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What can we expect as the ‘new normal’ for the European graphic paper market? Alejandro Mata Lopez, our director of European packaging and graphic paper, shares his insights on the changing global graphic paper demand, the impact of capacity rationalization, the drivers impacting graphic paper price trends and the factors that are challenging Europe’s position on the global graphic paper market.
Watch the interview and read the analysis below.
The European graphic paper market has been at a point of high price and weak demand for a while and we are seeing an accelerated rate of demand reduction in the market. Coated paper is taking a bigger hit than others, but overall, the demand for all grades of paper is declining at a higher rate than the historic average we have seen pre-pandemic.
This is caused by a number of factors including:
Capacity reductions had picked up around the globe in 2020-2021. Managing capacity in a world where demand is declining is not an easy task. There are only a couple of alternatives out there, such as mill closures and conversion to the other grades.
Conversion to other grades comes with many challenges. Firstly, due to the continued global decline in graphic paper demand, the machines that are more suited to the related conversions have already gone down this path in the last few years. This means the machines that have yet to be converted are either less suitable or require more work done for conversion.
Some of the factors to consider include energy integration of the mills, which comes with the complications of the energy challenges we face today in terms of source, supply and price. Although things are a little calmer today than in Q3 2022, we might see the energy prices go up again. Integration of these mills into electricity and energy generation will be very important to consider for conversion.
Also, the markets where these machines are going in to have their own supply and demand balances that need to be taken into account when making the decision for conversion. A lot of the conversions have gone into packaging grades.
More than 6 million tonnes of capacity exited the European graphic paper market between 2020 and 2021. Capacity rationalization will be important to watch for the graphic paper market, especially the capacity closures and their impact on demand and operating rates.
Graphic paper prices are high because of trends in supply and demand as well as costs.
Back in the beginning of 2021, we saw a rebound in European paper consumption together with capacity being removed from the market. This continued into the first half of 2022, with the addition of factors including strikes that further contributed to the tightness in the market. All of this created very high operating rates and paper buyers experienced paper supply shortages, which led to the building of inventories.
Along with the upward trend in production cost that had been on the increase since the beginning of 2022, these conditions created good momentum for paper prices to go up.
However, most of the conditions behind rising paper prices are rapidly disappearing. Observations in March had already signaled the turning of graphic paper prices ahead.
Production costs have dropped faster than anticipated as the situation surrounding energy eases prices. Higher rates of inflation had affected consumers’ purchasing power. Buyers are sitting on high inventories and demand has decelerated as they work on destocking.
The high prices also contributed to demand destruction. For example, higher paper prices are helping to accelerate the shift from paper-based advertising to digital. Over 50% of online advertising budgets in Western Europe are expected to go into digital in 2023-27, driven by the preference for online video.
In addition, capacity rationalization is also kicking in, with another 9 million tonnes expected to be removed between 2022 and 2027.
The new normal for the European graphic paper industry would look very similar to what we have now. The changes triggered by the pandemic, including the acceleration of digitization, consumption habits and working from home, are still affecting the industry and will be expected to remain for some time.
In terms of demand, we are going to go back to a state of structural decline. While the rate of decline will perhaps not be as fast as what we are seeing in 2023 and 2024, but we are definitely going into that next trough.
The new normal will also include capacity rationalization from the producers’ point of view. With the global graphic paper industry going into oversupply in the coming years, capacity management will be key to keeping the balance in the European market.
Lastly, the cost competitiveness of the European graphic paper industry is something we need to take into account in the new normal.
Exports for almost every graphic paper grade have been in decline, with the largest drops reported in newsprint and uncoated woodfree sheets. While some of the reductions in newsprint exports are due to the shift in machine conversions to packaging grades, exports in general are under pressure because of:
These elements behind the production landscape could drastically reduce European producers’ competitiveness and challenge Europe’s position on the global graphic paper market. While the energy crisis has been averted, it is important for European graphic paper industry participants to keep track of the market trends that are signaling the changes behind the scenes.
While no one can predict the future, there are many market trends and drivers you can track to keep on top of the changes and mitigate risks that come with volatility.
Planning and anticipating changes can be made easier with the help of our experts at Fastmarkets. With methodologies and pricing processes that align with core IOSCO principles, Fastmarkets has an unmatched product breadth and geographic reach.
Let our forecasts help you make critical decisions and stay ahead of developments in the graphic paper market with our short- and long-term forecasts for major global regions. Speak to our team today