Paper Industry Perspective 3rd Quarter 2015

SC duties finalized for Canadian mills

By Jesse Marzouk

Paper--q2-perspectives-graphSince 2000, North American demand for graphic paper has declined approximately 50%. North American graphic paper producers have tried a number of tactics to maintain and/or raise prices amid continual demand declines for their products. Most frequently, producers have removed capacity from the market in hopes of balancing supply and demand and consolidated to reduce competition. These measures have helped to some extent, with producers able to raise prices or keep them stable at different points throughout the last 15 years. Further consolidation in the North American graphic paper market is unlikely, however, with the top four firms controlling at least 75% of capacity for each grade. Consequently, recent falling demand trends show that neither consolidation nor capacity reductions are resulting in the lasting effect that producers desire.

Amid the flood of paper product imports, North American mills have turned to another strategy to help maintain prices—trade cases. In early 2015, certain U.S. producers of uncoated freesheet (UFS) filed a trade case against Chinese and Indonesian producers with the U.S. Department of Commerce. Duties were implemented, and imports subsequently fell 2.1% year-to-date through August as a result. Shipments from North American mills declined only 0.2% over the prior year period, which is significantly less than the approximate 3% to 4% declines experienced over the last few years.

Producers of supercalendered (SC) and coated mechanical (CM) paper more recently filed a trade case against Canadian producers of SC paper, claiming unfair subsidies. Final duties were affirmed in October 2015 and U.S. producers are hopeful that a decline in SC imports from Canada will result in the stabilization of these grades. They likely will be sorely disappointed. Port Hawkesbury Paper, which accounts for more than 25% of North American SC production, stated it would set up an entity in the U.S. and absorb the duties so its customers would not incur these costs. Secondly, demand for CM, particularly light-weight No.5 grade, has declined 6.9% year-to-date through August, which is worse than UFS experienced before its trade case. Lastly, SC imports from Europe continue to rise amid the weakening euro and the strength of the U.S. dollar.

Jesse MarzoukJesse 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.