Plotting a course in the global coated paper market.

Continued globalization is accelerating businesses toward a single world market, and the coated paper industry is a perfect example of the trend. Compared to 15 years ago, the global supply and demand profile for our industry has changed significantly. Understanding the changes, and, more importantly, the effect of the changes on the market for coated paper, is one key to sustaining profitable growth for companies competing in global paper markets.

It is equally critical for Dow and other companies that are part of the coated paper supply chain to understand the market dynamics. To that end, Dow has developed a model to assist in determining the global import and export situation for the next several years. By using the model, we have been able to develop one view of potential changes in the market that may affect coated paper producers here in North America, as well as in Europe and Asia.

At the same time, we have tracked changes in the performance properties for coated papers and correlated any significant change in properties by region. Paper producers can use this data to help shape their products to compete effectively in targeted markets.

TRACKING CHANGE-1990-2005

To build the forecasting model, we analyzed data from the past 15 years of industry production and imports/exports. The following is a brief summary of the information we tracked. Figure 1 and Figure 2 present a historical profile of production capacity and demand by region, comparing 1990 to 2005.

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Coated Freesheet (CFS): The global capacity picture shifted dramatically by 2005, with significant growth in Europe and Asia. Demand showed the same dramatic changes, with Asia growing to be the largest consuming market by 2005. With Asia having more than half of the world's population and currently a very low per capita consumption of coated paper (4 lbs/person vs. 40 lbs/person in the United States and Western Europe), demand in this region is expected to continue to grow at a much faster rate than the balance of the globe.

Coated Groundwood (CGW): In terms of capacity by region, the global picture has remained basically unchanged, with Europe and North America remaining the dominant suppliers, though capacity growth in Europe has outpaced North America. Demand growth has lagged behind capacity growth.

Overall capacity for coated paper has more than doubled in the last 15 years. In 2005, CFS demand was approximately 93% of capacity and CGW demand was 87% of capacity. CFS demand has grown at a rate of 8% per year as influenced by growth in Asia, while CGW has grown at a rate of 4% per year. Total industry growth has been about 6% per year.

Figure 3 and Figure 4 depict the "flow" of coated paper products, CFS and CGW respectively, between the three major regions, expressed in terms of net exports. Net exports are defined as total exports less total imports. Where there is a negative number, it suggests that imports exceeded the amount of material exported. To summarize:

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Coated Freesheet: In 1990 there were approximately 250,000 tons of imports to North America, primarily from Western Europe. This total accounted for approximately 6% of North American CFS demand. In 2005, North American imports were up dramatically and primarily came from Western Europe and Korea as capacity increased, and because the duties instituted in China in the 4th quarter of 2002 shifted much of Korea's export shipments from China to North America. CFS imports are now supplying approximately 28% of North American demand.

Coated Groundwood: Western Europe is the major exporting region. In 2005, net exports skyrocketed with approximately 3.6 million tons of paper going to other regions, primarily North America and Latin America.

BUILDING THE MODEL

The first step in the process was to identify an initial list of variables that may have the most impact on the movement of paper. The following is the list of variables that were used for the preliminary analysis:

* Apparent Consumption (demand)

* Capacity

* Exchange Rates

* GDP

* Imports

* Operating Rates

* Production

* Population

Dow's statistics group analyzed the historic data to determine the correlation of these factors to coated paper exports. The methods included equation definitions, simple time plots, neural networks, decision trees, and regression analysis. The actual historical data for each of these attributes, for each region, were used for the period 1990-2000. The data from 2001-2003 were held out and compared to the information derived from the proposed models to determine which model best fit the data and was the most accurate.

Two models were formulated and ultimately compared. One was a derived method and the other a raw type using original units and ratios to world exports. Both predicted very well. The derived model was more consistent over both large and small export regions.

The analysis identified that four of these variables have a correlation to the movement of exports. They are consumption (demand), capacity, production, and imports. To summarize these findings:

Consumption (demand) of a region has direct, inverse correlation with exports. This suggests that as consumption of these papers increases in a region the amount exported decreases. It would be expected that if the volume could be sold locally producers would pursue this avenue first.

Capacity shows a correlation to exports; however, this correlation is weak. It is believed this correlation is convoluted, suggesting that other factors play a role in this relationship, such as operating rates. Operating rate generally is a function of both capacity and demand. Production shows a direct correlation. The data suggest that as production of a region increases, exports increase as well.

Imports show a weak correlation to exports. This correlation appears counter intuitive. If producers in a region export, why would they import? The current hypothesis is that when a region exports the market is more open and the region also has some import volumes. These imports are likely products that are not optimal for that region to produce. Some regions may focus production on generic or commodity grades and be willing to import "specialty" grades that are not as cost-effective to produce.

Looking back at the variables that were tested, it is also important to note that this analysis did not show a correlation of exchange rate to exports. Recent data supports this conclusion. A perfect example of this would be imports into the U.S. Historically, it was believed that when/if the dollar weakened against the Euro that Europe would export less paper to the U.S. That has not happened. Even though the exchange rate changed dramatically over the last four years (from a very strong dollar to a very weak dollar), exports to the U.S. continued and in some instances strengthened.

After identifying the overall variables with a strong correlation to paper exports, it is noted that the key variables are production and consumption. Based on these results it would appear that paper producers feel it is detrimental to scale back their production too far and lose operational efficiencies. Instead, they will continue to export to less attractive markets (from a profitability perspective) if necessary to move paper and maintain or grow market share.

PUTTING THE RESULTS TO WORK

The results from this initial modeling exercise suggest the following for the next three years:

* Asian exports of CFS will remain at a similar level or decline, as the Asia region will consume much of the new CFS production capacity.

* Asian CGW demand will continue to show net imports as lack of fiber sources in Asia make it difficult to have integrated pulp and paper mills, which is important in the production of this product.

* It is expected that exports of CFS and CGW from Western Europe will continue to climb.

* In the United States, CFS and CGW will continue to have high import rates with CFS similar to current levels and CGW continuing to increase gradually.

This analysis is just the first step in the study. Many additional variables are being added to this equation to improve understanding of global market dynamics, and Dow customers are benefiting from our investment in the research. Globalization continues to be a critical part of this industry's future, and suppliers with significant global resources and experience are an important asset to help their customers identify new competitors and fine tune technology offerings to meet market needs.

TECHNOLOGY AND PAPER PERFORMANCE

Supply and demand and import/export data are only part of the story about the globalization of our industry. To offer customers a comprehensive view of the impact of a more global paper industry, Dow technical experts tracked changes in paper properties over a similar time period, in this case from 1991 through 2004. Understanding not only how much product is being imported, but also the properties and quality of the competitive product is important to help our customers make decisions about competitive issues.

We recognize that industry-wide changes in key paper properties cannot be linked only to a change in the import/export profile of our industry. Advances in technology, raw material availability and pricing, and customer requirements may have an equal or greater impact on paper properties. But the data reported here do show an interesting correlation to global market dynamics.

TRACKING CHANGE-1991-2004

We employed two methods to track changes in paper properties:

* An ongoing internal Dow benchmarking study in which we obtained and evaluated from 8 to 15 commercially available papers at regular intervals over the past 15 years.

* An audit of commercially available industry information sources, including data from Grade Finders Inc. * and other publishing/printing catalogs that report paper properties on up to 3000 individual products and grades.

The audit of commercially available information was used as a check to determine if the trends emerging from our internal benchmark study were universal or particular to the Dow study only.

THE DOW BENCHMARKING STUDY

Table I reports changes in properties of a #3 coated freesheet (CFS) paper.

Table II reports changes in properties of a #5 coated groundwood (CGW) paper.

To summarize, by 2004 the measured brightness ranges for both grades increased (brighter) and narrowed compared to 1991.

KEY PROPERTY AUDIT

Figure 5 and Figure 6 report changes in brightness for #1 and #3 CFS papers. The line represents the average of the individual sample data for each year. To summarize, there is an upward trend for brightness for all papers and a narrowing of the brightness range. Imported papers, on average, were brighter than domestic papers in 1993. By 2004, the gap disappeared. We believe the change is due to the changes in papermaking and coating technology and, to a lesser extent, industry consolidation that has led to global paper companies (e.g. SAPPI, Stora Enso, UPM).

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Figure 7 reports changes in brightness for #5 CGW papers. To summarize, there is very little change in brightness ranges. Note that historically, imports of CGW to North America have been relatively modest compared to CFS; we also believe that papermaking (acid vs. neutral) and coating technology (materials and equipment) have not experienced dramatic changes compared to CFS papers during this period.

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Note that we have reported on brightness in this discussion. Opacity performance was relatively unchanged over the same period.

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LOOKING AHEAD

It is often said that the best managers are those who can see the future. At Dow, we believe that a comprehensive view of the recent past can help our customers see the future, and plan accordingly. The information presented here, both tracking changes in global supply and demand and correlating product properties to the same market dynamics, is one tool that papermakers can use to help plot their course in a new global marketplace.

Figure 3

Global Flow - CFS

               Thousand Tons

                1990  2005

W. Europe        251  2407
E. Europe        -12  -750
China            -19    -2
Korea             50  1024
Japan            254    23
Mid East        -117  -805
Latin America   -409  -583
N. America      -246  -982

Source: RISI

Note: Table made from bar graph.

Figure 4

Global Flow - CGW

               Thousand Tons

                1990  2005

W. Europe        861  3610
E. Europe        -33  -669
China             -2   -49
Korea             -6   -61
Japan            -85  -155
N. America      -256  -813
Latin America   -299  -317
Other *               -914

Source: RISI

* Other = MEAF, Oceania, Other Asia

Note: Table made from bar graph.

Table I

COATED FREESHEET (#3) BENCHMARKING (Brightness Standard * 76-82)

PROPERTIES       1991      1995     2004

Basis Weight   60 - 80    60 - 80  60 - 80
              90-120g/m2

Brightness     80 - 84    80 - 85  82 - 89

* prior to 2004

Table II

COATED GROUNDWOOD (#5) BENCHMARKING (Brightness Standard * 68-72)

PROPERTIES      1991       1998        2004

Basis Weight    40lb     32 - 38lb     36 - 45
              (60g/m2)  (48-57g/m2)  (54-67g/m2)

Brightness    69 - 73     69 - 73      71 - 77

* prior to 2004

* Data used courtesy of Grade Finders Inc. Exton, Pennsylvania

RELATED ARTICLE

WHAT YOU WILL LEARN

* How to understand the market dynamics of the global coated paper market

* An analysis of data from the past 15 years of industry production and imports/exports

* How Dow analyzed historic data to determine the correlation of key market factors to coated paper exports

ADDITIONAL RESOURCES

* 2005 TAPPI Coating Conference Proceedings CD-ROM. Member Price: $57.00. Non-Member Price: $83.00. To access this product, type the following product code in the search field on www.tappi.org: COATINGCD-05. Or call TAPPI Member Connection at 1 800 332-8686 (US); 1 800 446-9431 (Canada); [phone] (International). A version of this article appears on the Proceedings CD-ROM along with several other papers that were presented at the conference.

* 2005 TAPPI Coating Materials: Pigments, Binders Short Course Notes CD-ROM. Member Price: $57.00. Non-Member Price: $83.00. Product Code: CMCD-05. This CD-ROM includes papers and materials prepared by the Short Course instructors to supplement their presentations. Specific topics include coating formulations, Calcium Carbonate and coating additives.

* "Coated Markets Improve, Technology Marches On," by Charles Klass, Solutions!, April 2005. Product Code: 05APRS026. Free to TAPPI and PIMA members.

* "Coating Pigments: From Size and Shape to Nanotech," by Charles Klass, Solutions!, September 2005. Product Code: 05SEPSO34.

DONNA M. BABCOCK AND FEMI KOTOYE, DOW CHEMICAL

Author's Note: Donna Babcock contributed the portion of the article related to import and export modeling; Femi Kotoye contributed the portion of the article related to changes in paper performance properties.

ABOUT THE AUTHORS

Donna M. Babcock is marketing executive for Dow Latex, The Dow Chemical Company, Midland, Michigan. Contact her by email at [e-mail]. Femi Kotoye is new business development leader for Dow Latex, The Dow Chemical Company. Contact him at [e-mail].