Go East?

Most discussions about the paper industry focus on three areas: North America, Western Europe and Asia. Latin America, with its vast fiber resources, is sometimes mentioned. There is usually very little discussion of Eastern Europe, since most global papermaking takes place outside its borders. Yet this enormous, underdeveloped market may some day be a big growth market for the paper industry. Can this region become another China, moving ahead in paper production by leaps and bounds? That's hard to say, but it's worth a look.

Margaret Leach of Pyrabelisk Ltd., a consulting firm based in Westbury, England, that focuses on Eastern Europe and Russia, gave a concise and insightful review of the Eastern European paper industry at AF&PA's Paper Week in March. She noted that big changes are taking place in Eastern Europe and Russia.

Clearly, this region is still struggling to throw off decades of economic mismanagement by their formerly Communist governments. Eastern Europe is an enormous market, with a population of 411 million, larger than Western Europe's 389 million people. However, the richest Eastern European country has less wealth than the poorest Western European country, a big damper on paper consumption. On average, Eastern Europe enjoys only 20 percent of the prosperity of Western Europe, according to Leach.

Eastern Europe is still recovering from the economic collapse of the early 1990s and its countries are undergoing economic reform at different rates. Eastern Europe is still tied, in part, to the Russian economy. The 1998 Russian economic crisis affected the whole region, said Leach, but Eastern Europe has seen significant recovery since 1999, with low inflation, stable economies, and accession to the European Union (EU). In fact, the Eastern European countries joining the EU, which Leach called "transition accession countries," represent the fastest growing countries in Europe.

Of course that growth is coming from a very low base. Eastern Europe produces about 20 million metric tons of paper and board annually, compared with about 120 million annual metric tons in Western Europe. The region produces mainly bulk grades of paper and board; nearly all of its coated paper consumption is imported. However, Leach noted that the region has ramped up production of cut size papers. Growth in coated cartonboard, for food products and consumer goods, has also been strong.

Three groups control more than one million metric tons of production in Eastern Europe: Ilim Pulp, Frantschach, and International Paper. However; there has not been large scale investment in the Eastern European and Russian paper industries. Western investors own fewer than 40 mills out of 270 in this region, according to Leach. In Russia, investors are still wary of the volatile Russian economic and legal climate. However, as more Eastern European countries are integrated with the EU, that investment climate is likely to improve dramatically.

Solutions! has featured two articles on companies and mills in Eastern Europe: one on the Frantschach Steti mill in the Czech Republic (June, 2002), and another on Frantschach itself, which has extensive operations in Eastern Europe (April, 2003). From reading these articles you can see that operating pulp and paper operations in Eastern Europe poses unique challenges, but there is also a sense of great opportunity. For example, Leach forecasted significant growth in newsprint consumption for Eastern Europe. With development in the service sector and the growth of modern retailing in Eastern Europe comes growth in associated markets, such sis coated and SC papers for magazines and catalogs, and product packaging and transport packaging for the growing consumer goods market.

As pulp and paper companies grapple with negative growth in North America and low growth in Western Europe, it may be time to "look East" for new markets. S!

ALAN ROOKS Editorial Director [e-mail]