Turbulent times in the worldwide paper industry

© VDP

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In 2007 worldwide paper production was 395 million tons. In this connection the USA was No. 1, followed by China, Japan and Germany. But times have changed. The industry is entering 2009 with a great many worries and concerns: the entire world market must adapt to over-capacities, further declining demand and an extremely difficult business year.

The whole world is affected: the effects of the worldwide financial and economic crisis have now also fully spread to the international paper industry. Many companies have already conducted considerable restructuring and adjustment measures. The sector expects an extremely difficult 2009, which will be heavily characterized by falling demand levels in the sales markets.

Less declines than in other industries

“The sector is bracing itself for the crisis”, declared the President of the Association of the German Pulp and Paper Association (Verband Deutscher Papierfabriken – VDP), Dr. Wolfgang Palm, although the decline is expected to be lower than in many other industrial sectors, because the highly consumable packaging, sanitary/toilet and graphic papers tend to be less affected by falling demand. Anyway, sanitary/toilet papers are the only sector to still register clear growth, but as far as graphic papers are concerned, the declines in circulation and actual size of newspapers and magazines are clearly having an effect. In the area of packaging papers the declining industrial production output has emerged as the main factor. In addition the paper industry is a very capital-intensive sector. It can be assumed that in general in 2009 there will be a clear adjustment of production capacities to the worldwide falling demand through further short-time working and production shutdowns right through to company closures. Last year in Germany alone, paper-manufacturing machines with a capacity of 600,000 tons were already shut down.

China plays a key role

Once again the up-and-coming Asian region, especially China, is playing a key role in the interplay of developments on the international scene. There are no overall figures for paper production in China, which is nevertheless paper’s country of origin. This is where paper was invented and where it is now also increasingly produced. While small, old machines were still being purchased in Europe 15 to 20 years ago, for about the last ten years China has been investing in modern, highly efficient production lines according to international standards. Nevertheless, these investment measures are far exceeding the still high level of consumer growth within the country itself. Because particularly after the Olympic Games, here too there is also a clearly evident decline in demand. Several paper factories have now been closed. However, in China there were and are thousands of tiny paper factories, mostly small family businesses, which are a disaster in terms of environmental standards and technology, and would have gradually had to be closed anyway.
But nevertheless: the Chinese paper industry’s excess capacities are searching for outlets abroad. Although smaller volumes are also being exported to Europe, China is in particular looking for new sales markets in its neighbouring Asian countries. However these countries were also well supplied previously: with European products. China is now therefore becoming increasingly involved on those markets which were previously supplied by Europe. As a result, the European manufacturers are only indirectly but noticeably affected. On top of this there are the numerous products, packaged in corrugated cardboard, which are flooding the European market. The corresponding figures are however currently almost impossible to verify.

Europe remains very competitive

In Germany alone, from 2003 to 2008, over five billion Euro was invested in the paper industry. As a result, Germany also remains competitive in a generally well-positioned Europe. On a worldwide scale declining demand is expected for 2009, and even if the percentage of the decline should be much lower than in other industrial sectors, it will nevertheless leave its mark. But nobody is risking specific forecasts: it will be very difficult, that is clear. Just how difficult exactly, no one knows or is saying. The fluctuations on the international energy markets are further factors in the uncertainty. Due to long-term contracts, many companies have not been affected by the high prices until this year. The sector is hoping for a stabilization in the next few months, even if it does not establish itself at a high level. The sector is not expecting any further dramatic declines, as the paper industry is a very demand-orientated sector and consumption levels will probably not suffer a spectacular slump.

Emission trade giving cause for concern

The as yet unclarified issues regarding European emission trading continue to be a source of great concern for the sector. It is still uncertain whether - due to the risk of migration - the paper industry will receive its emission certificates on a benchmark basis free of charge. Until this happens there will not be any investment certainty either.
In Germany the annual production output of paper, cardboard and pulp fell in 2008 by two percent to 22.8 million tons thus reverting to the 2006 level. However, production from 2001 to 2007 has increased annually by an average of 4.5 percent. In 2008, with a decline of 1.8 percent, foreign sales fell more sharply than domestic demand at minus 0.5 percent.

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