Another lightweight kraft liner PM targeted for export; little to some challenges are expected for big US players

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Another lightweight kraft liner PM targeted for export; little to some challenges are expected for big US players

May 31, 2019 - 17:03

OAKLAND, CA, May 31, 2019 (PPI Pulp & Paper Week) -A second major kraft linerboard project with global implications was confirmed this week.

Stora Enso said it would eliminate coated printing and writing output at its Oulu mill in Finland by September 2020 and convert one machine, the No. 7, by December 2020 to making 450,000 tonnes/yr of kraft linerboard. Stora Enso said PM No. 7's new output "will target global export markets."

Klabin said similarly a month earlier, yet with a plan that is more than double Stora's capacity. Klabin plans two new kraft linerboard machines with 920,000 tonnes/yr of capacity, made partly or mostly with bleached eucalyptus kraft (BEK) pulp. The first one is to operate in second-quarter 2021 and the second one by 2023. Output is aimed for North America and Europe, Klabin said.

It's unclear how the 1.37 million tonnes/yr of capacity from these projects will impact global kraft linerboard trade flow, especially for US major integrateds like International Paper (IP), WestRock (WRK), and Georgia-Pacific (GP) that hold long-standing export positions. In all, the US sells almost five million short tons per year of kraft linerboard around the world.

Contacts this week were mixed about how these two projects may challenge the US majors and their volume. They expected most of the competition to impact lower tier producers including especially those who make recycled linerboard.

However, one expected a more direct impact on US majors in Europe and likely a smaller impact in South America.

"The Stora Enso mill in Finland will directly compete with the US mills selling in the EU (European Union) markets. This mill will be the grade of preference given its virgin fiber, quality specs, proximity to market, and Euro-denominated currency," the trader said. "This will tilt the balance with IP, WRK, GP and others currently exporting into that market, assuming the EU will be in better economic condition by the time the mill starts."

Klabin will aggressively push for business in South and Central America, where the US last year exported almost half its kraft linerboard, the trader said.

"Klabin's new capacity will also become a thorn on North America mills exporting to the Latin American markets, with the exception of Mexico, where there is limited competitive advantages for Klabin," the contact said. "Klabin will look to place the bulk of its tons in southern portion of South America (Argentina/Chile) and some to the high-volume fruit markets like Ecuador. Some (Klabin) exports will go to the European Union and Asia, although, for these markets, it will be more of the same that is currently in play."

Low-cost fiber position.Both Stora Enso and Klabin have "good assets" and "good forest access," and "both know the world will need more virgin fiber," another trader said.

The contacts expected the new output from both will be partly or largely lightweight kraft linerboard.

"Both are good companies. I think they're probably pretty strategic about what they are doing. Everyone believes that kraft linerboard will get lighter (in basis weight and thus reduce fiber in corrugated boxes)," a producer said.

But demand for lighter basis weight containerboard in the USA may not come as fast as some think, another contact, with a producer, said.

"Europe is already at overcapacity and will be for a while," the contact said. "(The new capacity) will only add to the problem. It will be extra lightweight linerboard and the North American market is not ready for it yet."

How much that lighter basis weight kraft linerboard may find homes outside the USA is unclear today.

The trader also suggested that Stora Enso's Oulu conversion will be the "first of a series of moves" into corrugated packaging, the contact said. He expected Stora Enso would buy corrugated plants for integrating some Oulu production.

He also pointed to both the companies banking on continued expansion in e-commerce and overall box demand, including in China.

Forecasters believe China -- because of its fiber crisis caused by a dramatic two-year clampdown so far on recovered paper imports -- will need to import more linerboard. RISI's packaging economist Ken Waghorne expects US kraft linerboard exports to rapidly increase in the next two years.

23% of US kraft was exported.Last year, the No. 1 country market for US kraft linerboard exports of 4.77 million short tons (4.343 million in metric tonnes) was Mexico, where 18% of the total was exported. US kraft linerboard to Mexico, and South and Central America nations represented 46% of all US exports, with a special focus on 42-lb and heavier basis weight kraft linerboard for packaging produce. China's share of US kraft linerboard exports last year was 13%, and southern Europe's was 10%. In all, 23% of US kraft linerboard production of 21 million short tons last year was exported.

Klabin Puma.Valmet is to supply both the kraft linerboard machines for Klabin. The first, with 450,000 tonnes/yr of capacity, will be the No. 27 machine as part of Klabin's Puma II mill project in southern Brazil. Startup of No. 27 is set for second-quarter 2021,PPI Latin Americareported.

Klabin also signed a letter of intent for a Valmet 470,000 tonnes/yr kraft linerboard machine, PM No. 28, for May 2021. PM No. 28 would start up by 2023, according toPPI Latin America.

Stora Enso Oulu.Stora Enso this week said it would spend about Euro 350 million to convert the No. 7.

"We have proven competence in running large conversion projects successfully, as we have already converted one paper machine at Varkaus Mill to produce kraftliner," Stora Enso CEO Karl-Henrik Sundström said in a release.

Following the conversion, Stora Enso said it expected the Oulu mill's EBITDA margin to improve by 15-20 percentage points. At full capacity, the investment is expected to meet the company's Packaging Solutions division's profitability target, which is operational return on operating capital (ROOC) of 20%, Stora Enso said.

"The investment will include a new world-class line for virgin-fiber based kraftliner (both brown and white-top) … (and) the modification of the pulp mill and drying machine for unbleached brown pulp," Stora Enso said.

Stora's project starts this summer.

 Lower pricing in China?There were more reports this week of lower pricing for June for US kraft linerboard in China. Levels reportedly were down under $700/tonne delivered to main ports in China, for the first time in nearly two years. One contact said that domestic linerboard prices in China were dropped twice in May by at least one major producer.

--bygrudder@fastmarkets.com