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Steep drop in newsprint continues

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Steep drop in newsprint continues

July 08, 2012 - 16:00

BRUSSELS, July 9, 2012 (RISI) -Steep demand declines in North America and Western Europe, as well as a slowdown in growth from Asia and the introduction of new machines in developing markets, will necessitate the removal of 3.5 million to 4.4 million tonnes of newsprint capacity around the world over the next several years, according to RISI's just-released Global Newsprint Risk of Closure study.

Newsprint demand in developed regions like North America and Western Europe has been in a state of permanent retreat for years, leaving producers scrambling to ship tonnage to the still expanding export markets that kept world newsprint demand growth positive in 2010. However, this growth stalled last year as newsprint demand in some of the important Asian markets shrank and world newsprint demand fell 3.7%, creating even more stress for the already oversupplied global newsprint market. Although some of the 2011 decline in Asia was due to fluctuations in currency, inventories and government regulations that we expect to abate and allow a return to growth in 2012, the day when competition from the Internet and digital media causes newsprint demand in developing regions to join the downward spiral of North America, Western Europe and Japan is fast approaching.

Figure 1 - Newsprint demand growth

New capacity

In addition to the problems caused by disappearing demand, newsprint producers will also have to compete with several modern newsprint machines scheduled to come online over the next five years in Latin America, Eastern Europe and Asia. Since demand growth in developing regions is no longer enough to offset the losses of the developed world, these new machines will force out even more capacity. Other threats to newsprint capacity include the escalating cost of old newsprint, a situation exacerbated by the steeper demand declines in the North American market, which is a major supplier of recycled paper.

The study examines 189 machines in North America, Europe, Asia and Australasia, measuring the threat faced by each individual machine with a two-pronged index of machine risk and company risk. Machine risk describes the strength of each machine and includes factors such as production costs and the age of the machine. Company risk represents the likelihood that ownership driven factors, such as strategy or financial necessity, will motivate the closure of the machine. This two-pronged index makes it possible to distinguish not just the degree of risk, but also the different type faced by each machine by creating a chart such as Fig. 2, which represents the risk of closure for the European newsprint industry.

Figure 2 - European newsprint risk of closure matrix

The machines in the upper right quadrant have the highest risk of closure, as they face the highest levels of machine and company risk due to their relatively expensive production and their ownership's strong incentives to rationalize newsprint capacity. In contrast, the machines in the lower left quadrant are efficient producers whose ownership has little to no reason to shutter capacity. The machines in the bottom right quadrant face little company risk, but their high production costs will make investment necessary in order to remain competitive. Of course, given the outlook for newsprint demand, simply closing these machines once they become uncompetitive may be a more attractive option. Finally, the machines in the upper left quadrant have efficient production but risky ownership; their parent companies may need to sell the machines in order to service debts or attempt to convert the productive equipment to another grade.

The study includes detailed outlooks for how each company's strategic and financial concerns will influence decisions regarding its mill portfolio. North America will need between 1.0 and 1.5 million tonnes of closures over the next five years to maintain market balance, while Europe will need to shutter 1.3 to 1.7 million tonnes of capacity. Asia and Australasia will hardly escape unscathed, shuttering about 1.2 million tonnes of capacity as more efficient machines replace aging equipment and demand begins to decay in the few countries where it has not already done so. The global newsprint market has become more intertwined over the past few years as demand growth has been concentrated in regions with disproportionately low newsprint production and vice versa, and now that the global market has also become oversupplied, even capacity in growing regions has been put at risk of closure.

Derek Mahlburg, Economist, North American Graphic Paper, is the co-author of RISI's new study: Global Newsprint Risk of Closure as well as a contributor to the Paper Trader and Graphic Paper Forecasts. For information about purchasing the study, please visit contact your RISI account representative.