Paper

In 2023, the paper industry experienced a 6% decline in pulp production, a 9% drop in pulp prices and a 2% decrease in paper goods production, amid a slowdown in household consumption, which led client industries to cut orders and clear inventories. A new cycle began in the second half of 2023 and we anticipate these key metrics to grow by low single digits in 2024 and 2025 as overall economic growth and trade undergo a modest acceleration.

Recovering activity will bring some relief, but the industry faces many challenges: energy costs remain elevated, competition from low-cost countries is intensifying, the growing occurrence of severe weather events is fuelling volatility and new environmental regulations are adding complexity to supply chain management.

In the long term, overall paper pulp and paper goods production will continue to grow broadly in line with GDP as different trends play out among the main segments: graphic paper is expected to continue declining due to digitalisation, paper-based packaging will remain dependent on industrial production, while demand for trade and sanitary paper will remain robust thanks to its non-discretionary nature and to rising household incomes.

Disconnect between paper pulp upstream and paper products downstream

The paper industry includes the production of paper pulp and its transformation into paper-based packaging, graphic paper and sanitary paper goods. Paper companies operate upstream (paper pulp), downstream (paper products) or throughout the entire paper value chain (vertical integration). The paper industry is mostly local or regional due to the high transportation costs associated with the bulky and heavy nature of paper products, making it more economical to produce and distribute locally. Vertically integrated paper companies control over two-thirds of global paper pulp production with pulp mills operating close to paper mills for efficiency purposes. The remaining third, known as market pulp, is sold in international markets to serve the needs of countries with a deficit in forestry resources and of companies operating only downstream. While paper pulp price levels vary between regions because of differences in grades, properties and operating costs, they generally tend to follow similar patterns across all major producing regions. Because China produces nearly a third of all paper products, the country is the number one driver of the global pulp market.

Paper pulp restocking revives demand and prices, but challenges still abound

The global paper pulp industry has experienced unprecedented swings in production and prices since the pandemic. Pulp production increased during the first wave of the Covid-19 pandemic in 2020 (4%) before cooling in 2021 (-2%) and stabilising in 2022 (+1%). In 2023, production receded markedly (-6%) with only China (+8%) and Chile (+9%) posting growth. Conversely, volumes were down in North America (6% in the US, -12% in Canada), Europe (-14% in Germany, -13% in Finland, -8% in Sweden, -10% in Portugal), Brazil (-4%) and Japan (-6%). These ten markets together account for about 80% of global pulp production.

2023 marked a return to a sense of normalcy with production returning to its pre-pandemic levels as household consumption decelerated or receded in most key markets. Consequently, downstream paper companies cut orders to adapt to lower demand and clear pulp inventories. Pulp production bottomed out around the middle of the year as producers cut capacities. This prompted average pulp prices to contract by 9% in 2023, with declines oscillating between 5% (US, Sweden) and 22% (China). Reflecting the double whammy of lower prices and volumes, the turnover of dominant paper pulp companies contracted between 10% and 20%. With prices improving along production in the second half of the year, the market started to show signs of recovery. In line with the trend seen in the second half of 2023, pulp production picked up across all major markets in the first half of 2024, except for Japan. This hints at a full year recovery of around 5%, with restocking driving much of the demand. Meanwhile, average pulp prices should grow by about 5 to 10% and remain about 20% above their pre-pandemic levels. Factoring in our scenario of global GDP growth accelerating (very) modestly from 2.5% in 2024 to 2.7% in 2025, we anticipate pulp production and prices to grow by low single digits in 2025.

This recovery is particularly welcome for companies and countries losing ground in the market pulp trade, particularly in the Northern hemisphere. While global trade volumes have grown by about 1.5% per annum over the past decade, growth has been very unevenly distributed. The general trend shows that Southern hemisphere players, particularly Brazil but also Indonesia and to a lesser extent Chile, have been gaining market share at the expense of their North American and European peers. These relatively new players are not only supplying countries that have structural pulp deficits such as China, Japan and India, but are also competing for market share in the North American and European markets.

In addition to intense competition from low-cost producers, paper pulp manufacturers must also contend with generally higher energy costs, particularly those operating pulp mills without cost-efficient cogeneration equipment or those purchasing energy on the wholesale market. Increasing concentration among vertically integrated paper companies, which are both clients and competitors, is also a growing source of concern, as evidenced by International Paper’s acquisition of DS Smith or Smurfit Kappa’s acquisition of West Rock in H1 2024.

Of note, the European Union Deforestation Regulation (EUDR), which took effect on 29 June, 2023, has slowly been applied in 2024. It obliges companies to ensure their paper products are not sourced from deforested areas to encourage sustainable practices in the industry. While beneficial to players with the best sourcing practices, it is also likely to increase compliance costs, complicate supply chain management and potentially limit market access both for European importers and international exporters failing to comply with EU regulation. The regulation is the latest major development to encourage the paper industry to adopt more sustainable business practices.

Paper products: paper-based packaging bounces back, graphic paper is in decline, and sanitary paper goods show resilience

Paper companies produced an estimated 410 million tons of paper-based products in 2023, down 2% from 2022. China (+8%) and Indonesia (+3%) were the only major producers to report growth in 2023.

Paper-based packaging accounts for 70% of paper product volumes. Because paper is used across a very broad range of industries both for primary packaging (packaging in direct contact with goods) and secondary/tertiary packaging (packaging used for storage and transport), production is broadly aligned with trends in industrial production and global trade. The segment was the largest single contributor to the decline in paper goods production amid lower orders from client industries resulting from a general slowdown in household consumption and trade activity. Leading paper-based packaging manufacturers, which are mostly vertically integrated in European, American and Japanese companies, nearly all reported a double-digit decline in revenues for 2023. However, demand for packaging paper has recovered gradually since the second half of 2023, being mostly driven by restocking from client industries.

Accounting for 20% of paper product volumes, graphic paper peaked in 2007 and has been declining continuously ever since with production down by a third over the past decade. A decline in printed newspaper readership and reduced consumption of printing paper due to the digitisation of the economy are powerful and secular trends; production data, where available, show that 2023 was no exception to the trend. Financials from leading producers point to a general decline in turnover of around 10%. Strategies to reduce overcapacity by closing mills in mature economies at a rate of 3% to 6% per year and find more profitable and viable niche markets are the priority for specialised players. That said, conversion of production lines from graphic paper to packaging could increase overcapacity in this adjacent product market.

Comparatively speaking, sanitary paper goods (10% of paper product volumes) are more immune to the economic cycles owing to their mostly non-discretionary nature. Per-capita consumption is strongly correlated with household income levels: global production grew by 25% over the past decade, driven mostly by China (+44%), Brazil (+35%), Mexico (22%), Poland (70%) and India (290%). Sanitary goods different significantly from the rest of the market as they are mostly consumer goods sold through mass retail. Top producers including Kimberly Clark, Oji Paper, Essity, Unicharm, Hengan International and Ontex all fared better than the wider paper industry with the majority reporting positive sales growth, with gross margins generally improving on the back of lower pulp prices.

For 2024 and 2025, we anticipate long-term trends will persist and continue to drive growing sales of sanitary paper goods, but further reduce those of graphic paper. Paper-based packaging is expected to benefit from a moderate acceleration in global GDP growth and broader manufacturing activity.