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Summary Session II
Global Dynamics and Forecast |
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The focus of the second day of the Conference was the session on Global Dynamics & Forecast.
Dries van Wing, Regional Manager of Canfor Europe, Belgium, chaired the session, who predicted that this always-popular session could be even more favourably received then ever, because of the high calibre of the speakers lined up. He first invited to the speaker´s podium Margareta Renström, European Co-ordinator, Global Forest & Trade Network, WWF International, Sweden, and her presentation dealt with Sustainability In The Paper Sector.
She suggested that she understands sustainability to be a bigger thing than just economic sustainability, but she encouraged the delegates to regard her presentation as an opportunity rather than in a conflicting way, adding that the WWF is very keen to work with companies on improving forest conservation.
She began by saying that the WWF believes both forests and paper are essential and equally important. Sustainability can only be achieved if the needs for both are balanced and accepted by all of the various stakeholders related to forests and paper, she argued. From an environmental viewpoint, she said sustainability involves two main issues: maintenance of biodiversity and ecosystem functionality on the one hand and mitigating climate change on the other. Regarding the first of these, what is important is responsible fibre production and sourcing, as well as sustainable consumption (not using too much of the fibre) and clean production, mainly in processing. In terms of climate change, the needs are to reduce emissions, transportation and deforestation.
She noted that her observations related to the whole paper and forest supply chain worldwide, and that not all of her comments would necessarily relate to the situation specifically in Europe. The WWF believes forestry has improved a lot over the past few years, but she claimed that there are still a lot of high-conservation-value forests being logged, a lot of valuable ecosystems being converted into monocultures and a lot of toxic chemicals being used. She claimed there is illegal logging and trade in far eastern Russia and China, although she noted that Nordic forestry companies have done a lot of work on traceability. The pulp and paper industry has also made a lot of progress, but globally, she said pollution of water and air still takes place, hazardous waste is still being dumped.
Renström also questioned whether rising paper consumption in developing markets is sustainable in terms of fibre usage.
She argued that the paper industry has a responsibility, because of its scale and its use of a lot of natural resources. She called on the paper industry to mobilise to help mitigate climate change, to safeguard biodiversity and ecosystem functions and to promote social development and human health.
Actions that are required not only by the paper industry but by all stakeholders, including paper buyers, traders, end users, the public, governments, etc., include: 1) reduce the reliance on virgin fibre - maximising the use of recycled fibre, especially in non-recyclable paper, and also improving wastepaper collection; 2) source fibre responsibly - virgin fibre should come from responsibly-managed forests where both the environmental and social aspects are taken into consideration. She also promoted FSC certification, signifying, she claimed, credible third-party certification of such practices; 3) ensure clean production - reduce bleaching, eliminate chlorine and chlorine compound use and toxic waste, minimise emissions, maximise the use of renewable energy, reduce transportation, the use of water, energy and other raw materials and locate new mills appropriately; 4) reduce paper consumption - improve the efficiency of fibre use, develop paper grades with lower fibre content.
She also outlined the Global Forest and Trade Network, which is a WWF programme (including 41 forestry companies) to work with companies on responsible sourcing and cleaning up supply chains. This involves having an action plan to know where the products come from, right down to the origin of the fibre, then assessing the portfolio and taking out the unwanted sources, i.e. those which are of unknown origin or potentially from high-conservation-value forests, aiming at working towards 100% certified products.
She also mentioned the WWF Climate Savers programmes, a partnership between WWF and companies aiming at mitigating climate change, through energy saving, transport efficiency, conversion to renewable energy, etc.
To close, she outlined the upcoming WWF Responsible Purchasing Guide for paper users, to be launched in December 2006 - a guide on what to think about when buying paper or pulp. She also mentioned the website pulpwatch.org, a site being developed together with other non-governmental organisations (NGOs) on the global pulp business. On tissue, WWF last year carried out a survey of tissue producers, giving scores on clean production and fibre sourcing, and this is likely to be repeated, she said.
Finally, she warned that while the paper industry has been low on the NGO radar for some time, there is now renewed NGO focus on the paper industry, and there is now a common NGO vision for "transforming" the European and North American paper industries.
Renström was followed by Magnus Hall, President and CEO of Holmen, Sweden, whose presentation dealt with Energy Markets´ Impact On The Forest Industry.
He focused particularly on electricity, noting that Holmen is 35% self-sufficient in energy. He examined a range of reasons for the rise in energy prices, such as emissions rights trading and natural gas distribution.
Electricity consumption in the pulp and paper industry is on the increase, and the rise in prices particularly affects producers of mechanical pulp, as chemical pulp mills are more self-sufficient in energy. The part of the industry relying on electricity is significant, and rising energy costs have a big effect, he said. He gave the example of newsprint, which would have to achieve price increases of around +20%, just to keep profits unchanged after energy price rises. And of course, that is not possible, so the paper industry is feeling it, he said.
What is the solution? More power generation is necessary, he argued. Energy saving is important, but we cannot save ourselves out of this situation. However, if fossil fuel, nuclear, hydro and wind power have limited possibilities for various environmental or practical reasons, then biofuel could be considered an option. Chemical pulp mills are already into biofuel energy and biofuel is also fairly well used in, e.g., Sweden, but for financial reasons, potential new biofuel plants would be more powerful wood buyers than pulp and paper mills, so that would be yet another added pressure on mills.
Emissions rights must be re-examined, he argued. Permitting for new power stations must be accelerated, and his own personal view is that nuclear energy must be considered, because it offers a real rise in production with zero carbon dioxide emissions. Energy-saving investments are possible in pulp mills, but he believes any savings will be used to make better or simply more paper. Electricity consumption will increase, he insisted. More biofuel use at pulp mills is possible, but mills must also look at new, long-term, electricity-supply contracts, negotiated as base-load, all-year-round consumers. Another option he highlighted is to form power-generation investment alliances, aimed at identifying power-generation opportunities, with pulp and paper mills playing the role of long-term safe buyers to help secure project financing. Although pulp and paper producers would prefer the electricity suppliers to take the risk, if they won´t, then pulp and paper producers may have to, he said.
In concluding, he warned that electricity prices are likely to be high for some time and that more competition for wood is likely, which will also drive costs up. The likelihood is that this will slow down investment in pulp and paper capacity, he predicted.
The next speaker was Paul Leclair, Chief Economist, Pulp and Paper Products Council, Canada, and he examined Global Fibre Trends.
He focused on market pulp and noted that in one of the key market pulp demand sectors - Printing/Writing papers - demand is either stagnating or declining in major markets (largely due to Uncoated Woodfrees), which is a pointer for market pulp consumption. In contrast, the outlook for tissue, another market pulp consuming sector, is very positive, which is good news for market pulp, he noted. And tissue capacity is expected to grow further. Prospects for fluff pulp are also quite positive, although less certain than the tissue market. Meanwhile, China is playing a disproportionate role in market pulp purchasing, with a strongly rising market share, Leclair argued, and any slowdown in the Chinese economy would hit pulp hard. Another trend is closures of integrated pulp lines, which boosts market pulp consumption, although Leclair said he did not expect this to have a huge effect on the market. Finally, the difficulty in supplying quality recovered fibre could be a slight boost to market pulp in the future, as wastepaper recovery rates are peaking or slowing in major supplier regions.
Overall, the upside prospects for the tissue and fluff pulp sectors are not expected to compensate for the slower outlook in the much larger Printing/Writing paper sector, and the exposure of the market pulp industry to China is another very important demand factor.
Looking at the supply side, he noted that the majority of hardwood pulp capacity is progressively moving into the southern hemisphere and that China is expected to produce an increasing amount of its own hardwood pulp. Market pulp mills are becoming larger in size, with new mills being almost four times as large as the average North American market pulp mill, he said. Also, he pointed out that insufficient financial returns are causing a massive drop in investment at North American market pulp mills, which is an obstacle to productivity improvements and also leads to higher maintenance costs. As a result, there are capacity closures in both softwood and hardwood market pulp in North America. Finally, the PPPC believes that the cost curve at market pulp mills will flatten, as higher-cost mills close and more lower-cost mills are built, and this could accelerate the decline in pulp prices in the long term.
With these trends in mind, the outlook for next three years is for accelerating capacity growth (focused on Latin America), while demand is expected to be slower, especially in 2007-2008. The combination of these two factors will mean falling shipments-to-capacity ratios from a high level in 2006 (97%, excluding idled capacity).
At this point, one economist followed another, with Bruno Cavalier, Senior Economist, Crédit Agricole, France, taking the stand to give his World Economic Outlook.
The broad economic picture is bright, with improving global growth, and the latest IMF forecast is likely to continue this year and next, which would be all the more astonishing considering the rise in oil prices, Cavalier said. The highest growth is in China and India (+8%), with +3.5% in North America and +2% in Western Europe.
However, the positive picture is clouded by high oil prices, with other commodity prices also rising, which depresses corporate profits and consumer purchasing power, he warned. In the 1970s, similar oil price rises caused retail price and wage inflation, triggering tight monetary policy, leading to stagnation/recession and inflation (stagflation), he explained. Today the effects are almost the opposite, with robust economic growth and broadly stable consumer prices. Why? Because of globalisation and low-cost economics, according to Cavalier. Efficiency means less oil is used today per unit of output, so the global economy can cope better with rising oil prices, he argued. He doubts that this resilience can last forever, but it is the case so far, at least. The second reason for the current sustained growth is capital mobility, which is higher than ever before, he said. This has encouraged financial globalisation, which stimulates real globalisation and vice versa, Cavalier added. The internet, meanwhile, has made connectivity easier and cheaper than ever, and the world looks smaller than it did in the past. Falling communication and delivery costs have made it possible to have more complex supply chains, creating value by using labour and services in low-cost economies, such as China and India, he pointed out. In fact, he argued that China´s increasing importance to the world economy and global financial (im)balance has created a situation where the world economy is focused on the relationship between the American consumer and the Chinese producer, creating large deficits.
Cavalier predicted that a re-balancing of the world economy will not be easy, implying huge changes in exchange rates and interest rates, and the world economy probably cannot tolerate too-rapid changes. A de-pegging of the Chinese currency would probably not solve the US deficit problem, but it probably would cause a Chinese banking crisis and a global recession, according to Cavalier. Similarly, tightening monetary policy too rapidly after many years of ultra-liberal policy could cause abrupt corrections in asset prices, he warned. Current excess liquidity has caused inflation in asset prices, as seen in property and commodity markets, and a lot of work still needs to be done to correct this, he said. The longer the financial imbalances and mis-pricing continues, the greater the chance of a destabilising result, predicted Cavalier. He said it would be a mistake to think that the imbalances are sustainable in future, just because they have been sustained so far.
Looking at the major economies, the US economy has been in expansion for 54 months. The average US expansion is 57 months, implying a new recession in August this year, although he admitted that the expansion cycles are lengthening, with the previous one lasting for 10 years. The length of expansion cycles historically depends on inflation, and the inflation outlook in the USA is uncertain, but Cavalier is rather optimistic.
In Japan, the economy is making a comeback following a decade of deflation, which means challenges in improving the sustainability of public finances and ending the awkward zero interest rate monetary policy. However, he is also optimistic that the Japanese authorities can achieve these goals.
Looking at the Eurozone, after five years of lacklustre growth, there is a broad upswing in confidence indicators across a range of countries and sectors. Again, he is optimistic about the outlook both this year and next, although risks include appreciation of the Euro and the rise in German value added tax.
Crédit Agricole expects lasting economic expansion this year and next, with few inflationary pressures, although risks remain.
Moving onto forecasts for specific paper and board industry sectors, Peter Karell, Vice President Cartonboards, M-real Consumer Packaging, Germany, looked at Challenges And Trends In Packaging.
He began by noting that there has been a rapid change in the Western European market, triggered by the industrial dispute last year at Finnish mills. This opened the doors for imports, which has made Europe into a new playground, as far more producers are now active than before, with Asian and South American cartonboard imports playing a greater role.
Looking at the global market, he noted that US demand is stagnant, due to consumer goods production re-locating to Asia. On the flipside, Asian cartonboard demand is growing strongly. There is demand growth in Europe, although Eastern Europe is responsible for most of this, due to increased production of fast-moving consumer and luxury goods, he explained. Looking ahead, he said the strongest growth is expected in China, while North American and Western European demand are expected to stagnate in the longer term.
Production rates are expected to develop broadly similarly to demand, with high growth in China (with capacity growing rapidly) and a decline in North America.
Looking at broader trends, he predicted that logistics will be a key issue, whether in product safety or anti-counterfeiting measures. With growth focused on Asia, an increasing number of companies are realising the value of a global supply strategy, he noted. At the same time, however, markets are globalising and fragmenting. So Karell argued that while there are increasing demands for completely standardised products wherever they are produced, there are also regional standards, so another future trend will likely be away from large, integrated production lines towards more flexible production units.
Intelligent packaging will also be a strong trend, he said, including tracking and tracing systems, tamper-proof packaging, security packaging for secure product identification (anti-counterfeit measures, which are increasingly important, especially with so much trade being done via the internet, and he gave numerous examples of counterfeiting taking place in various markets), etc.
In conclusion, he said the focus in today´s market should be interaction along the supply chain, whereas the focus in the future will be on interacting with consumers. He ended by offering a ray of light for the packaging sector: Kevin Roberts, CEO of Saatchi & Saatchi, recently said Only emotions play a crucial role in marketing. A major part of consumer choice is based on packaging. People buy only those packages they touch. What an untapped marketing tool! In the future, packaging will be a more important marketing tool than branding.
The closing presentation of the conference was given by Roman Hohol, Director, Marketing Practice Area, AMEC Forest Industry Consulting, Canada, and dealt with Global Paper Markets.
He began by pointing out that he is a trained print journalist and that he has worked in printed media all of his life and that he is a strong believer in print media. He said this because his presentation focused on the threats he believes are coming for printed media, threats that he believes will be a revolution in media.
The threat from new media is forcing print media to justify their business model more frequently, and this will have profound implications on paper consumption, in absolute terms and on which paper grades will be winners or losers, Hohol predicted. The threat from new media has accelerated and his main message was that he expects peaceful coexistence of print media and new media to develop into turbulent coexistence by the end of this decade.
Looking at individual paper grades, he noted that North American newsprint demand has de-coupled from real GDP growth, and he raised the question of whether the same would happen in Europe. He explained that the reason for the de-coupling from real GDP growth is the decline in newspaper circulation and advertising, with latest data suggesting that more North Americans are now reading the news on-line than in a newspaper, as well as advertising being in long-term decline, as newspapers lose business to other media. In addition, newspaper readership is falling, particularly among young people, not only in North America but also in Europe, and they are also attracted to free newspapers, which publishers dislike exactly because they are free. As a result of these trends, the newsprint industry in North America is only one-fifth as large as it was in the year 2000. He argued that the outlook for Europe is also gloomy, where circulation and advertising are only growing in the new EU member states, but are in decline in the large consumer areas. North American newsprint demand will continue to decline, he predicted, while there will be weak growth in Europe.
Moving onto Printing/Writing papers, he observed that there was strong demand growth in North America and Europe up to the year 2000, followed by much weaker demand after the subsequent market crash in 2001. Demand has struggled to recover since then. In North America, he said the problem is uncoated woodfrees, where offset printing papers have been substituted by higher brightness mechanical papers, but more importantly, in Hohol´s view, cut-size papers have stopped growing, following strong growth in the 1980s and 1990s. He suggested that the internet and intranet played a big role in this. He argued that North American uncoated woodfree demand is now following the path of newsprint, with demand having peaked in the year 2000 and now being in decline. In Europe, there has been some recovery in uncoated woodfree demand, and he speculated that the North American trend might not be mirrored in Europe for some time.
Moving onto the large, advertising-driven publication papers (Printing/Writing papers, excluding uncoated woodfree papers), Hohol explained that growth in both North America and Europe has been quite slow, although erratic, since the market bust in 2001. He argued that there are three main reasons behind the slowdown: 1) the severe global advertising recession in 2001-2003, which hit Europe particularly hard (although print advertising is growing strongly in China); 2) many of the large-volume print media uses are mature and some are even in the decline of their lifecycle; 3) the rapid spread of new media, fuelled partly by changing consumer behaviour and partly by the spread of broadband internet access.
He gave many examples of the importance of on-line activities, and argued that the rapid expansion of internet usage, such as in blogs, will have profound implications for printed media.
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