5 ways to adapt
to declining/changing
    paper markets

                   November 2009
  Stig Andersen    Stig Andersen...
There is growing evidence of European paper demand being
        at a paradigm shift, going from long term growth to decli...
Furthermore, there is growing evidence that Europe will not
        be able to keep up its net exports. Thus, shipments fr...
Assuming this demand (and shipments) paradigm shift as
           given, how do you make money/survive in such a (declinin...
Option 1: Exit/quit

                 Leave the industry or the segment – rebuild your company – find other
              ...
Option 2: Go niche/higher value added

                 Leave the commodity game, and instead

                  – go nich...
Option 3: Restructure – learn supply control

                         Stay within commodity, but…

                      ...
Supply discipline – will it work in Europe?
            It will not work without a major consolidation/restructuring
     ...
Supply discipline – will it work in Europe?
            You have to restructure enough to:
                 – Reach a conc...
How to lift entry barriers sufficiently?

             The industry cost curve is today (too) flat

             Thus, ord...
Option 4: Form BioCombines

                  BioCombines - Integrated production
                  of pulp, paper & board...
Option 5: Form BioCombines (brown field version)

                  Similar to Option 4…

                  But where you ...
Additional slide – if time permits



         Interesting new constellations
                                            ...
Additional slide – if time permits



     New constellations
                                                            ...
Nordea &
                                                 Forest Industry
                                              Th...
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01 Stig Andersen Five Ways To Adapt To Declining Changing Paper Markets

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01 Stig Andersen Five Ways To Adapt To Declining Changing Paper Markets

  1. 1. 5 ways to adapt to declining/changing paper markets November 2009 Stig Andersen Stig Andersen Nordea CMB March 30, 2009
  2. 2. There is growing evidence of European paper demand being at a paradigm shift, going from long term growth to decline. 12000 16000 US paper demand development European paper demand development (12m rolling) (12m rolling) 11000 14000 Newsprint 10000 12000 9000 Office paper 10000 8000 8000 Office paper 7000 Newsprint 6000 6000 5000 4000 New sprint SC LWC UWF CWF 4000 2000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 3000 Please consider the impact on the environment before printing this e-mail 2000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2 10/11/2009 - Paper free/less office eventually a reality? New sprint SC LWC UWF CWF
  3. 3. Furthermore, there is growing evidence that Europe will not be able to keep up its net exports. Thus, shipments from Europe will likely perform weaker than demand. Most of the developed world also experience the same paradigm shift in European LWC development paper demand (12m rolling) 10000 Asia used to be a net importer, but is, after major capacity build-up, becoming a net exporter of paper 8000 Currency is, of course, a wild card European paper exports (12 month rolling) 2500 6000 2000 Growth: 4000 Shipment > demand Growth: Shipment < demand 1500 2000 1000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 500 3 10/11/2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 SC LWC UWF CWF Shipments Demand Exports
  4. 4. Assuming this demand (and shipments) paradigm shift as given, how do you make money/survive in such a (declining) market? What are your options? We show 5 different options/solutions: Option 1: do like NOKIA or Haindl Option 2: do like Borregaard or SCA Option 3: do like AbitibiBowater Option 4: do like …. Option 5: do like UPM 4 10/11/2009
  5. 5. Option 1: Exit/quit Leave the industry or the segment – rebuild your company – find other business opportunities Either through rebuild of existing assets to produce other grades or through complete industry exit – This is, however, a costly option today – as assets are hard to sell for a decent price (current poor second hand market for capacity) – Thus, leaving the industry as a result of bankruptcy has a higher likelihood (than being done voluntarily) the next 12-18 months. Examples: Haindl Papier Left the industry, sold at peak Left the rubber business, and instead went into a completely new business area (mobile phones), which at that time was small – but with a potential 5 10/11/2009
  6. 6. Option 2: Go niche/higher value added Leave the commodity game, and instead – go niche - find a niche you have or can develop a competitive edge within, and/or – move higher on the value chain (produce value added products, products with high R&D intensity). – this is a well known strategy, applied for years, mostly (but not purely) by smaller producers. Enclosed a few examples.. Specialty paper/packaging From pulp to higher value Further down the value chain, added bio chemicals closer to end consumer 6 10/11/2009
  7. 7. Option 3: Restructure – learn supply control Stay within commodity, but… Learn supply control/discipline – learn to adjust capacity (production) to demand – whatever demand is – and as such keep operating rates high enough to secure healthy prices. This has, partly successful, been applied in N. America over the past decade (within the industry), and in other industries globally Newsprint N. America Newsprint N. America 800 800 105% “Successful” 15200 “Successful” 100% 700 13200 700 95% 11200 600 600 90% 9200 85% 500 500 7200 80% Consumption down 40% Consumption down 40% Prices up 60% Prices up 60% 400 5200 400 75% 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 7 10/11/2009 Price Shipments from NA US consumption Price Oper. rate N.Am 12 m roll Oper. rate N-Am monthly
  8. 8. Supply discipline – will it work in Europe? It will not work without a major consolidation/restructuring Europe is still too fragmented Industry concentration - newsprint Newsprint market share - Europe Newsprint market share - N. America Mkt. share Europe N . Am Stora Enso Top 1: 19% 43% AbitibiBowater Top 3: 49% 72% UPM White Birch Top 5: 63% 87% Norske Skog Kruger Holmen Catalyst Paper Kondopoga Norpac Quite a different picture Other Other 0% 10% 20% 30% 40% 50% 0% 10% 20% 30% 40% 50% 8 10/11/2009
  9. 9. Supply discipline – will it work in Europe? You have to restructure enough to: – Reach a concentration high enough to successfully be able to practice supply control (need 1-2 players controlling roughly 50% of capacity – and taking a price leadership) – Lift entry barriers – avoiding new entrants to free ride. Have to be able to lift entry barriers substantially. Without lifting these, you just pave the road for new entrants – benefitting from the restructuring – and consequently ruining the possibility of succeeding in capacity control – through adding new capacity. Industry concentration - newsprint Newsprint market share - Europe Newsprint market share - N. America Mkt. share Europe N . Am Stora Enso Top 1: 19% 43% AbitibiBowater Top 3: 49% 72% UPM White Birch Top 5: 63% 87% Norske Skog Kruger Holmen Catalyst Paper Kondopoga Norpac Quite a different picture Other Other 0% 10% 20% 30% 40% 50% 0% 10% 20% 30% 40% 50% 9 10/11/2009
  10. 10. How to lift entry barriers sufficiently? The industry cost curve is today (too) flat Thus, ordinary focus on efficiency, modern machines and economy of scale is likely not enough to lift entry barriers sufficiently to prevent new entry. A pure and new newsprint or SC or CWF mill will likely be able to compete head-on with existing mills - how else to explain the three most recent new mills / PMs in Europe Another variable has to be introduced – to substantially move lower on the industry cost curve (and as such make the lower part of the curve steeper) – to clearly out compete new entrants Have then to work on group level – through integrating production (in a large combine) – making the sum of production lower on the cost curve than a single product player can manage And that brings us to Option 4…. 10 10/11/2009
  11. 11. Option 4: Form BioCombines BioCombines - Integrated production of pulp, paper & board, bio energy, bio chemicals, mechanical wood, etc. With synergies between the different parts of the combine that make competitive advantages vs single product producers (1+1+1 > 3 on the income side, and <3 on the cost side) These are giant (and very expensive) set-ups, that works best for green fields They will be done in partnership with energy/oil/chemical companies Thus, this is not a short term solution, but it is a long term one – and what we consider the business model of the future within forest industry 11 10/11/2009
  12. 12. Option 5: Form BioCombines (brown field version) Similar to Option 4… But where you try to integrate pulp, paper & packaging, bio energy, bio chemical, mechanical wood, etc. at existing mills – not necessarily situated within the same industrial compound. We already today see some examples of this option being rolled out, also within the Nordic region. This brown field version can be combined with Option 2 (niche, higher value added focus), either right away – or longer term, when green fields are entering the market. Green fields, however, will be the long term winner within commodities, where you will have the advantage of maximum integration within the same compound. These large bio combines will be built where costs are lowest, a similar picture as we have seen within pulp production the past decade 12 10/11/2009
  13. 13. Additional slide – if time permits Interesting new constellations BioCOMBINES – the new business model BioCombines - Integrated production of BioEnergy Pulp, paper & board pulp, paper & board, bio energy, bio chemicals, mechanical wood, etc. Adding energy/oil companies, we get the necessary expertise in energy processing and sales/ distribution (the BioCombine downstream part of bio energy). And the energy/oil companies achieve the necessary/wanted/legislative blend of renewable based energy in their portfolio. BioChemicals Mech. Wood Chemical companies have a pressure to partly replace petro chemicals with bio chemicals …. and that brings us to some interesting new constellations of industry structures and products 13 10/11/2009
  14. 14. Additional slide – if time permits New constellations Energy industry Oil industry We see in particular four industries that will Forest industry Petrochemical Chemical Industry play a major role related to bio energy / bio industry combines, and we expect all four to undergo major paradigm shifts, seeking new platforms, related to bio energy Forest Energy Based on this we expect to see a industry industry migration of new constellations of BioCOMBINES – the new business model industry structures and products among these four today fairly BioEnergy Pulp, paper & board BioCOMBINE: separated industries. P&P production Thus, we could see the oil/energy/ Mech. wood production BioCombine petrochemical industry as new owners Bio Energy (heat and fuel) in, or JV/cooperation partners with, Bio chemical production forest industry / bio chemical industry - as a way of getting access to the BioChemicals Mech. Wood important infrastructure (wood & Chemical Petrochemical Oil biomass sourcing, and logistics) and industry industry fibre knowledge. 14 10/11/2009
  15. 15. Nordea & Forest Industry The forest industry and its cluster is a focus area for Nordea Over 100 years experience of financing the industry in the Nordic countries, with a house bank position for numerous players Capitalizing on the Nordic experience, we have gradually moved from Nordic to global reach, establishing new clients and market know-how in Asia, Latin America, Eastern Europe, North America and Oceania. Closing remarks: Nordea is a big lender to this industry – and we thus pay close attention to the industry. Of course, there are challenged ahead – but there are also opportunities – from the renewal paths we showed earlier. Thank you for your attention. 15 10/11/2009

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