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OCTOBER 2003                                                                                                                                VOLUME 119, NO. 7
MARKET ANALYSIS
Uncoated Groundwood Papers Face Stiff Competition as Markets Mature

By Harold Cody >> email: info@paperage.com

Demand for uncoated groundwood papers, which rose modestly last year following a drop in 2001, is expected to post a gain of about 1% in 2003 as key markets such as catalogs, magazines and inserts continue to recover from dismal demand levels over the last two years. The key demand driver behind these gains is advertising expenditures. Following two years of weak advertising across all media, U.S. advertising expenditures are up 6.8% in first half 2003 over the 2002 level, with print advertising rising 8.6%, according to TNS Media Intelligence. Gains are being registered in the largest market, newspaper inserts, in addition to catalogs and magazines.

Rising end-use demand has led to modest improvements in demand for coated and uncoated groundwood printing papers, which has led to tighter markets and rising prices. A variety of grades can be used in and compete in key applications, and as a result groundwood markets are strongly influenced by newsprint and coated groundwood paper prices. Prices improved for most major groundwood grades during the first half of 2003, but gains varied and took some time to implement. Major producers such as Abitibi-Consolidated (AC) have announced further increases of about $40/metric ton (mton) on all grades for the fourth quarter. Effective Oct. 1, AC announced it will implement a $40/mton price increase on its hi-bright, SC-A, SC-B, soft nip, and bulky book grades. The real impact of this may not occur until early next year.

Demand Growth, Tight Supply Drive Price Gains
The 15-million-mton global uncoated groundwood papers market is concentrated in two major markets—Europe and North America. U.S. uncoated groundwood demand is about 5 million mtons, with SC grades accounting for about 2.8 million mtons. Inserts consume about half of this overall tonnage, with the remainder split among other printing, magazines, catalogs, books, and directories. Nearly 75% of U.S. consumption is supplied by imports, which is a far greater share than any other printing and writing grade. Imports from Canada have grown by more than 1 million tons in the past five years due to the switch of many machines from newsprint to SC production. Canadian imports now comprise over 80% of total imports of these grades.

Uncoated groundwood paper demand grew faster than any major printing paper in the past decade, when demand expanded at nearly double-digit rates. Demand is expected to post more modest increases in the future due to the more mature nature of its key end-use markets and less gains in market share at the expense of other grades. Demand for high-gloss grades, such as supercalendered and soft-nip grades, is expected to continue to grow faster than lightweight and standard grades.

Through the first half of 2003, North American uncoated groundwood shipments totaled 2.4 million mtons, up 0.9% over 2002, but with imports up nearly 16%, demand was running 1% ahead of prior year levels. U.S. output has been trailing year earlier levels due to capacity withdrawals, notably the closure of the former Great Northern mills in Maine. However, some weakness occurred in the second quarter, largely blamed on economic uncertainty due to the Iraq war, and thus price gains during this period were modest and demand slacked off somewhat. Demand should revive during the second half of 2003 and into 2004 if the economy remains on track.

Innovate or Be Left Behind
The market is comprised of a complex and growing matrix of grades, but the major segments include high-gloss, lightweight, and traditional machine finish or standard grades. New uncoated free sheet substitute products have also emerged, led by AC's development of a surface sized and a lightly coated groundwood sheet.

Lightweight grades (< 40 g/m2) include standard telephone directory (22.5 lb) papers. Standard grades have a basis weight < 40 gm2, brightness < 65, and smoothness < 2.5 PPS, according to PPPC definitions. The high gloss SC grades are further defined by gloss, brightness, and smoothness into three categories: SCA+, SC-A and SC-B.

SC paper quality continues to evolve as most major producers have invested capital to upgrade existing production lines with new wet ends in recent years and many rebuilt lines have included the addition of multi-roll calendering. These moves were in large part a response to a new generation of SC production lines, such as Stora Enso in Nova Scotia and new paper machines in Europe, which have raised the bar in terms of quality. In addition, newsprint mills upgrading to SC-B or SC-C production via on-line soft calendering were pushing up quality from the lower end as well as placing pressure on traditional mills by lowering costs.

A continuing rise in quality has meant mills either upgrade to remain competitive or be left fighting for orders and supplying an inferior product. It has also led to continued fragmentation of the market, where producers can claim, "my SC is better than their SC." Sources of supply have also undergone technology driven change. AC is now producing SC grades in Texas using southern pine (see PaperAge, July/August 2003, pg 16). Prior to this, essentially all SC grades were made using Northern species such as spruce and aspen.

Within the industry there has even been disagreement as to what constitutes a "supercalendered" paper due to the introduction of new technology. SC paper is now produced using both traditional off-machine supercalendering as well as the newer multi-roll on-machine calenders. Filler pigment technology for SC grades also continues to evolve as a few mills such as Madison Paper now use calcium carbonate instead of kaolin. However, kaolin continues to account for a majority of use in North America.

As shown in Figure 1, the share of major North American groundwood producers (in order of capacity) include Abitibi-Consolidated (31%), Norske Canada (11%), Bowater (10%), Stora Enso (10%), Nexfor—Fraser and Katahdin—(8%), Kruger (7%), Irving (4.2%), Belgravia—St. Marys Paper—(3.7%), Madison (3.5%), and others (11.6%). The top five producers hold about 70% of capacity and the top two nearly 50%. The major producers of SC grades are Stora Enso, Abitibi-Consolidated, Madison, Irving, and St. Marys.


Figure 1. Top North American Groundwood Producers

Table 1 compares North American uncoated groundwood shipments, imports, and overall demand for the first half of this year with that for the same period in 2002. Table 2 makes the same comparison for SC groundwood papers.

Table 1. North American Uncoated Groundwood Statistics
(000 metric tons)
June 2003 % Chg Year Ago Jan.-June 2003 % Chg Year Ago
Shipments 2430 -2.2 2430 0.9
Imports 320 23.5 320 15.6
Demand 2621 -0.6 2621 1.0
Source: PPPC

Table 2. North American SC Data (Jan. to June 2003), 000 metric tons
SHIPMENTS 2003 2002 % CHANGE
SC-A 653 635 2.9
Other 494 520 -5.0
Total 1147 1155 -0.6
IMPORTS
SC-A 226 199 13.2
Other 45 45 -1.5
Total 271 245 10.5
TOTAL
SC-A 879 834 5.4
Other 538 565 -4.7
Total 1417 1399 1.3
Other grades include SC-B and SC-C.
Source: SC Council


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