October Revolution!

In one long and remarkable week, Norske Skog announced the closure of its Albury newsprint mill and the sale of it and related assets to Visy, Orora sold its Australasian fibre business to Nippon Paper Industries (NPI), the owner of Australian Paper and Cleanaway picked up most of the assets of SKM Recycling.

Barely had the paper, paperboard and fibre supplies digested one and it was immediately dealing with the next transaction in what for the entire Australian fibre industries is little short of an October Revolution.

[The following information consists of extracts from the extensive (15 page) analysis provided to subscribers of Pulp & Paper Edge. Subscribers should use the link here and log into their account and download the latest edition of Pulp & Paper Edge. The full analysis was published in Edition 169 (October 2019).]

Key Points

  • AUD1,891 million of paper, paperboard, box and fibre transactions in a single week changes the dynamics of the entire Australasian paper and paperboard industry:
    • Norske Skog closes Albury newsprint mill, sells assets to Visy (AUD85 million)
    • Cleanaway acquires key assets of SKM Recycling (AUD66 million)
    • Orora sells Australasian fibre business to Nippon Paper Industries (NPI), the owner of Australian Paper (AUD1,720 million)
  • Options for Visy to expand are significantly enhanced by access to additional wood supply, and the Albury mill
  • Re-merger of Orora’s Australasian fibre business and Australian Paper brings increased competitive capacity to the corrugated box market
  • Japanese conglomerate manufacturers increase their Australasian footprint
  • Increased use of recovered fibre for packaging production becomes a viable option
  • Pressure on softwood fibre resources intensifies as control of pulpwood concentrates
  • Norske Skog’s Boyer mill set to become Australasia’s ‘publication papers hub’

Norske Skog – Visy transaction: Newsprint mill closes, assets sold to packaging manufacturer

On 4th October, Norske Skog announced the impending closure of Australasia’s largest newsprint mill, the 265,000 tonne per annum Albury Mill (NSW). It will close by the end of 2019.

When it announced the closure, the company also advised it had sold the Albury mill and related assets to Visy, Australia’s largest paperboard manufacturer. After remediation, the assets will be transferred to Visy, which reportedly plans to undertake feasibility studies into options for their use on the Albury site.

Eventually, for Norske Skog, it came down to just two options: a closure with no potential for future employment and regional economic activity, or a sale with opportunities for a different future.

There is a steely logic to the closure of the largest newsprint machine in a falling market. Once total regional production was over-weight to the market by anything more than about 150,000 tonnes per annum, the closure of any other machine would not suffice, as the table shows.

Australasian Newsprint Market: 2018-19 (kt & %)

 

Newsprint Capacity (tonnes)

Production 2018-19 (kt)

Exports 2018-19 (kt)

Export % of Production

Imports (kt)

Apparent Consumption (kt)

Albury

265,000

319,000

133,600

41.9

22,500

207,900

Boyer

165,000

Tasman

155,000

144,000

90,300

62.7

8,800

62,500

Total

585,000

463,000

223,900

48.4

31,300

270,400

Source: Norske Skog, ABS and IndustryEdge

As the above  demonstrates, Norske Skog exported almost half its newsprint consumption in 2018-19. Export returns have been so indifferent in the first half of 2019 that Norske Skog curtailed newsprint production at all three mills in the region. It did so because it was unable to recover its production costs.

Orora – Nippon Paper transaction: Fibre box business reintegrates

On 9th October, Orora announced the sale of its Australasian fibre business to Nippon Paper Industries (NPI) for AUD1,720 million. The sale includes Orora’s:

  • Fibre recycling business
  • Recycled fibre manufacturing (Botany mill)
  • Corrugated box manufacturing and distribution business
  • Folding cartons business (mainly food and FMCG related)
  • Bag and sack business (consumer and industrial)
  • Laminated functional paper assets

In all, the transaction includes 25 manufacturing plants, 27 depots and involves more than 3,300 employees. The key to the transaction is Orora’s corrugated box business, including the Botany mill, which manufactures recycled grades of containerboard for use in making corrugated boxes.

The transaction is expected to complete in the first quarter of 2020.

NPI is already the owner of Australian Paper, the supplier of Orora’s virgin Kraftliner for the manufacture of corrugated boxes, and also supplies Orora with other packaging materials. Australian Paper and Orora’s Australasian fibre packaging business were previously integrated.

IndustryEdge’s headline view is that the Orora-NPI/AP transaction is overdue from a rational stand-point. The re-integration of the supplies of containerboard materials must be expected to deliver synergies and unlock value.  The re-integration comes about as Australia is in the midst of a deep and increasingly distressing drought appears to be coincidental.

The sale of Orora’s Australasian fibre business means that after almost twenty years of separation, Australia will once again have two fully integrated fibre packaging suppliers. The other is the privately-owned Visy, which is the clear market leader in the corrugated box market in Australia. NPI’s two businesses in Australia (Australian Paper and the new Australasian fibre business) were once largely integrated, inside Amcor, as the earlier table demonstrates.

Where do these developments leave the market and the mills?

The most recent developments would be important in any situation, and by any analysis, they are significant. Their importance in re-shaping the regional industry and its supply chains and opportunities cannot be under-estimated.

In summary, and these points are expanded upon later in this analysis, IndustryEdge’s assessment is that Australasian paper and paperboard markets will be altered – probably irrevocably – in the following ways.

Norske Skog’s corporate announcement indicates production of publication papers will continue at the Tasman and Boyer mills. However, the sale of the Albury mill is part of a company strategy to ‘optimise’ its portfolio and ‘seek value enhancing transactions’.

On that basis, IndustryEdge observes that the Tasman mill in New Zealand will continue to make newsprint – for the time being. We note that it too has some energy assets.

In Tasmania, the Boyer mill will continue to be something of a mouse that roars. It can manufacture newsprint, other uncoated mechanical grades and especially, the light-weight coated mechanical papers used in catalogues. The market for the latter is stable, if not strong.

At least initially, IndustryEdge considers it unlikely that there will be significant operational impacts from the Orora-NPI/AP transaction. Certainly, that is the case when it comes to the supply of materials for the manufacture of corrugated boxes.

There is currently a notable lack of competition between the Maryvale (virgin grades) and Botany (recycled grades) facilities. NPI’s stated objectively is to capture the growing market for fruits, vegetables, meat and other consumer goods. It has signalled ‘continued strategic investment’. NPI’s new Australasian fibre packaging business holds the second-largest market share for corrugated boxes in Australia and the largest in New Zealand, as well as leading the paper carton and bag markets in both countries. It appears well-placed for a diverse packaging future of its own.

The details that follow are based around a series of themes, each of which is separate, but that together, demonstrate the breadth and depth of significance of the recent announcements.

‘Pivot to packaging’ works for the sector as a whole

In one short week, Australia’s pulp and paper industry turned decisively, pivoting in a move that shifts the pendulum even more decisively towards packaging, while at the same time, securing – as much as it is ever possible – the future of the remaining newsprint and printing and communication paper mills in Australia.

The end of newsprint manufacturing at Norske Skog’s Albury mill was, as described in this analysis, inevitable and merely a matter of time. That it has found a possible future is welcome, but that future lies in packaging, not newsprint.

Removing up to 265 kt of Newsprint production shifts the balance of Australian production further to packaging, even if the Albury machine is not converted to manufacture packaging grades.

If it is converted, the Australian industry’s pivot to packaging will be significant. [Subscriber only content – login required] 

Corrugated competition is the main contest

More than any other factor, the October Revolution has been driven by corrugated box markets and opportunities, on both sides of the Tasman Sea, and internationally. Ahead of all other similar grades, consumption of corrugated boxes has grown strongly over most of the last decade, especially the last five years. In Australasia, competition has always been intense in the sector, even though across the two countries, three companies dominate. The October announcements continue the trend but are likely to even out the competition.

Corrugated packaging is by far and away the largest sector in both the Australian and New Zealand paper and paperboard industries. Corrugated boxes are utterly ubiquitous in the regional economy, as they are across the globe.

Consumption data collated by IndustryEdge for the last decade demonstrates why there has been such a strong emphasis on corrugated packaging and the container materials used to manufacture them. The essence is that these are the grades for which consumption growth has been strongest and most consistent.

There are three grades of container materials:

  • Kraftliner, a linerboard made entirely or predominantly from virgin fibre pulp, used on the outside layers of corrugated boxes;
  • Testliner (aka Multi Ply), a recycled linerboard, made almost entirely from recycled fibre, used on the outside layers of corrugated boxes; and
  • Corrugating Medium, made almost entirely from recycled fibre, used as the inner sheet of corrugated boxes, formed into a wave pattern to provide box strength and material protection.

In the 2019 Pulp & Paper Strategic Review, IndustryEdge’s analysis demonstrated that the combined Australasian market for paper and paperboard (not including imports of already converted materials) totalled 3,870 kt. Of this, almost 45% was containerboard materials, as the chart demonstrates.

Combined Australian & New Zealand Paper & Paperboard Consumption by Main Grade: 2018-19 (%)

Source: IndustryEdge research and estimates

The containerboard market for each country is set out in further detail in this section, starting with Australia’s consumption of container materials.

Australian Apparent Consumption of Container Materials: 2009 – 2019 (ktpa)

Source: ABS & IndustryEdge

The combined effects of the deepening Australian drought and a general economic slowdown can be seen in containerboard materials consumption in 2018-19. The 4.5% decline compared with the prior year was the first fall in apparent consumption since 2011-12.

Latest data shows that total consumption of containerboard materials has risen an average 2.6% per annum over the decade, but 5.6% per annum since 2014. [IndustryEdge]

The situation in New Zealand is similar, but growth in consumption has been more consistent than in Australia. The decade ended June 2019 saw growth in consumption of containerboard materials rise 4.7% per annum in New Zealand to 393 kt. [IndustryEdge]

If nothing else, the Orora/Nippon-AP merger will bring renewed competition to the corrugated box sector, especially in Australia. Though it has not had the market entirely to itself for the last two decades, the power of integration provided Visy with an advantage that no competitor could match.

It is written into history that Visy leveraged its competitive position with the timely establishment of the Tumut mill and its own supplies of kraftliner at the same time as Amcor completed its demerger. It is a situation that speaks tokens for long term business strategy. It seems reasonable to say that when it came to fibre packaging, at that time, Visy had a long-term strategy, but Amcor did not.

Visy’s acquisition of the Albury mill and its related assets provides it with options for the future. It is yet again in the hard won, but no less enviable, position of being ready for expansion opportunities in the corrugated box and containerboard market, assuming its feasibility studies and market assessments point it in that direction.

For its part, Nippon Paper has publicly declared its hand on packaging and its acquisition of Orora’s Australasian fibre business provides a solid competitive base for it, and for its customers, in this region. Its kraftliner capacity (at Maryvale) and its modern recovered paper supplies (at Botany), position it as a more capable competitor to Visy, and also to Oji Fibre Solutions (OFS) in New Zealand. The latter is very strong in kraftliner and a highly capable and dominant supplier in its home market.

In Australia, OFS and the combined Abbe and Austcor are smaller, but not merely secondary players. They each have unique strengths, with OFS especially having an enviable position in virgin fibre kraftliner corrugated boxes and Abbe/Austcor often described as point-of-sale and presentation specialists, which in neither case undermines their general capabilities.

New Zealand’s corrugated box market is largely split three ways, between OFS, Orora’s Kiwi Packaging and Visy. NPI’s appendix announcing its acquisition of Orora’s Australasian fibre business (including three corrugated board facilities) declares it holds the leading market position in New Zealand. As we went to publish, IndustryEdge was still awaiting details that would allow this potentially surprising position to be confirmed.

Integration synergies and development opportunities

Acquisitions of this magnitude are never taken lightly. They must add value, or at least, be perceived to add value. IndustryEdge considers that the primary drivers from the buyer’s (Visy and NPI) perspective are the opportunities to integrate existing facilities and businesses, and to position themselves for development opportunities in the corrugated packaging market, and other components of the fibre-based packaging sector.

Like a real estate deal, location appears to have been paramount in Visy’s acquisition of the Albury mill and its related assets. At one level, theirs is a regional deal, linking the Albury mill and its wood supply, direct to the Tumut pulp and paper mill. 

Even more than Tumut, the Albury mill is perfectly positioned for the main Australian markets of Greater Sydney and Greater Melbourne. If it was to be converted to manufacture only recycled containerboard grades (testliner and corrugating medium), its location would enhance its flexibility, including its relationship with its new sibling at Tumut.

The Albury and Tumut mills are also in close proximity to the Visy Board facility in Wodonga.

For Orora-NPI/AP, the primary opportunity comes from the integration of supplies between the two companies that were, in any event, once so conjoined they were considered inseparable.

Australian Paper’s kraftliner, sack kraft and some other kraft-based packaging grades are predominantly supplied to Orora, as well as a wide range of other converters in both corrugated packaging and sack and bag markets.

It is not widely understood that for Australian Paper, the existing Orora fibre business is both its largest customer, and its largest supplier. On that basis alone, bringing Orora’s Australasian fibre business back into the fold offers opportunities. We assess the opportunities for both to be more substantial, from a combined business standpoint.

Rush to recycled

Recycled grades of paper and paperboard are nothing new, but for the last two years, they have been very topical. In some respects, these two deals are closely linked to the upheaval in the recovered fibre/recycled paper challenges of the last two years.

The Albury newsprint mill was developed specifically with recovered paper processing capacity. Its deinking plant has a nominal capacity of 100 ktpa – the largest of its type ever seen in the region.  In many respects, as this analysis shows, recovered paper threads its way through this entire story.

The next chart shows an index of the comparative annual import and export prices of newsprint and kraftliner since 2009. At least from a price growth perspective, production of kraftliner has been far preferable to production of newsprint. Although this simple comparison cannot do all of the work, it goes some way to explaining why relatively scarce and valuable wood is likely to find its way into kraftliner at Tumut, rather than newsprint at Albury.

Australian Import & Export Price Comparisons for Kraftliner & Newsprint: 2009 – 2019
Index (Base: 2009 = 100)

Source: ABS & IndustryEdge

For the Albury mill, if there is a future as a traditional paper mill, it will be as a facility manufacturing product exclusively from recovered paper. 

That eventuality has a logic to it, supported by two factors.

First, the market for corrugated boxes, and therefore containerboard materials, continues to grow. Even at the fairly innocuous 2.6% per annum recorded over the last decade, that will equate to consumption growth of approximately 180 ktpa by 2024. [IndustryEdge]

Second, if the proposed COAG ban on exports of recovered paper proceeds as a blanket-ban, Australia will be even more awash with supplies of recovered paper than even the current glut. As we have analysed previously and reported in Pulp & Paper Edge, IndustryEdge currently assesses the deficit of collection to utilisation (local and export) to be in the vicinity of 300 ktpa. Assuming steady-state collections, that deficit will rise to an eye-watering minimum of around 1,400 kt to 1,500 kt. To put it simply, under that scenario, recovered paper supply will not be the issue.

Although the Orora/NPI-AP transaction is less significant on this front, it is not irrelevant. Orora was at risk, over the medium term, at being shorted for supply of recycled grades. It has operated at or near the capacity of its Botany mill for the last two years, in IndustryEdge’s assessment.

Integrated with Australian Paper, its options are at least increased because Australian Paper’s Maryvale mill has multiple machines. NPI’s stated interest in packaging expansion may also prove to be of assistance.

Where’s the wood?

All the discussion about recovered fibre and recycled grades can be a distraction. It is important to remember that you cannot make paper without trees. Kraftliner is essentially a virgin fibre product (some blending of recovered paper aside), but all fibre commences where it grows. So wood, and its availability is important, if not critical, to the prospects for these transactions.

In some respects it is an historical artefact that Australia has a plantation based softwood fibre estate. National fibre security concerns ‘between the wars’ led to the establishment of what over time grew to be around one million hectares of mainly Pinus radiata plantations. That resource frames the nation’s houses, provides flooring (eg. particleboard) and a variety of other building products.

It is also the feedstock for what in 2018-19 was around 1,225 kt of pulp production [IndustryEdge], most of which was used to make kraftliner for corrugated box production.

The resource base has stood the test of time, but it has not expanded for twenty years. Over that time, demand has increased dramatically, fuelled by population growth and demand both domestically and internationally for Australia’s high quality kraftliner. It is in that context that we assert that one of the major assets of the Norske Skog-Visy transaction is access to the softwood logs that are currently pulped at the Albury mill. 

Further south, in Victoria, the specific situation is different, but no less significant. NPI’s pivot to packaging sets its course firmly towards a future where the balance is more towards softwoods than ever before. 

Almost everyone is a winner

There is much to like in these transactions, and there are plenty of winners, as we set out below. But there are some losers also. Those for whom we spare most thought are currently employed at the Albury mill, whose jobs cease at some point in the next few months. And at the same time, the winners are not just the corporations involved in the transactions.

Corporate winners

We can count Visy (solid assets at an attractive price), Orora (a good sale price realised) and NPI/Australian Paper (integration allowing it to extract full value for its board and presenting it new opportunities) among the winners from these transactions. Their positions are each improved, in IndustryEdge’s assessment.

Packaging buyers benefit from competition and options

Without yet adding a single tonne of production or capacity, these transactions improve the market from a packaging buyers’ perspective.

Two fully integrated local producers of corrugated boxes is the big prize, providing options for buyers that were arguably not as strong over the last two decades. That both Visy and Australian Paper appear to have expansion options and opportunities means local buyers can be served wherever their needs head. The potent mix of virgin fibre kraftliner and recycled fibre testliner and corrugating medium provides options of its own.

Regions more secure

Examine the socio-economic profiles of the communities where Australia’s pulp and paper mills co-exist, and typically you find relatively affluent communities, with greater security than many other regions in Australia. The regions around Visy’s Tumut mill and Australian Paper’s Maryvale mill are made more economically secure by these transactions, because on face, they extend their role in the Australian economy.

Norske Skog’s audible sigh a mix of pain and relief

Of Norske Skog’s three mills in Australasia, Albury is the only one for which a newsprint machine closure could result in a mill sale. A closure of newsprint capacity at the Tasman mill (Central North Island, New Zealand) means a mill closure, with no significant sales opportunity. The situation would have been worse at the Boyer mill (Tasmania), where a newsprint machine closure (PM3), would have put the mill’s entire fixed costs onto the remaining machine (PM2).

That would have the potential of bringing about the closure of the mill, along with ending domestic manufacture of non-newsprint grades of uncoated mechanical papers, and the highly successful local light-weight coated (LWC) mechanical papers.

Instead, with Albury closed, Tasman continues to operate in New Zealand and Boyer continues as something of a ‘publication paper hub’, able to make newsprint and a wide range of both coated and uncoated publication papers.

Japanese influence has never been stronger

The influence of Japanese paper and packaging conglomerates in the Australasian, pulp, paper and paperboard industries – and their supply chains – has never been more significant. Always taking the longest view (perhaps rivalled only by the Scandinavian producers traditionally), major Japanese businesses have acquired a growing portfolio of assets in Australasia, over the last two decades, but with greater intensity over the last five years.

Prior to the somewhat unseemly ‘MIS’ period, when retail investor focussed Managed Investment Schemes in Australia rapidly expanded Australia’s hardwood plantation estate, before spectacularly imploding around the GFC, much of the plantation establishment had been led by Japanese concerns. Usually led by the global trading houses, Japanese plantation ownership was focussed on supplying that country’s pulp mills with high quality eucalyptus fibre.

Although their proportional influence in Australia has faded over the last two decades, Japanese concerns and interests have been even more integrated in New Zealand. In the early days (before the mid 2000s), Japanese interests extended outside plantations in New Zealand, into sawmills and several pulp mills.

As was the case (and still is), Japanese printing and communication paper producers have held variable, but ever-present market shares in Australasia. At times, their influence was so strong that they were regularly described as a problem.

A decade on, Japanese interests control (in aggregate) some significant market shares, as the table demonstrates.

Japanese Companies’ Estimated End-Use Market Shares: 2020 (after Nippon/Orora transaction)

Sector

Australia

New Zealand

Corrugated Boxes

43%

>80%

Copy Paper

85%

65%*

Printing & Communication Papers

est. 25%

est. 40%*

Paper Distribution

88%

est. 90%*

Source: IndustryEdge research and company reports

* Including supplies from Australian Paper

These developments bear further analysis.

In Australasia, the likelihood of really significant and explosive changes in consumption volumes is quite low, but average consumption growth is generally better than the experience in Japan. Equally important is that both countries represent low risk operating environments, with stable economies and generally predictable regulatory positions.

Putting the bow on the box

When it comes to corrugated boxes, Australia and New Zealand have long operated in relative isolation to the rest of the world. The tyranny of distance was initially a weakness, requiring supplies to be imported or the economy to simply go without.

Subsequently, isolation has become a key competitive advantage for the industry. So much so, that the local competition for corrugated boxes and the containerboard materials from which they are made, is nearly as intense as in other regions of the world, where there are more manufacturers.

As the market for corrugated packaging continues to grow, both the re-integration of Orora and Australian Paper and the additional capacity available to Visy bode well for a robust future, whether in virgin or recycled grades.

The further advantage is that local manufacturing at Norske Skog’s other mills now appears to be more secure than ever before. On balance, that is also true for Australian Paper’s Maryvale mill.

It seems not all revolutions turn out badly.

 

First published, with extensive figures and charts and referencing in the October 2019 edition of Pulp & Paper Edge (Edition 169).

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