After declining consumption over

the past three years, any upward trend

will unfold gradually.

by Peter Ince

P aper and paperboard market conditions this decade have been less than spectacular, thus affecting all industry segments, including recovered fiber utilization. An understanding of

market factors can aid those involved in paper recycling as they look forward to 2003 and beyond.

North America conditions Economic conditions in the U.S. and similar factors in Canada this decade have negatively affect­ed the paper industry.

Beginning in 1996, an exceptional surge in the value of the dollar weakened U.S. industrial competitiveness and attracted a flood of imported goods, leading to enormous trade deficits and eventually to a collapse of U.S. industrial production in 2001. This drop in production was cou­pled with an abrupt slowdown in business growth and business investment. The weak economy led to an even larger drop in business spending for advertising and demand for graphic papers used in buisness and advertising applications.

As a result, demand in this country and in Canada for paper and paperboard was soft in 2000 and down sharply in 2001. For example, U.S. demand actually peaded in the second half of 1999 and, by the start of 2002, paper industry production was down 11 percent from its 1999 peak.

Peter Ince is a researcher forester at the U.S. Forest Products Laboratory (Madison, Wisconsin). He can be reached at (608) 231-9364 or pince@fs.fed.us.

14 Resource Recycling January 2003 FORWARD FOCUS

Paper and paperboard trade between Europe and the U.S soon may be complicated by the prospect of import tariffs.

The European Commission has formally proposed that a set of tar­iffs be imposed on U.S paper and paperboard products, including recycled goods, in response to the use of tariffs by the U.S. on steel imports. The European Union wants to see a 15 percent tariff set on a long list of products imported from the U.S. Included are products with high recycled content, such as corrugated boxes, paperboard car­tons and tissue products.

China has proposed similar retaliatory tariffs. In both cases, the tariffs would be used if the World Trade Organization finds that the U.S. steel import tariffs are illegal.

This trend of demand softness continued last year. even though domestic market conditions in the first half of the year appeared. for a time, to be a bit brighter. The American Forest & Paper Association (Washington) estimates U.S. paper and paperboard production in the first three quaters of 2002, at a seasonally adjusted annual rate of 88.9 million tons, was off 0.9 percent from the year-earlier level. On a monthly basis, paper and paperboard production turned upward in 2002 along with overall industrial production, but the path to full recov­ery may be long and uneven, as industrial capacity utilization remains well below historical averages.

Telling results This downturn ranks among the most sigificant in the past 50 years for U.S. paper and paperboard producers, exceeded only by the dip

16 Resource Recycling January 2003

Retalliation in tariff spat could hurt trade

that occurred in the early 1970s during the so-called energy crisis, when domestic pro­duction declined 15 percent between 1973 and 1975.

The sharp slowdown in industry output in the first three years of this decade has pro­duced weak North American industry profit levels. As a result, capacity rationalization, in which high-cost machines and mills are closed or idled, has ramped up in the past few years. Between 1999 and early 2002, employ­ment levels in the U.S. industry declined more than 7 percent, a loss of some 48,000 jobs.

According to AF&PA, more than three mil­lion tons of annual capacity were permanently idled in 2002. An additional 1.2 million tons were indefinitely shuttered. Paper producers did, however, add 896,000 tons per year of new capacity.

Global conditions mixed North American paper and paperboard pro­ducers do not operate in a geographic vacu­um. Global market conditions are major fac­tors in the stability and growth of U.S. and Canadian mill operators.

This focus on worldwide conditions is especially critical because of the increasing importance of foreign markets for fiber recov­ered in the U.S. American suppliers already account for about 40 percent of global imports of secondary fiber. And, recovered paper exports from the U.S. continue to grow. Data from the U.S. Department of Commerce (Washington) indicate that U.S. exports of recovered paper in the first three quarters of 2002, at 7.52 million metric tons, were up 5.9 percent and on pace to set a record.

With a few exceptions, demand outside of North America for paper and paperboard slumped in the period of 2000 through 2002. However, market fundamentals varied by region.

Russian Federation. On the positive side of the ledger, the paper and paperboard indus­try in the Russian states has grown this decade, boosted by low currency exchange rates, high export levels, political stabilization and tax reform. Especially in 2000, many Russian forest, pulp and paper enterprises increased their output and raised their profitability. This was associated with their adaptation to mar­ket conditions and by structural reorganiza­tion of both individual enterprises and the industry as a whole.

Asia. Paper and paperboard market con­ditions vary widely in Asia. Market changes in China during this decade parallel those in Russia. With a continuing improvement in the gross domestic product in China, demand for paper and paperboard products has risen sharply. As a result, numerous sizable mill investments have been made, mainly based on recycled fiber.

The importance of China to U.S. recov­ered paper processors is growing. In 1990, about 1 percent of U.S. secondary fiber

Resource Recycling January 2003 17

exports went to China. Last year, approximately one-third of ship­ments out of the U.S. went to China.

At the same time, however, market conditions elsewhere in Asia have not been as robust. For example, aggressive industry restruc­turing is underway in Japan due to past woes of overcapacity and a glut of competitors. The reform movement, aided by a stronger yen, has led to numerous mergers and an improvement in industry profits.

Europe. On the downside. market conditions similar to those in North America prevailed in Europe over the period of 2000 to 2003, with 2001 being an especially difficult year, when, with only a few exceptions, most European countries saw a contraction in paper and paperboard output.

The European industry recorded a slightly improved level of per­formance over much of last year. A slight market upturn in the early months of the year helped push production levels ahead of the year-earlier pace.

All in all From historical peaks in 1999, paper and paperboard consumption in both Europe and North America declined in the ensuing years. The downturn reflects the broader economic conditions that occurred glob ally in the past three years. As a result, global pulp and paperboard capacity growth remains well below historical growth rates, with the exception of Russia and parts of Asia, particularly China.

The broad nature of the economic downturn also suggests that any upturn in pulp and paper markets is likely to unfold gradually. The downturn was spawned by a decline in overall industrial activity and capacity utilization, along with dislocation ofbusiness investment and exceptional currency exchange values. It will take some time before global industrial output, business investment and business growth can return to levels experienced in the late 1990s, prior to the downturn.

RR

18 Resource Recycling January 2003