Where do the new investment opportunities lie in 2021?
In this article, we will look back at our forecasts from one year ago and discuss what has happened in world economic development since 2020 and we give examples of new opportunities for investors in 2021–2024.
“Preparation for future growth is now actual”.
There is most probably an investment backlog that is released as soon as the pandemic will be fading. We have already seen the first signs of this development at the same time as we see the start of the global decline in Covid cases and death rates causing the backlog to be released. Which businesses have been hit hardest and which will benefit in the aftermath of the pandemic?
Investments are most likely directed to businesses that have been winners during the pandemic and which will respond best to global megatrends like climate change, circular economy, digitalization, and new ways of doing business based on AI, blockchain technology, and digital currencies.
The effect of the lockdown on various businesses could be seen already in the early stages of the crisis. See below H&H Advisor’s estimate from last spring:
The stimulus packages:
“The heavy stimulus packages could cause high inflation and decrease the value of FIAT cash reserves. “
The stock market is considered to be overvalued and has lost connection to the real economy. How long will low-interest rates keep the real estate and stock market booming? Where is cash heading next? Cash holders are looking for new places as an investment and escape from FIAT cash reserves that could lose value due to heavy supply into the USA and European markets.
What is FIAT Money?
Fiat money is a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it as is the case for commodity money. Most modern paper currencies are fiat currencies, including the U.S. dollar, the euro, and other major global currencies.
Horror Scenario example:
The African nation of Zimbabwe provided an example of the worst-case scenario in the early 2000s. In response to serious economic problems, the country’s central bank began to print money at a staggering pace. That resulted in hyperinflation, which ran between 230 and 500 billion percent in 2008.12 Prices rose rapidly and consumers were forced to carry bags of money just to purchase basic staples.11 At the height of the crisis, a 100-trillion Zimbabwean dollar was worth about 40 cents in U.S. currency.
“Blockchain and Digital currency markets are booming”
Money has lately been flowing e.g. from gold and Fiat cash reserves to new financial instruments like cryptocurrencies due to increased value and due to future digital business models. Bitcoin value has passed $1 trillion and traded at a record $57,681 per coin at the current peak. The ascent comes on the heels of Tesla’s recent $1.5 billion investment and supportive moves from financial firms such as BlackRock, Mastercard, PayPal, and BNY Mellon. Some say it is justified amid the growing demand for bitcoin from companies and institutional investors, while critics say it’s speculative due to financial markets stimulus. North America’s first exchange-traded fund tracking bitcoin started trading in Toronto.
Global economic outlook:
“Economic growth is expected to bounce back in 2021”.
The global economic situation looks very different now than a year ago when IMF was forecasting a sluggish recovery for 2020, GDP growth reaching 3,3% in 2020. Instead, the global growth contraction for 2020 is estimated at -3.5 percent. The latest IMF World Economic Outlook report is from January 2021, and all figures for 2020 are still estimates.
Advanced economies have been hit harder with the Covid-19 crises and their GDP is expected to have contracted by -4,9% in 2020. Developing economies are expected to do better, at -2,4%. The Asian market has had a lower effect and recovered fast from the rapid drop in growth last spring and they have overcome the worst period of the crisis and got out of the lockdown faster than NA and Europe.
Economic growth is expected to bounce back in 2021. However, the uncertainty is large as to how fast economies will recover. Much depends on the pandemic and how it can be contained, the development of vaccines being critical. Lockdowns and other restrictions on consumers’ activities have changed consumption patterns eg. shopping, food take-out & deliveries. Some of these developments are likely to be permanent.
Below is the forecast H&H Advisors made last spring. We expected the world economy to decline roughly 3 %, current IMF estimate is 3,5 %. We estimated this year’s growth to be 3 % and the IMF forecast is now much higher at 5,5 %.
Source: H&H Advisors publication in Medium platform spring 2020.
Finnish National Bank reports that the Finnish economy will contract substantially in 2020, the contraction will not, at 3.8%, be as sharp as previously projected. COVID-19 will gradually be left behind in the course of 2021 due to the vaccines, and private consumption will generate a growth of 2.2% in the Finnish economy.
In Finland, the effect has been differing largely compared to our forecast. H&H Advisors forecast was even as high as -9 %, the reality has been at -3,8 %. This is most probably due to Finland’s learnings from the financial crisis and due to our government’s better accessibility to debt and heavily decreased costs of debt financing compared to the time of financial crisis.
Finland has had quite a well-managed lock done and a low number of the affected population sofar. The government has stimulated the markets heavily by high spending to subsidies based on increased debt financing ( 20 Billion euros reserved in additional loans), tax payment delays, new temporary bankruptcy and labor laws, the flexibility of debt payments in the private sector, etc. This has led to relatively good economic proceedings during 2020 but the Finnish National Banks growth estimate for 2021 is not giving hope to high growth in 2021, only 2,2 % which is the same level H&H Advisors’s forecast already in spring 2020.
Lately, we have seen an increasing number of bankruptcies. How long will the support keep businesses up? Have we just divided the drop in growth over several years with the heavy stimulus or can we correct the situation of smart investment that brings growth to the future? This will be seen in coming years.
What effect has all this on paper and packaging businesses?
We have made studies about the development of Pulp, Paper, and Packaging businesses below some examples. More details available from H&H Advisors.
Pulp Markets:
The Pulp Market is following, in the long run, the demand development of Paper and Packaging markets net growth. Graphic Paper demand is decreasing the need for pulp supply and at the same time, the increase in Packaging grades is leaving net growth for pulp producers.
Decreasing graphic paper consumption is also decreasing the supply of recycled fibers for packaging grades causing additional pressure on virgin pulp supplies in the long run. It is likely that we see investment in this area in the coming years. There is a large number of companies that have announced plans in this business area.
The global market pulp production was estimated to be about 67 million tonnes in 2019.
In Finland, the single largest investment into Pulp & Paper was announced last week by Metsägroup. 1,5 Mt capacity and Investment cost of EUR 1,5 B. This investment will replace the old mill.
Source: Global trade statistics
Containerboard markets:
“Declining graphic paper market will bring opportunities to machine conversions into growing containerboard markets”
Containerboard market growth has been slow the past five years, globally at 1,2%pa. This has happened despite the rapid growth of internet shopping and growing global trade.
The future outlook for containerboard is here assumed to follow this trend. New demand for the grade would be 10 million tonnes in 5 years' time globally if containerboard growth continues as it has in the past few years.
Growth is fastest and in Asia, where machinery to produce containerboard, as well as other paper and board grades, is relatively new.
In Europe and North America, graphic paper conversions have created new containerboard capacity.
Converted capacity from graphic paper assets covered 60% of containerboard demand growth during 2015–2019. Already announced conversions from graphic papers to containerboard account for a similar share of new demand in 2020–2021.
New conversions will most certainly be announced for 2022–24. Established containerboard producers are also likely to defend their market positions with new investments.
*The room for new conversions and investments based on estimated market growth to new capacity in 2020–2024 is roughly 10,5 Mt. Decided machine conversions are already 2,5 Mt leaving space for new machine investments 9 Mt for the same period.
Bag Paper Markets:
“Retail sector developments impact demand for paper carrier bags”.
“Take-out and home delivery benefit both carrier bags and consumer bags”.
The global bag paper market size is estimated to be 2,8 million tonnes in 2019. Growth is expected to be 4,2% pa by 2024. This would give absolute growth of 0,65 million tonnes for the period from 2019 to 2024. Growth is largely driven by general GDP growth, retail, and fast food sector growth, new regulation, innovativeness of new product solutions, and consumer behavior.
The bag market is at a turning point in history. The retail sector is starting to favor paper over plastics for carrier bags and lightweight consumer bags. The recent boom in takeaway deliveries is also boosting the demand for paper bags. There is an increasing need to replace single-use plastics in many markets. Legislation and other regulation are supporting this development in Europe, North America, and Asia. New barrier coating technologies are enabling the replacement of plastics and laminated products with barrier coated products. Barrier coated paper products, bioplastics and textiles are competing with each other and are taking a higher share of the market growth in the future. Market studies show that consumers prefer paper over plastics.
MG and MF papers have traditionally been used for bags due to their strength properties. Combined these make up 80% of the global bag paper volumes. Brown paper grades dominate the markets and are preferred by certain consumer segments and markets. However, new companies have entered the market with new innovative paper grades.
There are many established companies in the markets producing brown and white bag papers; 80 companies and 120 mills in Europe and North America. In recent years there has been also a number of new market entries by new companies or mills. Graphic paper producers are developing grades also for this market with modified woodfree printing and writing papers. This trend is expected to continue as the development is supported by the need for new barrier-coated products.
Most paper machines that make bag papers are capable of making papers for other end-use applications as well. Estimates of dedicated capacity and supply/demand balance are quite challenging to find out as producers can swing the capacity between segments and make strategic decisions on what paper grade to produce.
Of the two key markets, Europe has a larger number of companies and mills with the capability to produce bag papers than North America.
In Europe, there are close to 80 mills and over 50 companies with the capability to produce papers for bags. Most of these are well-established market players, and about one-fourth of these companies have only recently ventured to bag paper markets.
Of the bag paper producers in Europe, 51% of the mills are non-integrated with pulp production, however, as integrated mills tend to be bigger, the capacity that is integrated is about 60%.
In Europe, there are many small companies with just one paper mill or even just one paper machine in this market. Bag paper production is seen as one part of a larger product portfolio.
BillerudKorsnäs and Mondi, are the largest producers of bag papers in Europe and have many assets focusing on this market. As market size increases we expect the number of focused paper lines to increase due to competition and improved cost position for producers.
There has been relatively little M&A activity in Europe. Only recently Mayr-Melnhof announced that it is buying International Paper’s Kwidzyn paper mill in Poland. The mill produces woodfree uncoated papers (copy paper), folding boxboard and has recently converted one paper machine to MF papers.
We expect the European industry to follow North American development which would lead to M&A activities and consolidation. This tendency of Europe following North American markets with the delay we have seen also in various graphic paper segments
The industry is more concentrated in North America in terms of the number of companies and their capacity compared to Europe. There are 25 companies and some 40 mills with the capacity to produce bag papers. Seven companies have recently entered the bag paper markets.
As in Europe, the companies range from small one machine companies to large corporations with multiple mills. However, some large corporations, eg. International Paper and Georgia-Pacific produce bag papers, but only at one paper mill each. Few companies have more than one mill with bag paper production, eg. Westrock, Pixelle, or Twin Rivers. All paper producers manufacture many products on the same paper machines; other packaging paper grades or papers for foodservice applications.
Most of these companies in Europe and North America manufacture a wide range of products, with a focus on packaging papers or food service papers. Sack kraft, bag, interleaving, masking base, metalizing base, waxing base papers — are some of the most commonly produced paper grades by the producers. The swing machines can produce a selected mix of the above products.
For more detailed information contact us directly for a free online strategy meeting from our website hhadvisors.fi or send us a direct email at heikki.hyvarinen@hhadvisors.fi.
Disclaimer:
This document is a summary of studies conducted by H&H Advisors. No other circulation, quotation, or reproduction is permitted without prior written approval from H&H Advisors.
Current market estimates and Forward-Looking Statements:
Certain information set forth in this presentation contains “market estimates “ and “forward-looking information”, including “future-oriented market and producer information” (collectively referred to herein as forward-looking statements).
These statements are not guarantees of current or future performance and undue reliance should not be placed on them. Such market estimates and forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and market development in future periods to differ materially from any projections of future investments, market developments, or market shares or implied by such market estimates and forward-looking statements.
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