Paper Industry Perspective
1st Quarter 2014
China’s Impact on Paper
By Jesse Marzouk
The most significant news in
the first quarter of 2013 in the
North American paper market was
the delay of the acquisition of
NewPage Corp. by Verso Paper
Corp. The proposed acquisition
would have created a coated paper market giant with more than
50% of North American capacity
and a consolidated industry where
the top three producers controlled
approximately 80% of capacity.
The deal hit a blockade as some
of Verso’s bondholders objected to
the deal as they were seeking a
higher valuation for their bonds. A
deal in the near future is still likely,
however, as the industry sorely
needs to consolidate and remove
capacity. Recent prices for coated
mechanical paper have fallen
sharply and are approximately 5%
below levels from a year ago.
With the current ongoing
economic slowdown in China,
Hilco will analyze China’s impact
on the North American paper
market.
Unlike the other markets
covered in these quarterly perspectives, China has a more
muted impact upon the North American graphic paper market.
China is neither a large importer
from North America nor a large
exporter to North America of
printing and writing paper or
newsprint.
China’s largest impact on the
North American paper market
comes from its significant purchases of market pulp and recycled fiber. This affects producers in a few ways. For large
integrated producers of both
paper and market pulp, China’s
demand for pulp helps drive
prices higher and helps with
overall profitability. For non-integrated companies that purchase either recycled fiber or
pulp to produce paper or tissue
products, China’s appetite for
these raw materials is a negative. China has significantly
increased its purchases of both
recycled fiber and market pulp
over the last decade and has
either helped maintain pricing
(pulp) or driven prices much
higher (recycled fiber).
The impact on the North
American printing and writing
paper market because of higher pulp and recycled fiber prices is
relatively muted because the
overwhelming majority of producers manufacture their own
pulp and are little exposed to
price increases for pulp or recycled fiber. The impact upon the
newsprint market is more significant as there are a large number
of producers that manufacture
newsprint from recycled fiber.
The increase in recycled fiber
prices has simply been another
negative for newsprint producers, who are dealing with significant demand destruction in
North America. China’s impact
on the market probably hits
North American tissue manufacturers the hardest as a smaller
percentage are fully integrated,
meaning that they are large purchasers of market pulp. A lower
level of demand by China for
pulp would benefit tissue producers as input costs would decline.
Meaningful costs savings could
be achieved if Chinese demand
declined at the same time as
producers were bringing significantly more hardwood pulp capacity online in South America.
Jesse Marzouk is a vice president and forestry products specialist. He has
appraised numerous U.S. and Canadian pulp, paper, and lumber-related companies
involved in manufacturing and distribution. Jesse received his MBA in finance from
Kellogg School of Management at Northwestern University, and has a degree in
finance and accounting from Indiana University.