Europe's economy is going into the tank, weighted down by Germany's decline, by war risk in Iraq and by conflict between NATO, the UN and USA. Europe badly needs further growth in the U.S. to start recovering. Are pulp and paper markets showing any signs of growth—anywhere?
Some of you will be reading this comment in the rooms, bars and lounges of the Waldorf Astoria Hotel [March 2003]. Others may do so in the mills and elsewhere. Or, and of much greater significance, you may be watching and reading of the first wave of attacks against Iraq.
In any event, it all makes for uncertain times. The encouraging signs are scarce, but they're out there. Visitors to the Montreal show (EXFOR) at the end of January expressed positive feelings, But they were all anecdotal and none—that I heard—were data-based.
More encouraging was the second round price increase for NBSK pulp in the U.S. market, which is now trading (12 Feb.) between $465-$500 a ton. Increases in U.S. newsprint have also been announced for 1st March in the range of $440-$465. This is well short of the $480 announced earlier, but it seems to have been accepted.
I also looked elsewhere (company fourth quarter reports) for other signs. In particular, at the world's two largest producers—International Paper and Stora Enso. IP slightly beat forecasts of 26 cents per share for the fourth quarter. Stora Enso reported a higher operating profit of $353.5 million, and Jukka Harmala, CEO, said that the outlook in the U.S. was brighter than for some time.
Last August, StoraEnso was forced to write off about $1.1 billion, having overpaid to enter the U.S. market with the acquisition of Consolidated Papers. Now it hopes to benefit from its U.S. presence.
Lars Kjellberg of CSFB (Credit Suisse First Boston) said, "Figures show that that advertising spending in magazines in December was up by about 20% in the U.S., and magazine pagination up by 10%."
The decline in the dollar is working in favor of North American producers at the cost of their European competitors. Imports into the U.S. are declining, while US exporters are becoming more competitive in Europe and in Asia. In Europe, the market for printing papers continues to be depressed with both volumes and prices under pressure. Yet, despite the difficult environment, European forestry and paper stocks have outperformed the European part of the FTSE World Index by 25% over the past 13 months.
But Kjellberg states that progress in the U.S. should not be overstated as the recovery starts from a very weak base. "For example, newsprint prices may be on the way up, but they are only now reaching European levels."
Mikael Jafs at UBS Warburg says consolidation in the sector appears to have resulted in increased price and production discipline. "Pulp prices have fallen 40% since 2000 and the last time we saw this kind of drop, the price of graphic papers was down 20%. This time the fall has only been 10%." This relative stability has been reflected in the sector's share prices.
America's greatest optimist and the world's most high-profile banker, Alan Greenspan, presented a forecast to the Senate on 11 February that was remarkably upbeat. If he is proved right, his figures will represent an amazing comeback for the U.S. economy. He said there are glimmers of hope for corporate America. Business inventories remain lean, meaning that any upturn in demand should persuade factories and mills to increase production, rather than run down stocks any further.
The key, says Greenspan, once tension over Iraq has dissipated, is to resume capital investment. He believes that capital spending, or the money that U.S. businesses invest for the future, is the potential deal-breaker for the recovery. How many times have we read this in our trade press editorials? But he knows what he's talking about, and so, I'm delighted to say, do some of our better editors and publishers.
But finding that capital may be a problem for the U.S. pulp and paper industry as over 50% of its machinery is 20 years-old or more. The awesome amounts of money needed to bring these mills up to speed may just not be there.
The real threat for the U.S. pulp and paper industry is that, no matter how healthy the economy, the scale of domestic investment may be too high a hurdle. So new investment could go offshore, to Asia or Latin America, where U.S.-owned mills will not only serve local markets, but will also be able to export pulp and paper for the U.S. market. The clothing industry may be a useful guide. I buy my suits and footwear in British stores, but they're all made in Asia.
