Good news and bad news: the global view on newsprint? Could be worse!

Is consolidation really all it's cracked up to be? As far as the newsprint sector is concerned, it looks like we're about to find out. Ask some market observers and analysts, and they'll confidently predict that since the big players really are big these days, they'll keep supply and demand more or less in balance. But not everyone is convinced, holding the view that there are still enough un-merged players to destabilize the market. By the time this year is over, price levels may well tell us who was right.

Historically, when demand weakens (as it was in early August), prices have suffered accordingly. And this time around, although there has indeed been some erosion, the fall in headline North American prices hadn't yet developed into a three-digit drop. As one North American commentator says, despite shrinking demand, "prices are still in the high US$ 500s [per metric ton]. Traditionally, pricing [in a weak market] could be down to $450/tonne."

Informed predictions vary widely, with forecast lows in North America (European prices are lower due to the weak Euro) ranging from the current level down to the low US$ 500s/metric ton, with others sitting on the fence in between. So how can we tell whether the consolidation to date will help producers to sail through the current heavy weather?

SO FAR, SO HUGE

One major fact is the enormous consolidation that has taken place in recent years. Bearing in mind that the last comparatively weak year for newsprint was 1998, when global demand was stagnant following a very strong 1997, it is clear much has changed.

Even a look at just the major players shows the dramatic transformation since 1998. The world's largest newsprint manufacturer, Abitibi-Consolidated, which itself was the result of a merger between Abitibi-Price and Stone-Consolidated in 1997, was in at the creation of the Pan Asia Paper Company (Papco) together with Norske Skog and Hansol. Abitibi also took over Canada's Donohue last year. The new Abitibi-Consolidated markets over six million metric tons of newsprint per year.

The second-largest company is Norske Skog, which has been expanding in newsprint over the past few years. As well as buying two Shin Ho mills in Thailand and South Korea, then contributing them to the Papco venture, Norske Skog also signed up for a joint venture with Klabin in Brazil. To top all that, the company bought Fletcher Challenge Paper last year, with mills in New Zealand, Australia, Malaysia, Brazil, Chile and Canada. If proposed deals for Germany's Haindl (see below) and Canada's Pacifica Papers go through, it will take further large volume strides. The Pacifica deal has so far been approved by the Supreme Court in British Columbia, but still requires regulatory approval from the Canadian Competition Bureau and Investment Canada, and is expected to close at the end of August.

TRADING PLACES

Back in Europe, meanwhile, Stora and Enso merged to form what is now marginally the third-largest newsprint producer (with something over three million tonnes of capacity), while Bowater--the biggest in the USA--more than doubled its capacity through the purchase of Canada's Avenor, Korea's Halla and Newsprint South in Mississippi, USA. And Bowater looks set to steal the third spot from Stora Enso if its proposed purchase of Canada's Alliance Forest Products is approved. So far, the Canadian regulatory authorities have approved the deal, but the United States Department of Justice has asked for more information and completion of the deal is now not expected until the end of the third quarter.

The recent agreement to merge Japan's Nippon Paper and Daishowa forms world's the fifth-largest newsprint producer, but Finland's UPM-Kymmene could soon be challenging for the fourth or even third spot, if the Haindl deal goes through. The reason that both UPM-Kymmene and Norske Skog are affected by this is that UPM-Kymmene has offered to buy Haindl and to sell on two of the company's six mills to Norske Skog. But it's not a done deal yet.

Norske Skog explains that the future of the transaction "is up to the European Commission. Phase one has ended and the Commission has decided that it needs [to carry out] a more extensive investigation. [However], we are still confident the Commission will rule that this deal will be closed." As the Commission's extended investigation could last for up to four months, which means a possible completion date around the end of November. "We expected this investigation. Haindl may not be the biggest newsprint company in the world, but it is a significant player."

BIG OUTSIDE JAPAN

While Nippon and Daishowa have been getting friendly in Japan, undoubtedly the clearest example of international consolidation in the Asian newsprint arena has been the birth and subsequent development of Papco, as mentioned above.

Back in 1998, Norske Skog, Abitibi-Consolidated and Korea's Hansol agreed to form a joint venture, which effectively left the three companies each owning one third of newsprint assets formerly owned by Thailand's Shin Ho (recently bought by Norske Skog) and Hansol.

But only a couple of months ago, Norske Skog and Abitibi-Consolidated agreed to buy out Hansol's stake in Papco for US$ 350 million (US$ 175 million each), to give them each a 50% stake in Papco. The deal was still pending in early August, but Norske Skog said it expected the buy out to close during the third quarter.

Papco is Asia's largest newsprint producer outside Japan, and its production operations comprise four mills in Korea, Thailand and China, with total capacity of almost 1.5 million metric metric tons per annum (output reached 1.44 million tonnes last year). The former Hansol mill in Chonju, Korea, is the main asset, with an annual capacity of about 1 million metric tons on seven machines.

The joint venture's marketing agreement provides for Papco to sell all paper produced by Abitibi-Consolidated and Norske Skog destined for Asian markets, while any Papco-produced products exported to the Americas are to be marketed by Abitibi-Consolidated, with all exports to Europe, the Middle East and Africa to be sold by Norske Skog.

But while Papco is clearly a big deal (if it were an independent company, it wouldn't be far outside the world's top five producers), it is of course not the only example of transcontinental cross-pollination in the newsprint sector. Bowater bought Korean company, Halla Pulp and Paper, also in 1998, ahead of Norske Skog's purchase of the Shin Ho mills, which were included in the original Papco deal.

HOW MUCH IS ENOUGH?

What all this boils down to is a newsprint industry where the top five producers own roughly half of the world's 40 million annual metric tons of capacity. As Norske Skog said in its annual report for 2000, "by the end of August the total value of mergers and acquisitions in the forest industry had reached US$ 58 billion-far higher than in any previous year. Consolidation has led to a more owner--and market-oriented sector; this should mean greater stability ..." But will it?

An experienced market observer in North America believes the signs are good: "Bowater, Abitibi-Consolidated and Norske Skog own well over 50% of [North American] capacity. When they take a decision, they have a much larger impact [than previously]. No one can really skirt around them, and they all announced that they'd be taking downtime."

Gordon Manuel, director of government affairs at Bowater agrees: "The market is seeing more discipline" in both capacity additions and production behavior, he argues. "We [Bowater] will supply the demand. We will not go past that. Historically in this industry, that has not always been the case." He believes that the new discipline "augurs well" for the newsprint industry in the medium term.

So what effect has this determination to match supply and demand actually had? With the US market having such a heavy influence on markets elsewhere (in general, as well as in newsprint), it is worth a closer look at just how things are faring in America.

The U.S. operating rate for the first half of 2001 was still at 93%, although down from 96% a year earlier. However, the June 2001 number was only 87%, again down from 96%. Pessimists will say this shows the market is getting weaker, with order books forcing producers to cut back output. Manuel confirms that "it is certainly a challenging atmosphere. There is no question about it: as the economy slows down, the advertising dollars aren't there." Optimists, on the other hand, will say that the figures demonstrate producers' disciplined attitude towards tailoring their output to fit the downward curves on the consumption graph.

According to the available numbers, the optimists might not be far wrong. Indeed, one source argues "you couldn't get that operating rate if those companies didn't take downtime [like they said they would]." And this development was broadly reflected in the figures for North America as a whole, too. Total North American newsprint shipments were down 7% for the first half of 2001-that's the bad news. But on the upside, at least in terms of the supply/demand balance, North American production was down 6% for the same period. For June, North American shipments were down by 12%--that's the even worse news. But once again, on the upside, mills apparently refused to over-produce, resulting in a slightly larger percentage drop in output. Commenting on recent figures, one analyst points out that although demand may not be buoyant, "shipments have outpaced production." North American operating rates during the first quarter varied from 95%-97%, while the average for the second quarter was closer to 90%.

WORLD VIEW

So much for North America, but can the rest of the world help out the lackluster US market? In short, probably not this year. Demand growth forecasts made by Cepiprint some months ago for this year's newsprint consumption in Europe (+2.3%) may now seem somewhat optimistic, although half-year Cepiprint numbers still show apparent consumption up about 1% from last year, and one fresh global forecast predicts this will be maintained until the end of the year.

However, several commentators on Europe are talking of a full-year 2001 figure possibly slightly down on the 2000 volume. The source who quoted Western European apparent consumption some 1% ahead of the year-earlier figure also warns that the most recent figures showed the curve heading downwards. European deliveries were down in May and June, according to this source, who went on to predict that although demand traditionally picks up after the mid-year vacation period, a further slight decline was entirely possible this year.

He explains: "Newsprint consumption is certainly driven by economic activity; it doesn't have an independent life. And we have clearly seen that the European economy is dependent on the U.S. economy. There has been a very definite slowdown in economic growth in Europe." Illustrating the point, he cites growth forecasts for the U.K. and German economies, which have recently been revised downwards. The bad news for the newsprint sector is that these two countries account for half of European newsprint consumption. But he also points out that a slight drop in consumption from last year would be no catastrophe, as the bar was set very high in 2000.

Like their North American counterparts, Europe's producers are keeping a tight rein on new tonnage entering the market. Western European capacity is actually expected to fall this year (as it is in the USA), while growth for 2002 is forecast to be marginal, at just 0.3%.

GOOD NEWS AHEAD

Looking further ahead, one source predicts that "we are clearly not seeing a V-shape recovery [in global newsprint markets]. We do not expect 2002 to make a very strong recovery. [Although we do think], there will be some [recovery next year], it will not be tremendous in the first half. It will take more like nine to 12 months."

Opinions may vary when it comes to the prospects for the immediate future, but looking a little further ahead, the Pulp and Paper Products Council(PPPC), a North American trade group, expects things to look better once this relatively difficult 2001 is out of the way.

Following the drop in demand expected this year, consumption is slated to bounce back with a respectable 2.1% increase next year, easing back to 1.4% growth in 2003. At the same time, capacity is again only expected to creep up marginally in 2002 (+0.4%), while the further 1.4% rise in capacity slated for 2003 ought to be marginally outstripped by the capacity growth forecast for that year. Add it all up, and the PPPC believes the results will show demand equivalent to 92.7% of capacity next year, improving to 93% in 2003.

To sum up, while the PPPC forecasts a growth rate for newsprint demand of only 0.2% worldwide for 2000-2003 combined, the good news is that the worst of that predicted difficult period will already have happened by the time this article is published.

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