Tough year ahead for mills and for buyers

Firstly, a very Happy New Year 2023 and good health to you. It’s hard to believe we’re already in the second month of this new year.

Yet it’s also time to buckle up, as I expect the next few months are going to be even more turbulent, if that’s possible after the past year.

We warned throughout 2022 about the strong link between paper prices and paper demand, that is, significant price-demand elasticity, and whilst prices continued to rise to extraordinary levels right across the grade spectrum during the year, this would likely hit demand hard once they hit the ceiling.?

To be fair, that ceiling was higher than anybody anticipated, in part due to the energy crisis which had already begun in October 2021. But nevertheless, demand rose, prices climbed, lead times lengthened, orders ballooned, inventories refilled (at least in H2 after the UPM strike-inspired buying frenzy) and?supply became increasingly tight. ?

And once inventories hit more comfortable levels through the supply chain, prices stabilised, orders dried up and apparent demand, as expected, collapsed.?

W. European Demand GRAPHIC PAPERS:

Nov-2022 (vs ‘21)???????????????-22%

Dec-2022 (vs ‘21)????????????????-29%

These are some of the most negative apparent demand figures on record (excluding some Covid-affected Q2 2020 monthly data).?

But sadly for the supply chain, worst is still to come, as we have now reached the price-plateau / de-stocking phase of the cycle, and whilst orders vanish for multiple reasons, whether this might be because too many orders were placed at a time of lengthy waits and tight supply, or perhaps because stocks have reached high enough levels, or simply because buyers won’t commit during a period of falling prices, the result remains the same - extremely weak demand.?

This will be further exacerbated by the current stagflation facing many western economies, where inflation has hit double figures - the Fed, ECB & BoE all raised their IR again last week, despite inflation peaking - all the while economic growth stagnates or even worse, recedes. This despite an uptick in the most recent consensus forecast data.?

What is very different this time round, is the seller-buyer dynamic. And this for two principal reasons.?

1. After 5 years of seesawing prices, the level of trust between publishers and mills is at an all-time low, and where relationships were years in the building, sometimes even decades, the trust and goodwill element on both sides seems to have all but evaporated.
2. With so many machines and even sometimes whole mills being decommissioned over the past decade due to structural paper demand decline (principally linked to new media and smart phone technology), exacerbated by a booming paper industry in several European-export regions around the world, there are now so few mills remaining in Europe that consolidation has entered a totally new phase (see chart above). And to make matters worse, where the ongoing consolidation might still leave a feasible situation for buyers “on paper” at least (read: still enough choice), when you actually narrow this down to specific qualities within individual grades which work best with some publishers and printers, then the choice becomes even more limited and buyers’ predicament even starker.?

This new buyer-reality has created a constant fear-psychology which we believe has helped prop-up prices for longer than they otherwise might’ve lasted at these levels. This is especially true when you consider that costs – though not all – have been coming down significantly in recent months, coupled with industry operating rates at incredibly low levels, all the more so given the traditional role of these rates in determining pricing power, which historically varied between a band of 90 and 92%.????

W. European GRAPHIC PAPER Operating rate (Q4 2022): 73%??????

This rate is truly awful, and will signal, we suspect, a raft of new measures by mills – some of which are already planned and announced, e.g. Heinzel converting Laakirchen’s SC paper machine to packaging. But given these low mill operating rates in the last Q of 2022, it is surprising and unprecedented that prices are not only still at such high levels, but able to maintain these levels, to some degree, due, as mentioned earlier, to certain costs (for some mills), to mill consolidation, and to buyer?psychology/fear.?

Having said all this, many buyers across Europe are now reporting the beginnings of price erosion, especially for LWC and Newsprint grades.??

It is in this vein that UPM announced around ten days ago that “…it is looking into options to curb output at its Finnish mills and confirmed that negotiations with employee representatives were currently underway.”?According to the supplier,?“the aim is to create a framework to be able to resort to the instrument of temporary layoffs whenever the market situation requires such steps. In this context, UPM emphasises that no decisions or concrete plans are associated with these negotiations.”??

Enough to further worry buyers looking at a shrinking pool of mills, some of which may now be subject to growing volume limits; and this in addition to the already tried and tested mill technique of grade and quality diversification, where some graphic paper mills have been adding packaging grades to their machine portfolios. And this on top of (integrated) mills resorting – not for the first time – to producing some?additional pulp volumes rather than paper, whilst pulp prices have been so high.??

With both pulp and packaging becoming less lucrative and easy options during 2023, UPM’s latest move may be the next best option to use, to keep prices where they’d like them to be. But at just 73% average operating rates, possibly sinking even lower in this quarter, it is difficult to see how mills can now keep prices at such levels, even with the conversion announcements that we are aware of.?

Their trump card is - and will become even more so - each grade’s printing quality specialisation.??

As stated on many occasions throughout 2022, we expect a tough ride for sellers (demand issues) and buyers (prices and sales) in 2023, even if Q4 2023 may eventually show some statistical improvement (vs a horrendous Q4 2022). But with a major difference this year: the difficulties will transcend the paper grade spectrum, and not just graphic, as packaging readjusts to tough economic circumstances with consumers reigning in retail spending and thus the need for packaging too.?

We’ve already seen this very apparent indeed in the UK, where pre-Christmas retail sales were down substantially on a year earlier. And with demand plummeting whilst costs have been so high for some mills, we just saw Europe’s first casualty of the year, with the announcement that Crown Van Gelder was going into administration; this high-quality mill is still running whilst a solution is sought for its future in paper.?

And finally, to give an idea of the magnitude of the effects of high 2022 prices on demand, here’s an extract from EMGE’s recent Global Monthly Monitor:?

Europe: Huge volumes of paper demand disappear, as retailers pull out of print

One effect of the current high paper prices is becoming more and more visible – increasing numbers of customers are turning their backs on print, and it’s having a very serious impact on demand.

In France, for example, multiple retailers recently announced reductions or total cancellations of printed catalogues/flyers. Cora, which has over 60 stores in France, stopped printing its catalogs completely in January. In volume terms, Cora cut back from 260 million printed catalogs in 2019, to 170 million in 2022 and now zero, reports Linéaires. That is 15,500 tonnes gone.

The effect will be even bigger at E. Leclerc, a group with over 700 stores, which is to stop printing by September 2023. That is another 50,000 tonnes.

In addition, Carrefour (with 8 times as many stores as Leclerc) will reduce printed volumes by 40% in 2023 and 80% by 2024, according to Société. Système U (800 stores) will reduce its leaflets by 30% this year, reports Olivier Dauvers. Intermarché was due to stop printing at 240 of its 1,850 stores (around -15%) from January, reports France Bleu.

If we were to guesstimate, assuming Leclerc’s 50,000 tonnes for 700+ stores were typical, then the cutbacks at Carrefour’s 5,000+ stores could arguably amount to 150,000 tonnes this year and 300,000 tonnes by 2024. Système U could add up to perhaps another 50,000 tonnes, in addition to Cora’s 15,500. Even if these numbers are wildly inaccurate, it is nevertheless clear that we are talking about very major volumes of paper. And that is just in France.

In Germany, meanwhile, Aldi Süd, has announced that it will no longer publish its printed customer magazine, “Aldi Inspiriert”, following the January/February 2023 issue. According to CP Monitor, the magazine had a print run of around 2 million copies every two months (i.e. roughly 12 million copies per year). If we estimate around 150g per copy, that would be roughly around 2,000 tpa of (probably SC) paper.

For more information on EMGE’s recent report forecasts and newsletters, please don’t hesitate to ask.??

With very best regards,

Iwan Le Moine

EMGE & Co.

Cornwall GB

+44 7968 034744

www.emge.com