Declining graphic paper markets

What does this mean for manufacturers and investors in the market?

Paper markets have been experiencing big changes since the 2008 financial crisis. Underlying strong drivers have been sustainability, circular economy, climate change, and digitalization.

· Packaging markets have taken a strong growth position (product protection, branding, and logistics).

· Substitution of plastics by other raw materials has increased the demand for paper-based products, especially in packaging segments e.g. in product labeling, paper bags, cup stock.

· Hygiene markets have grown steadily, and the recent Covid-19 crisis is also having a positive effect on this market (toilet paper, napkins, sanitary products, hospital clothing, masks).

· There has been an undersupplying of recycled fibers due to the high demand in Asia and in the packaging segment. The declining graphic market has not fed enough fibers to the market.

· The demand for virgin fiber materials has grown due to this development and boosted pulp markets into high growth.

· There are also some smaller niche specialty segments having strong growth.

Digitalization is taking a stronger grip on consumer behavior due to the accelerated learning curve of organizations and consumers. This development will affect especially the development of graphic paper markets e.g. newspapers, copy papers, magazines, catalogs, and general advertising materials.

· Graphic paper markets are facing a step-change second time in recent history.

· First turning point was after the 2008 financial crisis.

· COVID — 19 is causing a new change wave in consumer behavior.

· After the financial crisis markets recovered partly but a continuous decline in market size started.

· What will happen after COVID-19 -crisis? Which segments will bounce back after the crisis? Which segments will suffer from permanent changes? This is difficult to forecast but the gut feeling is that permanent changes will happen in certain market segments.

What boost of change will the COVID-19 crisis cause to some assets in the graphic paper markets?

· Some assets improve their cost position and performance by cutting costs, improvement of product portfolio, or with better customer/market mix.

· Assets having weak costs position will have shutdowns and/or will be closed to balance the market.

· Low-cost producers will benefit from closures and shutdowns.

· Paper lines, companies, and brands will be for sale.

· Some producers convert assets into new businesses.

Which businesses and mills are affected most in this type of significant market decline?

· Paper lines with weak cost position? Low quartile.

· Especially assets with the weakest cost position in large corporations having big market shares. Unhealthy S/D unbalance has a major effect on market prices and thus to profit generation.

· Paper lines falling out of renewed company vision and strategy.

· Paper lines that help corporates refinance by selling some relatively good assets and improve the position of remaining assets.

· Paper lines having weak brands, low customer satisfaction, and low level of differentiation with weak product portfolio.

Some lines and mills could have an especially bad combination of the following cost-related issues causing closures and exits:

·Low efficiency and output.

·Location in high-cost areas (labor, wood, energy, taxation, logistics).

·Limited asset cost development possibilities.

·Low the level of fixed cost-sharing possibilities with other assets.

·No swing options for production.

·Stand-alone paper lines and mills having relatively high fixed costs.

·Non-integrated mills (raw materials, energy).

·Big backlog in CAPEX.

Heikki Hyvärinen

Chairman, Founder, H&H Advisors