John Maine, Vice President, World Graphic Papers, RISI
March 12, 2009
North American coated paper producers had been permanently shutting about 1.0 million tons of capacity annually for the past two years as they attempted to match supply to shrinking demand. So far in 2009, only one shut has been announced, SAPPI's Muskeegon mill with capacity of 190,000 tons, and even that shut was described as temporary. Today's release of preliminary February data on shipments from the AF&PA make it even clearer that more coated paper capacity in North American needs to be permanently shut in 2009 to balance supply with demand.
Uncoated freesheet producers have been a little more nimble in their response to the downturn by quickly announcing permanent capacity shuts. Over the past three months, Domtar, IP, Boise and Smart Papers have all announced and implemented permanent capacity shuts totaling 850,000 tons. As a result, the decline in uncoated freesheet pricing has been moderate, and operating rates fell to the mid-80s, a rather moderate drop considering the state of demand.
There will be some recovery in demand once the recession is over, but our best forecast indicates that demand will stay far below its pre-recession level and that demand will continue on a structural decline for the next five years. The chart below compares the monthly movement of shipments and capacity for the past few years. Oversupply was prevalent in 2005 and 2006, but producers eventually were able to cut enough capacity to make the market very tight in mid 2007. Shipments were to 100% of capacity and stayed there for 4-5 months, but demand has now fallen off the chart while capacity lingures at a too-high level.
This sad forecast means that North American coated paper producers need to shut another 1.3 million tons of capacity permanently and immediately, followed by further shuts over the course of the next five years if they want to balance supply with demand. Most of the high-cost, inefficient mills have already been closed, so the next wave of closures is going to involve larger, more efficient mills that are still generating a positive cash flow. These mills are going to have to be shut, and the equipment will have to be moved to regions of the world that need additional coated paper capacity in the years to come.
This is an excerpt from a full story that is available in RISI's Pulp & Paper News Service.