RéSUMé January 2011
UPM to acquire Myllykoski and Rhein Papier mills in Germany, Finland and the US
UPM-Kymmene Corporation has entered into an agreement to acquire Myllykoski Corporation and Rhein Papier GmbH ("Myllykoski"). The approximate enterprise value of the businesses acquired is EUR 900 million. Myllykoski Corporation and Rhein Papier GmbH consist of seven publication paper mills in Germany, Finland and the United States. The total annual paper production capacity is 2.8 million tonnes. In addition, Myllykoski Corporation owns 0.8% of the Finnish energy company Pohjolan Voima Oy, with an estimated value of EUR 70 million. Following the transaction, UPM Group's balance sheet assets will increase by approximately EUR 1.6 billion. The transaction will be financed through a directed share issue of 5 million UPM shares, with current market value of approximately EUR 60 million, and long-term debt arrangements amounting to EUR 800 million. The transaction is subject to customary closing conditions, including, among others, the approval of the regulatory authorities. Myllykoski will continue to operate independently until the transaction will be closed. The target is to close the transaction during the second quarter of 2011. The transaction is estimated to create annual synergy benefits exceeding EUR 100 million mainly from 2012 onwards. Synergy benefits will be reached for the most part by rationalising production, logistics and sourcing as well as reducing overlapping activities. The related restructuring and investment costs of the combined operations are estimated to be approximately EUR 100-150 million. UPM's President and CEO Jussi Pesonen says that UPM is focused on improving the cost efficiency and profitability of its European paper operations. Pesonen draws attention to the challenging operating environment of print customers. "Electronic media is posing a growing challenge for the print media. Print media has to be able to respond not only with good content but also with excellent cost competitiveness. UPMhas confidence in the potential of the graphic industry. Our target is to be a competitive player that is able to meet customers' expectations." "Myllykoski is without doubt one of the leading publication paper suppliers. The company has broad-mindedly taken advantage of new business concepts and technologies. We recognise today's Myllykoski people as solid professionals, who have a strongly customer oriented approach. This attitude and know-how fit very well with UPM." Profitability of the publication paper industry has been poor for almost ten years already. Demand growth is shifting to markets outside of Europeand the European industry is inefficient.
Suzano acquires Conpacel pulp and paper mill from Fibria for $880 million
Suzano of Brazil acquired the remaining 50% stake of the Conpacel 1.04 million tonnes/yr pulp and paper mill from joint-venture partner Fibria for $1.5 billion real ($880.5 million), the firms announced late today.Suzano becomes the full owner of Conpacel - Consórcio Paulista de Papel e Celulose, including 650,000 tonnes/yr of bleached eucalyptus (BEK) pulp and 390,000 tonnes/yr of paper at the Limeira, Brazil, mill in the state of Sao Paulo. The Conpacel pulp mill, built in 1965, added a paper mill in 1992 that makes printing and writing papers. The mill employs about 3,000 workers.The deal also includes Conpacel's 76,000 hectares of land and 71,000 hectares of plantation. In addition, Suzano will get installations and other assets of KSR, which includes a paper distribution operation.Suzano is expected to close on the acquisition of the Conpacel assets by Jan. 31, 2011, after executing definitive agreements and payment, Fibria said in a press release. Closing of the KSR assets is expected by Feb. 28, 2011.
One last throw of the dice - industry consolidation and technology could help with China's overcapacity problem
China's printing and writing paper industry started to emerge at the end of the 1990s and has seen rapid growth for the last decade. Not only did printing and writing paper production double during this period, but China shifted from being a sizable net importer in 1999 to a large net exporter in 2009. Many new, modern machines were installed in China from 1999 through 2009. These machines have relatively low production costs and can produce high quality paper. The difficulty with such large machines is that there must be sufficient markets to consume the large volumes produced on these machines to keep up their efficiency and achieve economies of scale. To help keep the new machines operating at full scale, Chinese producers have increased exports considerably over the last decade. Rising exports have also allowed the producers to add capacity ahead of the growth in domestic demand. This approach worked pretty well for the last decade, but it is not going to work for the next several years, which will be a problem for Chinese producers given the large amount of capacity they are bringing online in 2010-2012. This is particularly the case for coated woodfree paper, and 2010 is the first year that Chinese coated woodfree net exports have shown a substantial decline. Tariffs implemented following trade investigations in North America and Western Europe will keep Chinese coated woodfree papers out of these markets. With more new capacity coming online in China, China's (and Asia's) printing and writing paper market will be more imbalanced for the next year or two.
To solve this overcapacity problem, no other remedy will be more effective than industry consolidation. Therefore, we are expecting two types of capacity closures in China in 2010 to 2013: closures ordered by the Chinese government and closures due to market competition. The Chinese government looks set to accomplish its goal of closing down a huge amount of pulp, paper and board capacity by the end of 2010. The total capacity shut down during 2006 to 2010 is expected to reach 10.3 million tonnes, in which 3.3 million tonnes of capacity will have shut in 2010. We believe small and polluting capacities will be shut permanently and this trend will continue as the Chinese government continues to raise the standard for chemical oxygen demand (COD) emissions. Regarding industry consolidation, we are expecting that small- and even medium-scale mills will be impacted by market competition. While some of these mills may not have environmental problems and may have a comfortable scale, their relatively lower efficiency and small financial cushion could push them out of business when competing with large producers, as larger companies will have more competitive capacity and will be able to succeed in a low-priced environment versus their smaller competitors. Both types of closures will affect the uncoated woodfree industry more than coated woodfree as the former industry is still fragmented. In 2009, the largest 10 producers accounted for only 28% of total uncoated woodfree production, indicating a low degree of consolidation. Capacity closures will help the market absorb the new capacity, but also will raise the degree of consolidation in this industry. As for coated woodfree paper, this will not be the case. China's coated woodfree industry was already highly consolidated in 2009 with the top 10 producers accounting for more than 75% of the total production. Therefore, there is not much room for further consolidation. However, with nearly 3 million tonnes of new capacity in 2010-2013 and struggling exports because of trade investigations, there are not many choices for producers. One available choice is to swing production from coated to uncoated woodfree paper, but this choice will not be as efficient when it is an online coating machine. Another option is to produce paper with acceptable quality, but lower costs through technology. For example, mills could use more deinked pulp or recovered fibers. If producers can use new technology to reduce costs and keep the quality acceptable at the same time, this will give them more edge to compete with others, as well as to find new markets offshore. If they fail to do that, we will see lower operating rates in China's coated woodfree paper industry and more postponed new projects.
China's Inflation Genie
Over the past year and a half China has been living in a goldilocks economy -- high growth and low inflation. But with inflation now reemerging, Beijing will soon be approaching a point of reckoning regarding how much inflation it can tolerate, how much growth it is willing to sacrifice to control it, and how (and whether) it will force the inflation genie back in the bottle. The Chinese economy weathered the global economic downturn better than virtually any other country in the world. In large part this was accomplished by way of a massive government stimulus program that opened the floodgates of bank lending as well as by monetary expansion. One predictable result of this credit expansion has been a property bubble, especially in the major eastern cities of the country. However, an additional outcome has been a significant rise in inflation, with consumer inflation officially now running at a greater than 5% annual rate, though the actual rate may be much higher. Most observers have attributed this inflationary outcome to rising commodity prices, especially food and fuel, something that the government is now trying to control by often attempted but rarely successful policies like price controls. And while commodities have contributed to rising prices, we should remember Milton Friedman's oft-quoted adage that "inflation is always and everywhere a monetary phenomenon." For China, however, employing the traditional monetary policy lever of interest rate hikes may not achieve the desired effects. China has an incredibly high rate of savings -- in excess of 50% of GDP -- and much of the savings of households are held in banks, as opposed to financial assets as in most of the developed economies. Low levels of rates on deposits produce negative real rates, which are in effect a "tax" on savings. Raising interest rates will reduce this "tax", and increase disposable income and wealth and therefore paradoxically could actually produce increased inflationary pressures. Furthermore, raising rates will attract more hot money inflows into China, as investors chase higher returns than they can get in the low interest rate developed economies. In order to not allow these inflows to dramatically alter the exchange rate, the government will then need to buy US dollars by printing yuan, further adding to the already high growth of the money supply.
The government is therefore being forced to rely on other methods to battle inflation. Beijing has raised the reserve requirements for banks in an attempt to slow loan growth, although so far the data suggests that this has not had much of an effect. The total value of loans that that banks make is regulated by the central government's annual target. This year's target was set at RMB 7.5 trillion ($1.1 trillion), and despite speculation that next year's target would be lowered, indications so far are that the target would remain at the current level. The government has also placed price controls on some food items to try to rein in rising prices. While this type of measure may alleviate some short term pressures, history shows that it does not work, as it serves to limit supply expansion of goods, and therefore actually causes more inflation later on. China's inflation has the potential to exert serious effects on the world economy. First of all, it could lead to higher inflation in the USA, which, although a positive in the current US disinflationary environment, could turn into a problem once the US economy accelerates. Most importantly, however, Chinese inflation could cause instability in US and global financial markets, as uncertainty mounts over what exactly Beijing will do.
So what can the government do? The two most effective steps also present the most risk for both the Chinese economy and social stability, which is why the government is trying everything else first. The first of these steps would be to allow the yuan to appreciate to market levels. At this point, the yuan is undervalued by anywhere from 20-50%, and allowing it to move to a more appropriate level would dramatically reduce inflationary pressures; the export sector would cool off, imports would become more competitive and erode some pricing power of Chinese producers, and it would allow China to slow the expansion of its money supply by not having to constantly print yuan and buy dollars to offset the effects of hot money inflows. In the long term, this would produce a much more balanced and healthy economy, but in the short to medium term, it could cause tremendous job losses and increase the possibility of social instability, something that makes China's leaders and policymakers very nervous. The second step for the government, if it really wants to control inflation, is to drastically slow growth. Realistically, to control inflation, growth will need to be reduced substantially, something the government is very wary of attempting, once again due to the fear of what this will do to a society that is clearly experiencing some growing pains. In the end, if the Chinese leadership is not prepared to undertake these last two steps, and chooses to focus on growth as it seems to be currently doing, inflation in China will be part of the landscape for the foreseeable future, with important implications for the rest of the world. China can have high growth with high inflation, or moderate growth with lower inflation, and it will need to choose over the next couple of years. To once again quote Milton Friedman, "there ain't no such thing as a free lunch."
European consumer pulp inventories fall 1.8% in November, consumption dips 4.3%
European consumer pulp inventories decreased in November, falling 1.8% from October to 674,566 tonnes, according to UTIPULP data. Inventories were 15,646 tonnes (2.3%) lower than the year-earlier level of 690,212 tonnes. The figures break down as 20 days' worth of stock last month, the same level as in October and one day less than in November 2009. Pulp consumption fell in November by 4.3% from 1,088,911 tonnes in October to 1,042,511 tonnes. The November figure was 0.55% less than in the year-earlier period, when consumption stood at 1,048,319 tonnes. UTIPULP statistics include information from Austria, Belgium, Denmark, France, Germany, Italy, the Netherlands, Portugal, Spain, Switzerland and the UK for sulfite and kraft pulps.
UTIPULP STATISTICS(1,000 tonnes)
November 2010 / October 2010 / % change
Consumption (tonnes) / 1,043 / 1,089 / -4.3
Stocks (tonnes) / 675 / 687 / -1.8
Stocks (days) / 20 / 20 / 0 days
Note: Figures have been rounded.
European CWF deliveries still declining in November, UWF shipments slightly up
Coated woodfree (CWF) paper shipments continued to drop in November, according to data from CEPIFINE, the Association of European Fine Paper Manufacturers. Total CWF shipments dropped 6.0 year-on-year to 661,000 tonnes. Those within Europe tumbled 6.0% to 530,000 tonnes, while deliveries to non-European destinations fell 5.1% to 131,000 tonnes. Total uncoated woodfree (UWF) paper deliveries inched up 1.2% to 649,000 tonnes in November. While shipments within Europe edged down 1.9% to 525,000 tonnes, exports to non-European destinations accelerated 17.0% to 124,000 tonnes.CEPIFINE statistics include information from the 27 countries in the European Union plus Norway and Switzerland.
Pulp inventories in European ports rise in December
Stocks of woodpulp at European ports increased in December, following a slight decline the previous month. Inventories totaled 1,193,286 tonnes last month, up from 979,710 tonnes in November. Total stocks in December were higher than the year-earlier period, up from 762,431 tonnes in December 2009.
Stocks of Woodpulp at European Ports(tonnes)
Country / December 2010 / November 2010 / December 2009
Netherlands / Belgium / 519,599 / 352,040 / 298,810
France / 112,219 / 95,300 / 80,728
UK / 36,930 / 30,199 / 36,082
Germany / 142,046 / 136,149 / 137,033
Switzerland / 15,598 / 11,645 / 13,610
Italy / 339,269 / 317,785 / 167,396
Spain / 27,625 / 36,592 / 28,772
TOTAL / 1,193,286 / 979,710 / 762,431
Source: Europulp.
European consumer pulp inventories rise 6.9% in December, consumption dips 13.1%
European consumer pulp inventories increased in December, rising 6.9% from November to 721,161 tonnes, according to UTIPULP data. Inventories were 40,974 tonnes (5.4%) lower than the year-earlier level of 762,135 tonnes. The figures break down as 21 days' worth of stock last month, one day more than in November and three days less than in December 2009.Pulp consumption fell in December by 13.1% from 1,042,511 tonnes in November to 905,931 tonnes. The December figure was 4.9% less than the year-earlier period, when consumption stood at 952,889 tonnes. UTIPULP statistics include information from Austria, Belgium, Denmark, France, pulps. Germany, Italy, the Netherlands, Portugal, Spain, Switzerland and the UK for sulfite and kraft
The Electronic vs. Paper Debate: WWF's new PDF format draws flak …
A recent Dow Jones article covering the Electronic vs. Paper debate starts …"The paper and board sector is going to have to work hard if it is to retain its valued centuries old roles as the carrier of ideas and the practical container of products. Attacks against paper, such as those from the computing and electronic sectors and sermonizing in favour of dematerialization, are very often misleadingly couched in terms of environmental protection, while the reality of the situation is often very different." For instance, at the recent INFOtoDOC/Demat'Expo exhibition, held in Paris, the Paper Mail association took the opportunity to act during the and highlight its slogan was "Electronic billing, good for the environment?... End the pretence."
This debate recently got a new twist when WWF (Word Wildlife Fund, U.K.) announced the launch of its new PDF format, which comes minus the printing option. According to WWF, "every day, entire forests are cut down to make paper. Paper that's senselessly used to print out documents all over the world: websites, emails, even entire books, in spite of the fact that it's easy to avoid printing by saving the document as a PDF. But even PDFs can sometimes also be printed out. So to stop unnecessary printing and encourage a new awareness about the use of paper, we've developed a new, green file format: WWF. A format that can't be printed out. A simple idea that saves trees."This has predictably drawn flak from the paper / printing industry. In a press release entitled "Don't be fooled by WWF's new PDF format," U.K. based Two Sides warns consumers against getting "hoodwinked" by WWF's new PDF format. As per Two Sides, the announcement misleads users regarding the true facts about sustainable forestry and print.
Martyn Eustace, Director, Two Sides, in an open letter to Editor & Journalists opines:
" When I first heard that WWF had launched their own version of PDF software that won't allow printing of documents, I'm afraid I did not take it very seriously. After all, we all demand increasing functionality, not less, and surely printing is a necessary function for all at some time or another? They'll be telling car manufacturers to not fit wheels next! But then I thought about this more and reached the conclusion that this initiative is not only a retrograde step for users but also some sort of Orwellian attempt to impose misguided beliefs upon a general public who deserve to be treated better. Not printing does not save trees. And that's the truth! The reality is that forests in Europe are growing at a rate of 1.5 million football pitches every year, cover about 44% of Europe's land mass, and are 30% larger than in 1950. 94% of the paper we use is made in Europe and it may be surprising to learn that only 11% of the worldwide timber felled is used directly for paper making -- fuel and construction are far bigger users. But, whatever the use, the demand for non fossil fuel and renewable timber is leading to ever increasing reserves of trees in managed and increasingly bio diverse forests and it could be argued that whilst there is a demand for paper and other forest products, the future of our managed forests is assured.
So what's WWFs beef about printing? Well it's clear that first they are not telling the world about how far the industry has moved to reduce its impact and also they are trying to scare users with tales of forest destruction which has very little to do with paper production and certainly not in Europe. Print is not senseless, as WWF imprudently describes it, it is one of the most powerful communication mediums and increasingly recognized as still having enormous benefits for serious communication and study rather than the distractive, sound and eye bite medium offered by electronic communication. It is a sad fact that, with schools and teachers in general having been brainwashed by the myths about print and paper peddled by various pressure groups, we have schools switching to electronic methods of teaching which may well have huge implications upon a new unread generation unable to communicate coherently and confidently. WWF's encouragement to ditch the printed word is not only misleading but highly dangerous.
And what about the environmental effects of electronic communication? 60/70% of computers are now left on all the time and the European energy requirements of data servers and IT equipment now exceeds that of the airline industry. Greenpeace has identified that electronic waste is the fastest growing component of the municipal waste tip and there are serious worldwide environmental concerns surrounding the disposal of quickly outdated electronic equipment. With paper recycling rates in Europe at an all time high of 72.2%, encouraging the switch from paper based to electronic communication, without the environmental facts, and without identifying and comparing the carbon impact of both media channels, is just irresponsible. No, print and paper can be a highly sustainable product. It is made from a renewable and recyclable resource and if used responsibly, which means that collection and recycling rates must be continuously improved, may well be the sustainable way to communicate. So WWF needs to be challenged about the statements they are making and whilst I am not an expert in the scope and remit of advertising practice, I believe they are now promoting a product on the basis of a misleading environmental claim and face reporting to the UK Advertising Standards Authority, and other similar European bodies, for Greenwash. It's a pity, having done so much good work, that WWF is now 'barking up the wrong tree'.