinations are playing a role in this, especially in Germany.
Of interest next year is the Smurfit Kappa acquisition of WestRock. They will say differently, but experience indicates this may take a long time (years) to achieve efficiency of scale. Distance and cultures will not help this assimilation and will control the speed of full completion. The assimilation has nothing to do with the companies themselves but the granular cultures of the individual departments that must come together.
Story...If you have two weak beehives you may want to merge them into one. Just sitting one on top of another will cause a war. A strict procedure must be followed. First, find and kill the queen in one of the hives. Then, you place two layers of newspaper between the hives as you set them atop one another. By the time they eat through the newspaper, their scents will have comingled, and they will get along. Were it as easy with companies.
I think the far eastern companies that have come to North America, and their baskets of acquisitions will still be sorting themselves out a year from now--and longer. They need to reread the beehive procedure above.
The nimble--Sofidel, Essity and Pratt--will continue to put pressure on the traditional companies (disclosure, I have an arms-length working relationship with Pratt). Another notable, but small, very nimble company playing in many grades is NORPAC of Longview, Washington.
Long term, in both North America and Europe, the question of stable sources of virgin containerboard fiber is going to come into play. Hodge, Louisiana; Counce, Tennessee and Cedar Springs, Georgia, to name just three, are getting to be very, very old virgin mills and even they supplant their fiber sources with a small bit of wastepaper. Others are gathered around them age-wise, too. Ultimately, we must answer the question, from whence comes the virgin fiber that circuitously makes its way to the recyclers? Scandinavia is doing a better job of upgrading and replacing their sources of virgin fiber.
To see next year unfold, day by day in a timely fashion, keep reading Paperitalo Publications in its many varied forms. We commit to continue to bring you the news first and with some of our services, will put the news in your personal email as it happens.
Please note--I do not own any individual forest industry stocks and if they are in my investment portfolio managed by others I am unaware of it.
Jim Thompson is CEO of Paperitalo Publications.