Western European demand for magazine paper and newsprint, as well as book and telephone directory paper, declined in the first quarter of 2012 compared with the same period in 2011. This is largely attributable to the weak economy in Europe, as well as lower advertising investments in daily newspapers and magazines. Investments in direct mail and product catalogues remain better than in traditional media.


Categories: Holmen Paper , Paper

2012-05-14

The state of the economy

During the first quarter of the year the euro area continued to struggle with a sharply rising unemployment rate and declining private consumption. Industrial production is slowing down, and at the beginning of the year the International Monetary Fund (IMF) adjusted their forecast downward by 1.6 percentage points, now estimating that the eurozone’s economy will contract by 0.5% in 2012. Many European countries, especially hard-hit Greece, will feel the pain of austerity measures for a long time to come despite, or perhaps because of, the European Central Bank’s rescue package, which affects the entire European Union. Higher unemployment leads to lower consumption, which in turn affects export-dependent economies such as Sweden, which had been doing well so far. For Italy, a country surrounded by great uncertainty, the IMF is lowering its forecast and expects a recession there in 2012–2013.

 

The IMF is adjusting its global growth forecast downward to 3.3% in 2012 and 4.0% in 2012. The US economy has improved, unemployment is declining, private consumption is increasing and the balance of trade is less negative than it has been in a long time. The US central banking system, the Federal Reserve, is repeating its mantra that its benchmark interest rate will remain at its present low level at least until the end of 2014. China is still a powerhouse, even though its first-quarter GDP growth rate of 8.1% was somewhat lower than expected.

 

Advertising spending

Global advertising investments are expected to rise by 4.8% in 2012 as Asia and Latin America make up for the slowdown in Europe. This forecast from ZenithOptimedia has been revised upward slightly primarily based on two factors: large companies are investing more in marketing, above all brand building advertising; and the risk of a total collapse in the euro area is considered to be reduced, even though the area’s short-term financial results have deteriorated.

 

Advertising investments in Western Europe are forecast to grow by a modest 1.5%, while investments in Eastern Europe are expected to grow by 6.5% and in North America by 3.6%. The major growth is forecast for Asia at 7.4% and Latin America at 9.2%; their economies are expected to remain strong. The forecast for advertising investments in North Africa and the Middle East has been reduced to 1.0% due to continued political and social turmoil in the region. Zenith expects a gradual but steady increase in marketing investments in 2013 and 2014. 

 

Ten growth markets will be responsible as a group for half of the increase in advertising investments between 2011 and 2014. Moreover the share of investments spent on internet advertising will continue to grow rapidly: in six months internet advertising will make up more than 30% of total marketing investments in 2014.

 

Advertising investments in newspapers and magazines have declined steadily since 2007, with a brief respite for magazines in 2010. Zenith expects advertising investments in both newspapers and magazines to continue declining by 1% per year between 2011 and 2014. This reduction refers to advertisements in print editions and not to electronic editions or websites, which are categorised as internet advertising. For this reason the prospects for newspaper and magazine publishers aren’t necessarily as gloomy as this figure would indicate if they succeed in developing a successful business model for their electronic media. However paper manufacturers cannot expect newspaper and magazine publishers to increase their consumption of printing paper. Things look brighter for other types of marketing such as direct mail and product catalogues. These marketing channels are not measured in the same way, but so far no obvious structural impact upon them has been discerned, nor is there any discussion of sharply reduced volumes in Europe in the next few years. 

 

Industry structure and capacity

At the end of 2011 UPM closed down the capacity that they announced they would be shutting down immediately after acquiring Myllykoski. This means that at the beginning of 2012, capacity was around one million tonnes lower than at the end of 2011. The capacity closed down was primarily in the magazine paper segment, but they are still able to supply cut-sheet paper since the equipment from the closed Albbruck mill was moved to Plattling. During the quarter UPM also sold its packaging business to Billerud and announced that they would be making a number of investments, such as a combined heat and power plant connected to the Schongau mill, and a biorefinery to produce wood-based biodiesel.

 

Norske Skog closed the Follum mill at the end of March. Viken Skog, which bought the mill along with its land and some of its equipment, will not be producing printing paper at the facility. Instead, they plan to convert it into a “forest industry centre”. The Follum mill produced book paper, improved newsprint and on-line coated paper (MFC) on two machines with a total capacity of 290 000 tonnes.

Stora Enso has reorganised, and the new business area structure means that on the printing paper side, they’ve combined Newsprint & Book Paper with Magazine Paper and Fine Paper, forming a new area called Printing & Reading. Moreover Stora Enso has reviewed the organisation of its maintenance operations at its Swedish mills in order to improve efficiency and profitability, leading to around 130 jobs being axed. During the quarter the news was also published that Stora Enso will build a paperboard and pulp mill in China, an enormous investment of EUR 1.6 billion.

 

Russian newsprint producer Solikamsk had previously announced that they would be expanding their newsprint capacity. They were planning to construct a new machine with a capacity of 350 000 tonnes per year to produce newsprint from virgin fibre. Now there are indications that the project has been put on the back burner, and Solikamsk is keeping quiet about it.

 

Another Russian producer, Kama, shut down its PM 7 machine, which produces LWC paper, in mid-February due to financial problems. The plan was to restart the machine in the middle of March, but it is still idle and will remain so indefinitely.

 

Another major piece of news during the quarter was SCA’s sale of its packaging operation (except for the two Swedish mills Munksund and Obbola) to the British firm D.S. Smith. The reason was that SCA wants to concentrate more on its tissue paper business. The two Swedish mills were left out of the sale because they are tightly integrated with printing paper manufacturing in Sweden. Furthermore there is great uncertainty about the majority of North American mills, including St. Mary’s Paper and Port Hawkesbury, which manufactures SC paper, newsprint and uncoated wood-containing paper. The mills are closed indefinitely and under the management of a bankruptcy administrator, but they are in the process of finding a new owner.

 

Market outlook for wood-containing printing paper

Magazine paper

Total European demand for Magazine Paper (MF Magazine, SC and coated wood-containing paper) declined by 4% during the first quarter of 2012 compared with the same period in 2011.

 

MF Magazine

    (000 tonnes)  
  Q1 2011 Q1 2012 Changes
Western European demand 339 315 -7%
Exports from Western Europe 100 94 -6%
Total Wester Europe deliveries 439 409 -7%
       
  Q1 2011 Q1 2012  
Capacity-to-delivery ratio Western Europe 93% 89%  

 

MF Magazine was the grade that did the best in 2011. Demand rose through the third quarter, but then declined in the fourth quarter, and for the full year demand was at the same level as in 2010. The established trend of lower demand has continued in the first quarter of 2012.

 

In the MF Magazine segment, deliveries of both high-brightness and low-brightness products have declined, but the high-brightness products did somewhat better.

 

 

SC paper

    (000 tonnes)  
  Q1 2011 Q1 2012 Change %
Western European demand 723 742 3%
Exports from Western Europe 319 306 -4%
Total Western European deliveries 1043 1048 1%
       
  Q1 2011 Q1 2012  
Capacity-to-delivery ratio Western Europe 83% 83%  

 

In the first quarter of 2012 total deliveries of SC paper from Western Europe were essentially unchanged compared with the first quarter of 2011, since Western European demand has risen while exports have declined.

 

While deliveries of both SC-A+ (the brightest SC grade) and the standard product SC-A declined, deliveries of SC-B (with a recovered paper element and the lowest brightness) rose by 8% during the first quarter of 2012 compared with the first quarter of 2011.

 

Coated wood-containing paper

In the first quarter of 2012 Western European demand for coated wood-containing paper declined by 8% compared with the same period in 2011, which in turn was a weak quarter compared with the same period in 2010. Deliveries of glossy LWC paper were unchanged during the quarter compared with the first quarter of 2011. However deliveries of both matte LWC paper and MWC paper (high grammage coated), which make up 15% and 20% of the segment respectively, have declined.  

 

It is worth pointing out that the established trend for different printing methods is accelerating: deliveries of coated paper for offset printing are essentially unchanged, while paper for gravure (rotogravure) declined by 10% during the quarter.

 

The higher capacity utilisation for coated paper in the first half of 2012 versus the same period in 2011 – despite reduced deliveries – is attributable to UPM shutting down its coated capacity, which was equivalent to almost 600 000 tonnes per year. 

 

 

Book paper

    (000 tonnes)  
  Q1 2011 Q1 2012 Change %
Western European demand 84 80 -5%
Exports from Western Europe 27 32 18%
Total Western European deliveries 111 112 0%

 

Demand for wood-containing book paper declined in 2011 for the first time since this grade began to be accounted for separately. The 4% reduction is due to several likely causes, including e-books and the increased use of digital printing, which reduces the number of overruns. The decline seen in 2011 continued on its established path in the first quarter of 2012. 

 

Newsprint

    (000 tonnes)  
  Q1 2011 Q1 2012 Change %
Demand      
Western Europe 1797 1627 -9%
       
Exports from Western Europe 305 370 21%
To North America 6 5 -8% 
To Asia 142 208 47%
To Eastern Europe 90 91 2%
       
  Q1 2011 Q1 2012  
Capacity-to-delivery ratio Western Europe 91% 86%  

 

Demand for newsprint declined by 9% in Western Europe during the first quarter of the year, compared with the first quarter of 2011. After the first quarter of 2012 demand in all parts of the world except for Asia and Latin America was lower than in the same period last year. The trend of lower demand in China appears to have turned around as it increased by 14%; however after the first quarter it declined by 7% in India, where demand was previously growing strongly. Japan demonstrated higher demand for newsprint for the first time in a long time, because the country has now recovered from last year’s earthquake.

 

Imports to Western Europe had risen after two months in 2012, but it is still a matter of low quantities since imports were low in 2011. Exports from Western Europe grew by 20% in the first quarter, with deliveries to above all Asia being greater than during the same period last year. Deliveries to North America have declined.

 

Capacity utilisation is only 86%, which is lower than in all quarters in 2011.

 

Telephone directory paper

Western European demand for telephone directory paper declined by approximately 5% in 2011, but it remains unchanged in the first quarter of 2012 compared with the same period last year. It is worth pointing out that European telephone directory publishers’ demand for paper is steadily declining by approximately 20% per year, so paper for other uses is making up for this.

 

During the quarter Western European capacity utilisation was significantly lower than in the same period last year for all grades that can be manufactured on the same types of machines and are considered “swing capacity”. These grades are book and telephone directory paper, MF Magazine and newsprint.

 

 

 

Sources

General Economics: International Monetary Fund (IMF)

Advertising: ZenithOptimedia

Paper Demand: Euro Graph



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