In general, Specialties paper producers are small - often smaller than their suppliers or even their customers.
Most Specialties paper products are made with small and old machines. Average deliveries are small and some grades can be vulnerable to competition from larger machines that have been converted from other grades, such as Newsprint and Printing & Writing. Product knowledge, customer service, good logistics, and business acumen can protect small Specialties paper producers. Nevertheless, some Specialties products are already being made with bigger machines, begging the question: Will there be further shifts toward bigger machines in the future?
Printing & Writing paper producers continue to face declining market demand for their products. At the same time, many grades are becoming more like commodities rather than products to say nothing of customized solutions. This makes Specialties paper products a very attractive transition choice. Doubtless, there will be even more new paper-based solutions available in the future. But technically suitable machines do little if you can't manage the complexity of the value chain the new end products confers. Sappi and Kruger are prime examples of traditional Printing & Writing producers shifting their business into Specialties paper grades. It will be interesting to see how this transition process will shape the industry.
Specialties paper producers face many challenges, but they also have numerous opportunities as technology is changing rapidly and new products are being developed that will enjoy market growth in the long term. Urbanization and ageing populations are trends that will create new opportunities for Specialties producers.
New products such as individual packaging for food that can be refrigerated, heated in the oven, and served to the end-customer in one-and-the-same container create more value for producers who are capable of making such paper products. New medical products together with the need for clean water and air offer new avenues of opportunities as well.
Globally, and compared to other paper grades, Specialties grades are growing albeit not at the rates seen in Packaging and Tissue (Figure 1). In Asia (notably China), Specialties is growing rapidly while Europe and North America have seen declines though this has recently flattened out. Globally, Specialties grades like Art Paper, Laminating, Packaging and even Cigarette paper are growing, while Communications and Wall Lining are trending down (Figure 2). Amazingly, China's demand for cigarettes is growing fast even as the rest of the world quits smoking.
Historically, we can say that Europe dominated in adding Specialties paper capacity until the late 1980s and then Asia took over, becoming the main growth driver ever since. Overcapacity is inevitable, partly because of repurposing. Despite this, a lot of the machines are still small, even in Asia, which is to be expected given the low-volume demand for many highly specialized grades.
Most Specialties mills are either non-integrated or use recycled fiber. Consequently, fiber raw materials represent more than 50% of all their cash costs, with Kraft pulp being the biggest furnish component in all regions. Fiber thus presents a huge risk variable to Specialties producers (Figure 3). While for most major grades, about half of the chemical pulp needed for furnish is integrated, for Specialties, integrated pulp is a very small part of the total furnish – maxing at 20% except in North- and Latin America, where it is significantly higher.
In the next five years, demand for chemical pulp (integrated and market) from Printing & Writing grades is expected to decline by close to 1 million tons, according to Fisher's models. At the same time, Specialties will increase demand for chemical pulp by about 800,000 tons.
Meanwhile, Brazil's announced new hardwood Kraft pulp capacity is likely to exceed global demand. Given the low-marginal cost of production in Brazil, Fisher estimates that if prices fall due to oversupply, 5-6 million tons of Chinese pulp production may be at risk as the Chinese government pressures polluting and inefficient producers to close down.
Access to low-cost fiber will be a focal consideration for entering the Specialties paper business. But new technology and the scale of size are important too. New technology enables more precise products to be made. In the past, larger machines couldn't handle small customer orders and too many product categories, leading to efficiency problem. New technology and automated processes are helping to mitigate those issues too. Still other factors to consider include the disposition of brand owners and distribution channels. What if a large Specialties customer decides to start its own production of Specialties paper? Or if large customers consolidate, making them big enough to justify the addition of larger new machines? Location and logistics are also clearly important, as are low-cost energy, vertical integration to the end product chain, know-how and good customer service. All this will make some of the smaller producers' life difficult in the future despite the growing demand of existing and new Specialties paper products. We will most likely witness more consolidation in the years ahead. Bain Capital's acquisition of Fedrigoni is the latest transaction we have seen.
As Packaging producers are demonstrating, downstream integration is a means for improving profitability and serving end-users in new and better ways. This is so important that the paper producing part of the equation is becoming a less dominating driver of some Packaging producers' businesses. Can this be the model for some Specialties producers as well? E-commerce, on the other hand, is probably going to blur the difference between some of the containerboard and Specialties packaging solutions. In the past, containerboard was mainly used to carry multiple units and heavier loads. E-commerce demands are often more individual and light weight in terms of packaging needs.
In Specialties grades, cash cost profiles are very steep (Figure 4). This makes it fairly safe to invest in the first quartile of the cost curve for any given Specialties grade. Globally, almost 25% of current Specialties assets are at high risk, mainly because they are small, old and high-cost.
Specialties in Global Trade
It is surprising how little apparent global trade there is in some Specialties grades. Low freight costs are shrinking around the globe, so it could be cheaper to ship to the U.S. East Coast from Portugal than from Minnesota. The impact of this new "Silk Road" is unknown but it could encourage new international trade flows. Approximately 35% of NBSK Market Pulp is traded compared to less than 5% of Grease-Resistant and Filter papers (Figure 5). That may change as transportation costs dive and customer size increases. Global trade is no longer just for big commodities.
For those Specialties producers able to sell globally, there are plenty of opportunities for export. Let's take Europe as a case in point. The decline of the Euro is helping Europe increase exports to the U.S. and to build new export-oriented capacity. Among others, Gruvön, Husum, and Varkaus, have all rebuilt machines and are exporting to the U.S. There is, for example, no Parchment production in the U.S., though the percentage growth rate is high, so Europe can export to this market and investment in this grade is very safe.
Worldwide, there are 588 mills selling about 22 million tons of Specialties paper listed in the FisherSolve™ database. In Europe, there are currently 165 sites with 278 machines making Newsprint and Printing & Writing paper, 49 of which also produce Specialties (Figure 6). This amounts to nearly 1 million tons of Europe's Specialties paper being made on machines producing Newsprint and Printing & Writing grades. Most of the Printing & Writing machines are small, old and not efficient, but they could be converted into Specialties machines.
Most of the lines making Specialties in Europe are privately owned (62% of capacity) with all that that implies for continued operation under difficult conditions, and for intense competition (Figure7). Most of the small machines making Printing & Writing, Newsprint and Packaging are also privately owned and are more likely than those in public companies to be repurposed.
There are more than 50 machines in Europe making Printing & Writing paper that are only 2.5 meters wide and they are a prime target for conversion to Specialties (Figure 8). Particularly, we can expect machines making woodfree papers in integrated chemical pulp sites to be candidates for conversion.
Will there be more repurposing or new machine installations in the future? Both will happen but particularly so in Europe and North America where we will see more machine conversions, and especially at mills that have chemical pulp available on site. Specialties papers have the potential to be the next big thing in the pulp and paper industry. New technologies, research, and better understanding of how fiber can be used in new solutions (like foam forming) are leading the way from within the industry. People's growing irritation on plastic waste and tightening legislations represent external forces driving change — UK-based supermarket chain, Iceland Foods, which specializes in frozen food, announced it would go plastic-free within five years to help end the "scourge" of plastic pollution. Theresa May, Prime Minister of the UK pledged to eliminate all avoidable plastic waste within 25 years as part of the government's environmental strategy.
This is all good news for Specialties papers.
The source for market data and analysis in this article is FisherSolve™.