Lise Lachapelle
Canadian Pulp and Paper Association, Quebec
Summary
As expected, the inventory correction that began in the fall of 1995 continued to depress world demand for pulp and paper products well into 1996. Demand conditions began to improve during the second quarter; however, for Canadian producers, destocking by US consumers of newsprint and other wood-containing papers continued to impact shipments through the third quarter. For the year, overall, Canadian shipments of pulp and products fell by 1.8 percent to 28.0 million tonnes.
Inventories have now returned to more normal levels and economic conditions remain very favourable. Consequently, it is expected that Canadian shipments will increase by 3.7 percent in 1997. Supporting the recovery will be increased shipments of newsprint and printing and writing papers to customers in the US and higher deliveries of containerboard to the North American and offshore markets.
Industry performance in 1996
Canadian pulp and paper producers ended last year on a strong note with an 11 percent rise in fourth quarter deliveries. On the whole, though, 1996 was a disappointing year for most producers, particularly given the favourable economic conditions and strong performance in 1995.
In volume terms, total shipments slipped by 1.8 percent. A healthy rebound in sales during the second half failed to make up for the 7.3 percent drop during the first six months of the year. A sharp decline in product prices further eroded revenues, cutting earnings on pulp and paper by approximately 80 percent.
For integrated producers, the earnings drop was partially offset by slightly better results from solid wood products. Still, it is estimated that net earnings from all forest products operations fell by more than 60 percent - from a record US$ 5.6 billion in 1995 to US$ 1.9 billion in 1996 (before unusual items).
The weak market conditions during the early part of the year were caused by an inventory adjustment. As product prices peaked in the fall of 1995, consumers began drawing down the inventories they had accumulated in the event of shortages and as a hedge against rising prices. For market pulp and fine papers (white papers) the draw-down was largely over by April of this year; in fact, some offshore pulp consumers began restocking during the second quarter. In the case of newsprint, the destocking by consumers only began in April, which depressed North American demand right into the fourth quarter.
One segment that managed to post a year-over-year gain in spite of a weak first half was fine papers (+6.3 percent), helped by an 8.6 percent increase in shipments of uncoated freesheet papers, mostly to the US market. Another was paperboard. Shipments of boxboard, used in packaging, rose 5.2 percent as a result of improved demand from US and Asian customers. Deliveries of linerboard and medium, used to manufacture corrugated containers, grew by 7.0 percent. A modest increase in sales to the US combined with a 36 percent rise in shipments to offshore customers in Asia, Latin America and Europe sustained the strong performance by these grades.
On a regional basis, there was a significant decline in sales to the domestic market (-4.7 percent). Shipments to the US also fell (-5.0 percent), mostly due to lower deliveries of newsprint and market pulp during the first half of the year. As expected, it was the offshore markets which yielded the best results. Overall, shipments rose 5.0 percent. Those to China more than doubled and those to other Asian markets (excluding Japan) rose by nearly 16 percent as a result of increased deliveries of market pulp, paperboard and newsprint.
The reduction in total pulp and paper shipments of almost 2 percent, combined with a 2.5 percent increase in manufacturing capacity, resulted in a four point decline in the industry's overall operating rate to 88 percent, from 92 percent in 1995 (measured as shipments as a percent of capacity). The industry operating rate last peaked in 1994 at 95 percent.
The outlook for 1997
Although growth in the domestic economy slowed, and the economies of continental Europe struggled, 1996 was a relatively good year in terms of economic conditions. This year looks even better. Growth in North America should match or surpass 1996, the economy of Western Europe should expand by 2.5 percent, and the developing economies of Latin America and Asia are expected to remain buoyant. Japan is the only major economy likely to slow down in 1997. This suggests very good growth in world paper and board consumption.
Based on this economic outlook and expected market developments (e.g. capacity additions, stock movements, etc.), Canadian shipments of pulp, paper and paperboard are forecast to recover in 1997, rising 3.7 percent to 29.0 million tonnes.
Supporting the growth will be increased shipments of newsprint and printing and writing papers to customers in the US, and higher deliveries of containerboard to the North American and offshore markets.
On a regional basis, shipments to the US should post a gain of just over 7 percent, more than reversing the decline in 1996, while those to Canada are forecast to rise by 3.8 percent. Deliveries to offshore markets are expected to decrease by 1.6 percent as a result of lower overseas exports of newsprint.
The advance in shipments this year should outpace the growth in Canada's capacity to manufacture pulp, paper and paperboard. Based on CPPA's latest capacity survey (released January 27, 1997), it is estimated that incremental additions and speed ups will add only 1.1 percent to total industry capacity in 1997. Therefore, the overall operating rate should edge back up to 90 percent, from 88 percent last year.
Performance by sector
Newsprint
The US consumers (dailies and commercial printers) continued accumulating stocks through the first quarter of 1996. As a consequence, newsprint was among the last grades to feel the impact of the inventory adjustment. The destocking that did finally take place, and the conservation measures that continued to depress consumption during the early part of 1996, resulted in a sharp reduction in demand for newsprint, most evident in the North American market. This had been forecast; however, the severity of the adjustment was somewhat greater than anticipated.
By the fourth quarter, though, consumer stocks were back to normal or below normal levels, and consumption by US consumers had rebounded above the 11.2 million tonne mark on an SAAR (seasonally adjusted annual rate) basis, and North American mill stocks were down 25 percent from the peak in July. Canadian producers saw fourth quarter shipments rise almost 3 percent. Despite this turnaround and record offshore sales, for the year overall Canadian shipments were down 4.7 percent due to the slump earlier in the year.
In 1997, newsprint should be one of the strongest segments of the industry: US consumption is expected to grow by 3 percent (to achieve this requires only modest growth from the seasonally adjusted level in the 1996/Q4); the absence of consumer destocking as we saw in 1996 will mean actual US demand should grow by 7 percent or more; and in the offshore markets, the supply/demand balance should remain favourable in spite of the new Asian capacity.
For Canadian producers, this is expected to result in an increase in shipments of 4.9 percent over 1996. Since domestic capacity will decline slightly, this should increase the shipment-to-capacity ratio by 6 percent to 96 percent.
Printing and writing papers
Results for the printing and writing sector were mixed. Demand for the uncoated woodfree grades remained depressed during the first quarter due to destocking, but rebounded as expected, posting a solid 8.6 percent gain for the year. Demand for coated woodfree and lightweight coated papers began to improve in the third quarter allowing for a 2.9 percent advance for the year. For producers of uncoated mechanical papers, the destocking by consumers only became significant during the second quarter, so signs of recovery were late in coming. The result was a 12 percent drop in 1996 shipments.
The decrease in deliveries of uncoated mechanical printing papers was responsible for the overall decline in shipments of printing and writing papers of close to 4 percent last year.
This year, printing and writing papers are projected to show the strongest growth of all the sectors. Solid economic growth in North America, some additional capacity to produce coated papers, and the absence of destocking which hurt demand in 1996, should contribute to an overall increase in shipments of 6.4 percent and a 4 point increase in the operating rate to 91 percent. The wood-containing grades will account for most of the additional tonnage.
Other papers and boards
A buoyant US economy and a strong Asian market resulted in healthy demand growth for packaging papers and boards. Shipments of boxboard rose by 5.2 percent, while deliveries of linerboard and medium climbed by 5.2 and 10.0 percent, respectively. Kraft papers registered the only decline. For most grades, however, average transaction prices were below 1995 levels.
In 1997, a 3.8 percent increase in deliveries is forecast based on improved demand in North America and offshore markets. Linerboard and medium should account for most of the growth.
Woodpulp exports
As expected, 1996 was a tumultuous year for pulp producers world-wide. During the first quarter, the destocking by consumers (of both pulp and paper) sent world-wide shipments plunging. On a year-over-year basis, world shipments of chemical paper grade market pulp dropped nearly 20 percent during the first three months of 1996 and the world shipment-to-capacity fell to only 73 percent. During the April-June period, offshore consumers began restocking and paper production recovered, pushing the world shipment-to-capacity ratio above 100 percent. For the year overall, world demand grew by just over 2.5 percent, and the shipment-to-capacity ratio averaged 88 percent for the chemical grades.
Demand in the US and Japan, two of Canada's main markets, fell last year. And demand for softwood pulps in Western Europe was held back due to weakness in demand for lightweight coated and supercalendered papers (important end uses for softwood kraft pulp from Canada). As a result, Canadian exports of pulp slipped by 0.7 percent in 1996.
For 1997, it is expected that Canadian deliveries of chemical market pulp will rise by about 1 percent, and total market pulp shipments will increase by 1.2 percent, helped by improved demand in the US and Japan. Since it is expected that there will not be any growth in domestic capacity, this should push operating levels upwards by close to one percentage point although, when rounded, the projected shipment-to-capacity rate appears unchanged.
