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Paper Market Update December 2019

December 16, 2019

Paper markets continue to struggle with weakness caused by several factors, but leading the way is surplus supply and lower demand. The contrast between the paper markets last year vs. this year is startling, and producers are struggling with pricing pressures and diminishing profits. As a result, the risk of mill closures or conversions to more profitable grades is high for all grades of paper.

Recent News

Atlas Holdings and Blue Wolf Capital (ABW) have challenged Verso about its decision to sell their two specialty paper mills to Pixelle for $400 million. ABW, who own a combined 9% of Verso’s shares, sent a letter to Verso raising several topics related to the sale announcement, including criticism of the credentials of Verso’s board members. (source: press release)

Verso, in turn, has announced nomination of Dr. Robert Beckler, a seasoned paper industry executive, as a director. At the end of 2019, the current Co-Chairmen of Verso’s Board will step down, indicating that they “believe that ABW, spurned bidders that have made several attempts to own or control Verso, and have chosen to pursue a proxy fight in order to further their continued efforts to obtain control of the Company and its prospects”. (source: news release )

Kruger’s newsprint mill in Corner Brook, Newfoundland will cease production for two weeks starting Dec. 24 and temporarily lay off 365 workers. The company will resume operations Jan. 6, 2020, but warns of future shutdowns. (source: CBC News)

Resolute has indefinitely idled the Augusta, Georgia, newsprint mill, removing 214,000 tonnes/year of capacity. (source: internet)

Verso has announced that it will produce as much as 44,000 tons of packaging at its Duluth, MN mill starting in 2020. The potential for a full conversion at this mill are high, as it currently produces SC grades of paper for a faltering market. (source: internet)

Neenah Packaging has launched a new line of hemp fiber papers into its premium folding board portfolio to support the exploding CBD market. (source: internet)

Market Drivers

Book sales up 4% YTD in 2019. Audio downloads are up 25%, while E-books are down 3.4%. Printed hardcover books are up 2% and paperbacks are up 4% vs 2018 sales. (source: Assoc. of American Publishers)

U.S. National load to truck ratio was up in November, at 2.3 loads to 1 truck posted. Fuel prices were unchanged in November.

Wood Pulp prices hit an historic high in Q4 of last year, but have since fallen by 22% through October. Pulp prices were static in November.

Currency Exchange rates have not changed much the past month. The Canadian dollar has remained at $0.76 since mid October. The euro has fluctuated between $1.09 and $1.12 since October 1, and is now at $1.11.

Paper Grade Review

Coated grades – According to RISI Paper Trader, coated paper demand is down between 15 to 20% year to date, which is an historic stat considering we have not seen such coated demand declines in one year that was not also considered a recession year. Coated paper prices were stable in November, but will be under pressure in 2020, given the global surplus supply situation. We expect significant coated groundwood shuts and/or conversion in 2020.

Uncoated freesheet grades (UFS) – UFS mill inventories have returned to normal levels, and operating rates are higher than mid-year, so all signs point to a relatively balanced market for these grades. During Q4-19 and Q1-20, conversions and/or shuts at the Flambeau mill, Domtar’s Ashdown and Port Huron mills, and at IP’s Selma mill will have removed a combined 530,000+ tons/yr of UFS capacity. UFS paper prices are currently stable, after weakness and low mill operating rates occurred in Q2 and Q3 of this year. The current market is relatively balanced, and the aforementioned mill conversions and shuts between now and through Q1-20 should bolster the market. RISI predicts price stability for 2020.

Uncoated groundwood grades (UGW including SC) – Historic declines in demand for UGW grades this year will force UGW producers to make large capacity closures. Otherwise, prices will fall 3% per year over the next two years, according to RISI Paper Trader. The lack of demand is caused by several factors, including: the collapse of newspaper inserts and printed directories, and “crash in sales” of mass-market paperback books. Additionally, some have migrated from UGW grades down to lower-cost newsprint.

Newsprint grades – Despite the Resolute Augusta closure, the newsprint market continues to suffer from massive surplus supply, which adds downward pressure to current prices. Industry indices show newsprint prices on the decline. The upside price risk in this market is the potential for very large suppliers to rapidly and severely cut capacity, eliminating the surplus supply and restoring relative balance.