Prospects in packaging

By Kasia Patel

iStock

The paper industry has historically been a huge consumer of industrial minerals, particularly traditional writing and printing grades, which use kaolin, talc, ground calcium carbonate (GCC), precipitated calcium carbonate (PCC) and bentonite in their production. Minerals are used as coatings, fillers or as part of the production process, and paper products can contain more than 50% mineral content, according to The European Calcium Carbonate Association (CCA Europe). 

According to the Confederation of European Paper Industries (CEPI), initial estimates for 2017 show that paper and board production globally increased by 1.5% in 2017, reaching 420 million tonnes worldwide.

Declining production in Canada, South Korea and India was more than offset by strong growth in Brazil, Russia and China. 

Chinese growth accelerated, increasing by 4.7% in 2017 compared with 2.9% in 2016, CEPI’s preliminary statistics for 2017, published in February, show. The organization also noted moderate production growth in Japan and stable production in the United States.

For CEPI member countries, which include Finland, France, Germany, Italy and the United Kingdom, paper and board production increased 1.5% reaching 92.3 million tonnes in 2017. 

New capacities and upgrade of existing ones have more than compensated for closures in 2017, similar to 2016," CEPI said. 

However, in the increasingly digital age of paperless offices and iPads, paper manufacturers are being forced to reposition themselves and look to higher-margin and growing paper end-user markets, such as specialty paper and packaging products. 

As CEPI noted in its recently published statistics, the gap between falling production of graphic grades and the rising output of packaging grades continues to widen.

Production of paper and board by grade in CEPI  countries, 2017

Total Paper and Board producton 92.3m tonnes Source: CEPI estimates

Minerals in paper

Lime, in the form of calcium oxide, is used to regenerate caustic soda in the pulp-making process for paper manufacture. Kaolin, calcium carbonate, bentonite and talc can be used to coat paper for high-quality printing applications, while both kaolin and precipitated calcium carbonate are used as a filler to increase sheet volume and porosity, which ensures high whiteness and opacity levels. 

According to Girona, Spain-based PCC and limestone producer Cales De Llierca, global demand for calcium carbonate has been rising and expected to exceed 110 million tonnes per year in the near term. 

The company said in mid-2017 that demand for both GCC and PCC is continuing to increase for paper-coating applications, mineral fillers and in plastics. 

It highlighted the paper industry in the US as the leading consumer of the mineral, accounting for about 1.7 million tpy compared with less than 1 million tonnes for adhesives, sealants, paints, rubbers and plastics combined. Globally, Cales De Llierca said that "Asia occupies an increasingly import share [of calcium carbonate consumption], particularly in the paper industries."

According to a report published in February 2018 by Transparency Market Research, demand for calcium carbonate is expected to increase at a compound annual growth rate of 5% between 2017 and 2025. 

While the report, Calcium Carbonate Market - Global Industry Analysis, Size, Share, Growth, Trends and Forecast, 2017-2025, pinpoints other areas of growth for the mineral, such as plastic, rubber, paints and pharmaceuticals, it notes that paper and building construction are two sectors providing the strongest traction. 

The value of the global calcium carbonate market, according to the report, is expected to increase from $15.2 billion in 2017 to $22.3 billion by the end of 2025. 

While some paper products have seen a decline in demand, calcium carbonates market share is growing as it increasingly replaces kaolin in the paper industry, according to Transparency Market Research. 

Additionally, paper manufacturers are continuing to focus on increasing mineral loading in paper to offset the higher cost of pulp, with the Asia Pacific region scheduled to be the most lucrative region in terms of calcium carbonate consumption. 

Not on a roll: According to the most recent figures from the American  Forest & Paper Association, printing and writing paper sales are  continuing to decline. Total printing and writing paper shipments fell 5%  in January 2018 compared with January 2017.  iStock

North America

Despite overall increasing consumption of calcium carbonate, a major concern for mineral suppliers to the paper industry is falling demand in graphical paper grades, particularly in mature markets like North America, resulting in suppliers looking both to new end-user markets and geographies for opportunities. 

Minerals Technologies Inc (MTI), a major supplier of PCC to the paper market, faced a number of restructuring and non-cash impairment charges as a result of the closure of paper mills in North America. The company also faced charges related to the alignment of staff into "higher growth regions," it said in February 2018. 

MTI’s PCC sales declined 2% in 2017 owing to sales declines in North America, which offset growth in Asia, Europe and Latin America. Although GCC sales increased 4% due to higher volumes in construction and automotive markets, these were partially offset by a 3% decrease in talc sales.

However, indicative of its focus on higher growth geographies, in 2017 MTI signed two agreements with Asia Pulp & Paper Group for the construction of two satellite PCC plants in Indonesia for a total PCC capacity of 305,000 tpa. 

According to the most recent figures from the American Forest & Paper Association, printing and writing paper sales are continuing to decline. 

Total printing and writing paper shipments fell 5% in January 2018 compared with January 2017, with a small increase in shipments of uncoated free sheet not enough to offset year-on-year declines in coated free sheet, coated mechanical and uncoated mechanical paper. 

Data published by the association in February indicates that total printing/writing paper inventory levels fell 1% month on month in January 2018. And total imports of printing and writing paper fell 5% in the full year 2017 compared with 2016, although exports increased 5% in the same comparison. 

Helsinki, Finland-based Stora Enso is one of the world’s leading pulp and paper manufacturers and the company’s recently published 2017 financial statement reflects the decline in printing and writing paper.

"Structural erosion of paper demand continued in Europe and North America during 2017," the company said, noting that North American demand for paper fell by 6% compared with the previous year, compared with a drop of 2% in global demand. 

"However, variation between paper grades is wide," Stora Enso said. "Uncoated fine paper global demand was stable whereas newsprint declined by 7%."

Stora Enso said that while the effects of a 10% increase in pulp market prices would have a positive impact of operational earnings before interest and taxes (Ebit) in 2018 of €105 million ($129.2 million), a 10% increase in energy prices, wood prices and chemical and filler prices would negatively affect 2018 Ebit by €13 million, €182 million and €64 million, respectively. 

However, despite the declines in graphical paper, diversified paper producers in and raw materials suppliers in and to North America are benefiting from headwinds in containerboard and packaging as a result of changing consumer patterns and the growing popularity of e-commerce.

Westford, Massachusetts-based Kadant manufactures and supplies processing systems to customers worldwide in the pulp and paper, oil and gas, construction, rubber and food industries among others. 

The company posted a revenue increase of $41 million for 2017, which a company spokesman attributed to strong market conditions in most regions of the world, which led to increased investment in maintenance and capital projects, particularly in the paper segment.

Kadant saw signs of continued growth and capital products in the paper industry in most geographical regions including North America, Europe and Asia, with the exception of South America. 

According to the company spokesperson, healthy containerboard demand in 2017 allowed packaging mills in the US to operate at 97% average capacity and enabled producers to push through several price increases over the past year.

"With packaging making up the largest portion of our revenue, we benefit from strong demand, largely driven by e-commerce shipments and the healthy financial position of our customers," the spokesperson said.

Meanwhile, publication grades have seen continued demand weakness, the spokesperson added, although Kadant has remained largely unaffected by changes in filler mineral loading levels in terms of its technology.

"Minerals are used primarily on printing and writing grades, which is a relatively small part of our project activity in the paper industry and has been declining for much of this century," the spokesperson said. 

Meanwhile, the biggest challenge faced by paper producers, according to Kadant, is the high fixed-cost structure in the sector, which requires mills to operate efficiently at high rates and with limited downtime. 

Upgrading technology can enable producers to reduce costs by improving fiber yield, reduce water consumption and improve energy consumption throughout the paper production process.

Paper and board production by region, 2015*

Total: 407.6m tonnes *2016 and 2017 figures not available at time of publishing Source: CEPI

Paper and board consumption by region, 2015*

Total: 410.7m tonnes *2016 and 2017 figures not available at time of publishing Source: CEPI

Europe

According to CEPI, "divergence in the production trends of graphic grades against packaging grades continues, with a decline in the production of graphic grades and additional growth in the output of packaging grades." 

Overall output of graphical grades in CEPI member countries* fell by around 1.5%, with preliminary figures from CEPI indicating that newsprint output declined 5.4% in 2017 (see Figure 1). 

The production of packaging grades from CEPI member countries, however, is estimated by the organization to have had growth of 3.7% in 2017, despite being affected by an ongoing trend towards lightweighting and resource efficiency. 

Total packaging production, which includes case materials, wrappings, packaging paper and other paper & board rose to 51.2%, up from 50.2% in 2016, while graphic grades fell to 36.2% in 2017, down from 37.3% in 2016.

Overall consumption of paper and board increased around 0.5% for CEPI countries in 2017 compared with the previous year. "This is the fourth year in a row registering growth, thanks to the favorable economic environment in the [European Union] and a stronger global growth and trade," CEPI said.

The decline in demand for graphics and printing paper in Europe also led producers to diversify into higher margin segments, such as packaging. 

Sappi, a Johannesburg, South Africa-based producer of dissolving wood pulp, specialty and packaging paper, printing and writing paper and biomaterials is one such company, having announced the acquisition of Cham, Switzerland-based Cham Paper Group (CPG) in February 2018. 

Each year, Sappi produces 5.4 million tonnes paper, 2.2 million tonnes paper pulp mainly for internal use and 1.4 million tonnes dissolving wood pulp, with the majority of its customers located in Europe. 

According to the company’s chief executive officer Steve Binnie, the move to acquire CPG diversifies Sappi’s product range and strengthens its specialties and packaging paper business both in Europe and globally. 

Binnie told Industrial Minerals that the acquisition was a response to higher demand as well as higher margins in dissolving wood pulp (DWP), specialty paper and packaging paper, which the company plans to now focus on. 

Binnie also highlighted demand for products from renewable sources as driving the company’s decision to focus on nanocellulose, biochemicals, composite fibers and lignins.

"Our strategy indicates that we do not see much growth in the coated graphics/printing and writing papers segments and we have improved our operations and product mix accordingly," he told Industrial Minerals. 

However, he said the company still sees value in this segment, adding that it is an effective tool in the marketing strategy of any organization trying to communicate their brand. 

"The reality is however that this market needs to adjust to return to equilibrium, which recent closures from other companies in the US has helped achieve," he said.

Looking ahead, Sappi expects printing and writing papers will make up 25% of its earnings before interest, taxes, depreciation, and amortization (Ebitda), while specialties and packaging is expected to increase to 25% of Ebitda, while DWP is steady at 40% of Ebitda. Sappi has set a 10% Ebitda target for its new biotech business. 

In terms of raw materials inputs, such as kaolin, talc and calcium carbonate in paper production, Binnie said Sappi works with its suppliers and partners to enable the company to "win the cost game" so it can honor its customer service, innovation and sustainability commitments.

"The recent emergence of supply chain transparency means that we also require our suppliers to comply with all the sustainability requirements of commitments that we and our customers have," he added.

European exports of paper and board by region

Total: 18.4m tonnes Source CEPI

Asia

Although Binnie outlined that Europe remains Sappi’s largest market, he said "it would be accurate to indicate that Asia is driving growth and demand across most sectors."  

While demand for graphic paper is falling in North American and Europe, the paper industry in India is anticipated to drive consumption for both raw materials suppliers and paper manufacturers, according to data published by Industrial Minerals sister publication RISI, a provider of market data for the global forest products industry, at the end of 2017.

Demand for paper products in India is expanding faster than Chinese and global averages, and is estimated to grow 3.1% annually to over 16.3 million tonnes in 2022, according to Li Meng, economist for RISI and author of the agency's Outlook for India’s Paper and Packaging Markets.

The country accounts for around 18% of the world’s population but only 3.3% of global paper and packaging consumption.

A number of factors, such as India's rising literacy rates, increasing wealth and growing population, are likely to drive consumption, Meng said. 

The country’s population is forecast to hit 1.4 billion in 2022 based on growth rates of 1.3% over the past five years. Currently, only 6% of Indians are over the age of 65, and India is entering a "sweet spot" for economic growth much like China 30 years ago, Meng said. Additionally, plans to provide every Indian with at least eight years of education by 2022 is likely to increase paper consumption further, which rises with literacy rates. 

"Also, the infrastructure to support digital media use is still lacking," she added. "This will drive increased consumption of graphic papers - even newsprint, for which demand is falling in most countries." Obstacles to e-media adoption in the country include limited infrastructure and poor access to electricity and the internet, particularly in rural areas. 

Indian paper manufacturers face growth constraints such as high woodfibre and energy costs in addition to infrastructure issues. As such, Meng anticipates opportunities for international producers to grow market share, particularly for Indonesian and Chinese suppliers in coated and uncoated woodfree, mechanical, tissue and boxboard grades. 

The US also has a strong competitive position to supply India with packaging grades, while Europe is well poised to supply the country with mechanical and boxboard grades. 

Meanwhile, Russia and Canada are well-positioned to export newsprint grades to India. The total share of imports accounting for Indian paper and packaging consumption is expected to rise to 20% over the next five years, up from 13-17% between 2012 and 2016, Meng said. 

In China, although the country’s economic growth continues, its economic boom has slowed and paper producers have responded with mergers, overseas expansions and new product development. 

Previously home to over 200 small paper mills, Zhejian province saw significant consolidation in 2016, while in Dongguan, millions of tonnes of paper capacity shut down in 2015, RISI data shows. And China, traditionally the world’s leading producer and consumer of paper products, is also feeling the shift in demand from graphical paper products to packaging.

One of China’s leading paper producers, Lee & Man Paper Manufacturing said in its 2017 earnings statement that the company plans to invest additional resources into the overseas packaging paper market, which "possesses enormous potential." 

Lee & Man has invested in the construction of overseas paper factories to supply growing markets in Southeast Asia. Production of its 400,000-tonne paper manufacturing site in Hau Giang, Vietnam came online last year, bringing total output from the company to over 6 million tpy. 

The company also anticipates additional consolidation in paper capacity in China as a result of stricter environmental monitoring policies by local authorities, in addition to overcapacity leading to the shut-down of obsolete capacity in the country. 

"Despite the slowdown in economic growth in China, local demand for packaging paper is expected to grow steadily in the long run," the company said. It added that the development of e-commerce and online shopping has led to changes in consumption, which are benefiting the consolidating packaging industry.

"Looking ahead, overall paper consumption still possesses considerable room for growth, thus the group is optimistic about the outlook of both the packaging paper segment and the paper industry as a whole," it said. 

Nine Dragons Paper Holdings Ltd, China’s largest producer with paper products capacity of 14.08 million tpy, echoed this positive outlook for Chinese growth in production in its 2017 results statement. The company has made several investments in China and Vietnam, which will bring its total production capacity to more than 17 million tonnes by the end of 2018.

In 2017, the company saw its sales increase by 34% to a record high of 25.6 billion yuan ($4.04 billion) as the push by the Chinese government for economic and environmental reform resulted in the supply-demand dynamics of the packaging paperboard industry seeing further improvements. 

"The profitability of [the] packaging paperboard industry has basically been stabilized at a reasonable level," the company said. 

Outlook