In a recent post on the RISI blog, John Maine questions whether North American coated paper mills can keep imports at bay to avoid closures.
The demand/supply outlook for coated paper in North America looks very grim. Mills operated at only 72% of capacity through May, and while there will be some rebound in demand as the recession recedes, there is no way that a demand rebound will even come close to absorbing this excess capacity. Most of the high-cost inefficient mills have already been closed over the past few years, and producers have been taking roving downtime and delaying the hard decision to shut reasonably efficient and up-to-date facilities.
One option being pursued by some producers is to try and reverse a longstanding trend of increased offshore supply to the North American market. In the final quarter of 2008, offshore imports supplied 22% of US coated paper demand, more than any other paper or board product. This was split almost equally with an 11% market share for Europe and an 11% share for Asia. The European share of the US market has been flat or trending down as its share five years ago was 12%. However, the Asian share, which was only 5% five years ago, has been sharply increasing.
The imported tonnage was quite large in 2008 and represents a sizable opportunity for North American mills to take back some market share. North American buyers imported 1.1 million tons of coated freesheet and 900,000 tons of coated mechanical paper from offshore suppliers in 2008.
In the short term, US producers have been more successful than expected at combating imports. With the influence of a stronger euro and substantial capacity closures, European producers have cut back sharply on their sales into the US market. European coated paper exports to the USA through April had dropped 46% below year-ago levels, and the European share of the US market hit a lowly 6.5%in April, nearly half of its peak level. Yet despite this decline in European supply, US mills still operated at only 72% of capacity.
Surprisingly, US mills have also been successful at displacing some low-cost Asian tonnage in 2009. US mills have become more aggressive on pricing to meet the level of low-cost imports and have also touted environmental certification, customer service, payment terms, local warehousing and "Made in America" sentimentality whenever possible. One program with a US merchant representing about 100,000 tons has been switched from an Asian supplier to a US supplier and will likely result in lower offshore imports in the coming months.
The effort to reduce Asian imports will be increasingly difficult over the next few years due to the large amount of new Asian capacity coming on-line. Between 2009 and 2011, over 2.0 million tonnes of new coated paper capacity will come on-line in Asia with major expansions by APP, Chenming and Oji underway in China. While the Asian market is growing rapidly, it will not absorb all of this new capacity and Asian producers will be fighting aggressively to increase exports all over the world.
While there has been some surprising success at reducing offshore imports in 2009, we do not believe that US producers can solve the coated paper oversupply issue entirely by reducing imports. The battle to replace imports amid world oversupply and capacity expansion in Asia will result in lower coated paper prices in the market and will ultimately force more mill closures in North America as prices approach cash cost levels of some of the higher cost mills.