Another Graphic Paper Machine Converts to Board!

Laakirchen SC machine conversion announced last week - short analysis

In terms of publication paper outages – and prices - it’s all coming together very well for the mills, as Heinzel Laakirchen plans to convert the large 350,000t 8.7m wide SC-A machine (PM11) to Containerboard by mid-2023, so presumably no more SC production there from early 2023, coinciding with the announced Newsprint closures at Norske Skog.

Laakirchen currently represents 11% of European SC capacity. Year-to-Date SC Magazine Paper Operating Rates for 2021 are hovering around 85%, and this remains around 5-10% off the historical threshold for mill price momentum, especially at this busy time of year.

But prices are rising robustly now (Q4) – even for SC Magazine Papers - due to severe issues with availability; not just paper availability, but “everything” availability which is in turn driving up costs for… everything, including paper, and especially for energy.

The resulting damage to demand in 2022 risks being severe, so for a supplier (Laakirchen) to leave the SC market completely in 2023 will certainly help the remaining players, namely Norske, UPM, SE, Parenco and Holmen. Effectively five (5) players will be left in Western Europe after the Laakirchen closure. This will increase consolidation considerably – as it did for Newsprint mills in N. America 5 years ago – increase distances (mill to buyer) and thus logistical challenges, and support pricing power for mills… if demand isn’t decimated by back-to-back…-to-back price increases in 2021/early-22.

The consolidation picture is actually more extreme than it first appears, as these SC mills make quite different qualities of uncoated magazine papers, ranging from wastepaper-based SC-B Offset printing papers to SC-A Rotogravure papers, and even SC-A+++ at the high quality end, thus further limiting buyers to even fewer mills.

The SC (Uncoated Mechanical) Magazine Paper sector is squeezed between Newsprint/Hibrite grades below and Coated Papers/LWC Magazine above, with price gaps between the grades usually shrinking as prices fall and widening as prices rise.

So when Newsprint prices rise in Q4 (now) and technically again in Q1 2022, and if they reach the stated objective of €600/t+, this will be the fastest climb in recent history (since at least 1980), admittedly from a record low point (circa €380/t) rising over 50% in less than 12 months. Although the initial Q4 increases will be less than this, and the higher levels reached probably only in Q1 2022.

For comparison, between:

end-15 and early-19 the price rose +26%, but over 13 quarters!

Mid-10 to mid-11 it rose +21% in a year.

end-04 and early-07 it rose +20%, over 9 quarters.

Mid-97 to early-01 it rose +34% over 14 quarters (and after a -26% fall in 1996/97)

End-93 to early-96 it rose +72% over 9 quarters (but after a -38% fall during the 1990/93 recession to a similar low - €390/t)

Steep rises in the early/mid 1980s (+27% & +16%) were both over two to three years.

It is also difficult to compare situations exactly, as costs varied (there were many more higher cost paper mills around 30-40 years ago), little wastepaper was used in the earlier period and advertising spend and paper demand were both usually positive!!

But still… It’s extraordinary and pretty brutal for publishers who already have their backs to the wall, as newspaper after newspaper shuts titles, cuts circulation and pagination with advertising income vanishing, and more importantly, newspapers drifting further and further into online alternatives… probably never to come back (to paper). And what about the business models for “free” newspapers?!

2022 could be another milestone, with demand – and possibly prices in mid-year – crashing heavily, as retailers and even publishers look for alternatives that are not 1. so expensive, and 2. dependent on containers finding their way to local ports, i.e. online!

The upside from the publication paper mill pricing perspective is probably a steady stream of mill closures ahead of potentially disastrous demand falls in 2022-23, with Kvarnsveden last July, Shotton last month, Norske (at Golbey, Bruck & ??) end-22/early 23 and now Laakirchen.

In short, if mills can survive demand falls in 2022, say -5 to -10%, then higher prices are probably secured until 2023-24. But if demand falls by -15 to -20% next year, then prices could come down heavily in H2 2022, and ahead of the next (2023) publication paper capacity shuts.

Either way, it’s a bumpy ride for paper buyers right now, in book, magazine and newspaper publishing, as well as for retailers and all the printers out there whose other costs are also rising, not least energy, inks & transport…