30 April 2001 00:00 [Source: ICB]Marjorie Walker takes a look at current and future trends within the paper industry and the impact these will have on chemical producers
This year, as last, European Chemical News is giving a high profile to the speciality chemicals sector through a series of bimonthly special reports. This week we publish the second, on paper chemicals.
In future months ECN will take a close look at fine chemicals (18 June), paints and coatings (3 September), pharmaceuticals (9 October) and textile auxiliaries (17 December).
The rationale for the closer focus lies in the restructuring taking place in the speciality chemicals sector, as players increase critical mass and focused players emerge from larger companies.
At the same time, margins in the sector are still under pressure, but with some signs of improvement in places, putting pressure on players in terms of innovation, customer service and cost base reductions.
The first of these reports, on plastics additives, appeared in the 26 February issue of ECN.
I hope you find these surveys valuable. Please contact me at john.baker@ rbi.co.uk if you have any comments or ideas for consideration.
The chemicals and paper industries have a lot in common. Both are seen as 'old industries'. Both are mature and suffer cyclical swings in profitability. Like chemicals, the paper industry has a habit of investing too much in the good times and then margins suffer from capacity overhangs. As with chemicals, investments in world-scale facilities are now so large it is almost impossible to avoid overcapacity.
Like commodity chemical players, the paper industry is cutting back production to avoid the worst of the oversupply-induced margin squeeze, but there is always the temptation for weaker players to undercut prices and margins are under pressure.
Pressured by shareholders, both chemicals and the pulp and paper industry are undergoing substantial restructuring. One chemical producer said 'If you look at the performance of the pulp and paper sector in the 1990s, it is horrible.'
Global focusPulp and paper producers, like the chemical companies, have been on an M&A roll, becoming larger and more global in their quest to fulfil the needs of their customers. Sometimes they are becoming more focused too. For instance, Norske Skog used to produce a broad range of paper products - now 70% of sales are newsprint.
Regional players are absorbing their smaller competitors. Some are moving into North America and the faster growing Asian marketplace. Several of the Scandinavian pulp and paper groups have been buying assets in North America. Stora Enso bought Consolidated Paper. UPM-Kymmene failed to acquire Champion but bought Canadian company Repap. Norske Skog and SCA have also been active too. In the US Georgia Pacific bought Fort James and International Paper acquired Champion.
In spite of all this activity, industry concentration is running well behind other industries. The five largest players in the paper industry account for only 13% of global paper and paper-board production. This compares with around 33% for the chemical industry and just short of 70% for consumer durables. There is plenty of room for further consolidation.
There are sectors of the global market where there is a higher degree of consolidation. In the US newsprint market, Bowater and Abitibi Consolidated control over 40% of the market.
Consolidation may have helped, but volumes are under pressure from the slowdown in the world economies, particularly in the US but also in Europe and Asia. Paper was hit first, and it is also suffering from a run down in inventories. This is leading to inventory build with pulp producers, who in turn are cutting back production. In the UK some smaller mills have closed.
When customers are experiencing hard times, it is inevitable that their chemical suppliers will be impacted too. Producers say it certainly has affected volumes, but not pricing too much - yet. This is partly because profitability in some areas of the paper chemical business has been under pressure for some time. The downside is limited.
Paper chemicals in the US marketplace were hit first, but the slowdown is being felt in all sectors of the market and in all regions. Sizing has been under stress for some time but raw material costs are going up, so prices have to remain fairly stable. In pulp chemicals, sodium chlorate prices have been low and businesses on negative margins. The only way is up, say producers, to reflect high power prices and the closure of capacity.
ConsolidationWhen customers consolidate and globalise, the industry supplying the customers has to do the same. Ciba bought Allied Colloids. Hercules bought BetzDearborn. High prices were paid, and Hercules has paid the price of the heavy debt burden acquired with the purchase. Another consideration when acquiring businesses in the specialised non-commodity, service-intensive, paper chemicals businesses, is that a lot of the value of the business lies in its people, and these are assets that are not always easy to keep.
Forecast for the futureWorld demand for pulp and paper chemicals is forecast, by the consultancy Freedonia Group, to increase at 3.9%/year to nearly 78m tonne by 2003, valued at $36bn. It expects volume gains will slightly outpace growth in pulp and paper industry production over the same period.
North America will complete its move from elemental chlorine bleaching to elemental chlorine free (ECF) bleaching this year. Europe no longer uses chlorine.
Sodium chlorate has benefited most from the move to ECF bleaching. Hydrogen peroxide, oxygen, ozone and peracetic acid are winning business in both ECF and totally chlorine free (TCF) bleaching. Future demand for bleaching chemicals will match the 2-3%/year growth in wood pulp production.
Increased use of recycled waste paper means that secondary fibre is forecast to account for 46% of the industry's pulp requirement by 2003, pushing up demand for de-inking chemicals, particularly polyaluminium chloride and sodium silicates. Also this environmental push is lifting demand for various speciality additives required to improve the papers final properties, including wet and dry strength resins, retention and drainage aids, and defoamers.
The industry is also recycling more process water which is increasing demand for biocides, deposit control agents, defoamers and drainage aids. Chemical producers selling to this market are also likely to benefit from the faster growth of higher quality and coated papers, which promotes demand for pigments and fillers, sizing agents and speciality materials such as paper coatings.
|Paper and board production, m tonne||235.8||305.5||364.0|
|Kg/pulp and paper chems/tonne paper||200||210||213|
|Pigments and fillers||15 300||25 055||31 670|
|Pulping chemicals||14 265||15 620||17 530|
|Bleaching chemicals||7925||9065||10 400|
|Recycling and de-inking||1875||3050||3970|
|Sizing agents,coatings and other||7895||11 375||14 080|
|Total pulp and paper chemicals demand||47 260||64 156||77 650|
|Pulp and paper chemicals demand, $m||15 330||26 100||36 210|
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