Taking the pulse of the pulp and paper industry: June update

Each month, the team at IndustryEdge provides an update on the state of the pulp and paper industry, as a snapshot and lead in to each edition of Pulp & Paper Edge, the industry’s only market and trade analysis.  This pulse of the pulp and paper industry was drafted on 25th and 26th June.

There are numerous challenges now, many still emerging, and few that have entirely passed by thus far in the global annus horribilis. This is a year when the world will surely look back and be grateful for its passing – and we are just half-way!

Opportunities of interest

Despite that, some clients have engaged with IndustryEdge on opportunities arising from the current situation. Without disclosing confidences, we can comment briefly on some broad opportunities being considered at the moment. We do that in the spirit of starting with the best we can offer. None of these is guaranteed, but few are off the table at the moment, either.

The Australian Government’s ban on unsorted recovered paper and cardboard exports means somewhere between 500,000 and 1 million tonnes of material will not be exported after mid-2024. A threat for some, but an opportunity for others. Options being considered include the production of recovered paper pulp, expansion of moulded fibreproduction, including for single-use medical and sanitation purposes and export focussed recycled containerboard materials (corrugating medium and testliner) production.

Converters have been examining their options also, with new fibre-based work screens and single-use (or at least single-day use) ‘stations’ being produced for a range of purposes. These are similar to the ballot booths produced for the Australian Electoral Commission, and help to maintain sanitation, while generally being recyclable.

Personal protective equipment seems a ‘no-brainer’, but it is never that simple of course. There is work underway however, including using recycled materials.

Retail sales, jobs and households

Locally, with both Australia and New Zealand handling the pandemic as well as could reasonably be expected, economic activity is by no means back to ‘normal’. Recent days have seen a return to the absurd panic-buying of toilet paper in some Melbourne suburbs, underscoring the fragility of community confidence.

Little wonder there is deep concern lurking behind brittle smiles in the community. Despite the JobKeeper program, Australia’s unemployment rate shifted up to 7.1% in May, with the number of people without a job lifting to more than 927,600. Almost 228,000 people lost their jobs in May, and the Participation Rate fell a steep 0.7% to 62.9% of the working age population. Recent announcements will add thousands more people to the ranks of the unemployed.

Under those stresses, orthodox thinking was that Australian households had pulled back on their consumption. As we outlined in the mid-month edition, retail sales fell 19.0% in April, having surged 14.7% in March, which seemed to confirm the thesis. But the preliminary retail sales data for May showed a 16.3% rise, compared to April (the largest ever monthly rise).

Much of the spending is being supported by JobKeeper payments, increased JobSeeker payments and withdrawals from superannuation accounts. Real time retail sales data analysed by Illion and AlphaBeta shows that those who have drawn down on their super have increased their discretionary spending, “…as opposed to being the lifeline for which it was intended.”

Advertising should be back, soon, if not already

Advertisers need to take heed of the population’s prompts here. Households and families are using whatever is available to them to maintain a relatively normal lifestyle and pattern of expenditure. They may be doing that on the never-never and it may not last past the September cut-off for JobKeeper and JobSeeker payments, but for now, conditions are strangely similar to say a year ago.

To our mind, that says it is time for retailers to switch the powerful medium of print advertising back on. As they do, the emphasis will be on catalogues, with less printed newspapers available to get their message out.

Homework having an impact on printing and communication papers

The likelihood of many people working from home until late in 2020 – and realistically into 2021 – is likely to lock in lower levels of office printing and printing for business-to-business purposes. Reports of large inventories of copy paper, throughout the supply chain, are unsurprising and come around the same time there has been some churn in local supply contracts.

Distressed assets finding buyers

Many businesses in the print supply chain are distressed and facing massive change, either under their own hands or others. No better example exists than Bauer Media’s sale of its Australian operations for a reported AUD50 million less than a decade after it paid AUD525 million for its core assets and only a few months after it paid AUD40 million for Pacific Magazines. Private equity firm Mercury Capital made the acquisition, a pretty sure sign they consider there is value in the magazine sector, on the other side of the pandemic-fuelled print pandemonium.

Packaging companies have the opportunities, for now

Local packaging and industrial paper producers – including the integrated Oji Fibre Solutions, OPAL (formed by NPI from the merger of Australian Paper with Orora) and Visy have supply-chain integration and market proximity in their favour right now.

The strategic advantages may also provide an opportunity to disrupt what have been growing imports of pre-converted packaging materials. IndustryEdge has been approached by several companies seeking access to local sources of corrugated boxes and sacks and bags in particular, because their imported supplies are currently unavailable.

Disrupted supply lines will recover however, so nimble action to secure new opportunities remains important.

Around the world, conditions are poor

In general, Australia and New Zealand are better off than many of those countries with economies unable to be supported by robust government accounts. We can see this relatively close to home, where South Korea’s GDP continues to trend down and fell sharply in the March quarter, but by no means as sharply as countries like Malaysia and Indonesia.

South Korea can invest into its economy, Malaysia has less capacity and Indonesia reportedly has very little capacity to contribute to its own economic recovery. We can expect neighbours with limited economic weaponry available to them to battle to recover over coming years. That will disrupt supply chains, both for imports and exports, for years to come.

But it is not only local economies that are stressed. The world’s largest economy, the USA, has seen its economic growth plunge in the March quarter. We find it difficult to imagine a ‘snap-back’ in the US economy in the June quarter, impacting Australia and New Zealand to at least some extent.

Meantime, economic growth for our major trading partner, China, slumped, while India’s (already on the slide) continued to roll downhill. A better June quarter for China seems likely, but not for India. Exporters (including of raw wood to make pulp) have found Chinese demand very weak in some cases.

Overall, whether it is as suppliers or customers, Australia and New Zealand face their own troubles, compounded by those of the rest of the world.

The pulse in late June 2020?  Weak, variable and quite unpredictable.

 

This is an edited extract of an item published in the June 2020 (Edition 180) of Pulp & Paper Edge

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