fastmarkets risi global graphics outlook...three times faster than historical average due to higher...

Fastmarkets RISI Global Graphics Outlook

2020 | Fastmarkets | Global Graphics Outlook

Market overview

European Conference 2020

Lisbon, Portugal

March 2020

Alejandro Mata

Director, Europe Packaging and Graphic Paper


2019… a year full of contrasts

2

Industry dynamics show weakness


9.2 Mill

ion t

onnes

Lost opportunities

between 2018 and 2021

7.8 Mill

ion t

onnes

Additional capacity

closures or conversions

One of the lowest levels

in recorded history

86%

3


Global graphic market in

recessionary territory

Lagging in global economic growth

Fewer export opportunities

affecting mature markets

Digitization of printed products not

slowing down… in fact, it accelerated

Demand elasticity becoming an

issue amid high paper prices 80.0%

82.0%

84.0%

86.0%

88.0%

90.0%

92.0%

94.0%

1992 1996 2000 2004 2008 2012 2016 2020

Global graphics operating rates

The last economic cycle lacks a clear drop,

showing a gradual slowdown instead. This has

contributed to the lackluster performance of

global graphics since 2010.

China PfR import ban

4


Paper buyers struggling with

high paper prices

400

450

500

550

600

650

700

750

800

850

900

EU

R p

er

tonne

Newsprint Umec Cmec UWF CWF

+ 18%

+ 21%

+ 13%

+ 21%

+ 24%

5

Companies reducing or ditching print catalogs

Printers going out of business / exiting print


Daily newspapers (Germany)

Consumer magazines (Germany)

▪ Magazines and newspapers in Germany

experiencing strong decline in print advertising

and circulation

▪ Other European markets share the same trend

Publisher’s growth based on digital

6

European advertising expenditures


0

20

40

60

80

100

120

140

0

10

20

30

40

50

60

70

80

90

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

15

16

17

18

19

20

21

Mill

ion e

uro

s

Total Internet Print Other

• Overall advertising dollars

growing again since 2013

• Internet advertising growing

at the expense of print

• Most of the internet growth

coming from mobile

advertising

• Speed of conversion was

slowing down

• This is not the case

anymore


Producers showing good results

• Strong performance influenced by high paper prices

• Low PfR prices pushing margins up for newsprint and

mechanical papers

0.0

0.5

1.0

1.5

2.0

2.5

2015 2016 2017 2018 2019

Cash flow from operations Operating profitsIndustry weighted average, 2017 = 1

8

Graphic assets becoming cash cows?


Most graphic companies

growing in areas other than

graphics

Investments in graphics

limited to maintenance and

cost optimization

Cash generating

capabilities to deteriorate

over time

With prices trending

down, graphic asset

performance will deteriorate

in 2020

9

-16.0%

-14.0%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

-7.0% -6.0% -5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0%

Wo

rst d

em

an

d r

ed

uctio

n, 2

01

8 o

r 2

01

9

Average demand reductions 2010-2018

-56% since 2004

North America slowing the most


Asia

Europe

North

America

0 20 40 60

Asia

Euro

pe

NA

Million tonnes

2019

2000

Global market sizes

-34% since 2008

-8% since 2013

10

Uncoated woodfree the best

performer


-5.0 -4.0 -3.0 -2.0 -1.0 0.0

New

sp

rint

Um

ec

Cm

ec

UW

FC

WF

Million tonnes

Demand losses, 2019-2021

Newsprint16%

Umec9%

Cmec9%

UWF47%

CWF19%

Uncoated woodfree is the largest and

slowest declining grade globally

Newsprint was similar in size in the early

2000s

11

Despite reducing, capacity still lagging behind

Operating rates took a dive in

2019 due to global economic

weakness and effects from

high paper prices


83.0%

84.0%

85.0%

86.0%

87.0%

88.0%

89.0%

-4.5

-4

-3.5

-3

-2.5

-2

-1.5

-1

-0.5

0

201

2

201

3

201

4

201

5

201

6

201

7

201

8

201

9

202

0

202

1

Mill

ion to

nn

es

Demand Capacity OR

Global market balances

-6.0 -4.0 -2.0 0.0

Asia

Euro

pe

Nort

hA

merica

RoW

Mill

ion to

nn

es

Capacity changes, 2019-2021

Europe the most oversupplied region globally


Production VS demand, 2019

0 20 40 60

NA

Euro

pe

Asia

RoW

Million tonnes

Demand

Production

Note: There is significant amount of trade

within and outside North America and Asia.

The chart above only shows how large the

oversupply situation of every region really is.

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

2010 2014 2018

Mill

ion

to

nn

es

Global graphic net trade

NA Europe Asia RoW

86%

87%

85%

Market conditions at recessionary levels

2020 | Fastmarkets | Global Graphics Outlook 14

84%

85%

86%

87%

88%

89%

90%

91%

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Mill

ion to

nn

es

Demand Capacity OR

Europe at the top of the business cycle in 2017


Graphics Europe

• Better capacity rationalization

until 2016

• Improved margins since

2017—thanks to low PfR and

higher paper prices—behind

fewer capacity closures and

conversions

• European exports

constrained by weak global

demand

• Uncertainty persists on the

amount of capacity reductions

15

Is the economy accelerating the demand declines?


40

45

50

55

60

65

EZ PMI Demand

Economic performance still

matters

• Poor economic sentiment

closely related to the

acceleration in demand

losses

EZ PMIEurostat Eurozone PMI economic

indicator

DemandYear-on-year demand changes in

European graphic paper demand

16

Price/demand elasticity still matters


High paper prices affecting demand

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

580

600

620

640

660

680

700

720

740

201

2

201

3

201

4

201

5

201

6

201

7

201

8

201

9

202

0

202

1

Euro

s p

er

tonne CWF Western Europe

Prices Demand

-12%

-10%

-8%

-6%

-4%

-2%

0%

460

480

500

520

540

560

580

600

620

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Euro

s p

er

ton

ne

Western European uncoated mechanical

Prices Demand

A similar pattern can be seen in uncoated mechanical

In 2015-2017, lower prices (lower production costs)

influenced stronger demand, partly explained by grade

shifting as the gap with other grades widened during this

period

Coated woodfree prices started to increase as early

as in the second quarter of 2017

By 2018, CWF demand went from declining 5% to

8.5% and more than 9% in 2019

17

Price can be a lead and a lag indicator


60%

65%

70%

75%

80%

85%

90%

95%

100%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

Mar-

08

Aug-0

8

Jan-0

9

Jun-0

9

Nov-0

9

Apr-

10

Sep-1

0

Fe

b-1

1

Jul-11

Dec-1

1

May-1

2

Oct-

12

Mar-

13

Aug-1

3

Jan-1

4

Jun-1

4

Nov-1

4

Apr-

15

Sep-1

5

Fe

b-1

6

Jul-16

Dec-1

6

May-1

7

Oct-

17

Mar-

18

Aug-1

8

Jan-1

9

Jun-1

9

Nov-1

9

Demand Prices Operating rate

Price as lag indicator Price becomes a lead indicator

Demand declines stabilize and the

industry learns to rationalize capacity

W. Europe coated mechanical

Coated mechanical production

costs are less volatile than in

any other graphic grade

2009: Weak demand influenced

decline in paper prices

2011: Demand rebound moved

paper prices up

2012-2016: Demand reductions

stabilized, low operating rates

caused prices to gradually move

down

2017-2019: Better demand and

capacity closures tightening the

market contributed to rising

paper prices

18


UWF is the largest graphic grade

0.0 2.0 4.0 6.0 8.0 10.0

New

sp

rint

Um

ec

Cm

ec

UW

FC

WF

Million tonnes

Current

-6.2%

-2.9%

-5.2%

-2.7%

-3.7%

-9%

-10%-11%

-4%

-9%

-12%

-10%

-8%

-6%

-4%

-2%

0%


Perc

ent

change in d

em

and

CAGR 2010-2018 2019

Every segment declined much faster in 2019 (except coated

mechanical)

High paper prices have influenced this behavior

UWF, although declining faster, doing better than before

19

European producers are not exporting more


High volatility due to changing global markets and capacity reductions in EU

EUROPEAN GRAPHICS

LARGEST TRADE

PARTNERS

0 2

North America

Far East/Oceania

Latin America

Middle East

Africa

Million tonnes

Weaker euro Global demand

decline, capacity

closures in EU

350

400

450

500

550

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19

Tho

usan

d t

on

ne

s

Chinese fiber

restrictions

20

European newsprint


82.0%

84.0%

86.0%

88.0%

90.0%

92.0%

94.0%

96.0%

98.0%

300

350

400

450

500

550

600

2014 2015 2016 2017 2018 2019 2020 2021

Euro

s p

er

ton

ne

Price Production costs Operating rateDEMAND: High publication paper

prices favoring downgrading,

resulting in slower demand

reductions in 2019 (-7.2%)

SUPPLY: Higher imports (mostly

Canada) adding to the problems

for European producers

Capacity changes include UPM

Chapelle, International Paper

Kwidzyn, Papresa Renteria and

possible changes at SCA Ortviken

PRICES: Dropping due to higher

imports from Canada, weak

domestic demand and insufficient

capacity closures

Newsprint prices still far above cash costs


Russian producers are by

far the lowest cost

producers in the world

Low PfR prices have

increase margins

significantly since 2018

High margins providing

companies with ample

room to maneuver to

navigate the current

challenging times

Ample margins have kept companies from

announcing more capacity changes

22


Global newsprint average cash costs Global newsprint prices

400

500

600

700

800

900

1,000

Mar-

13

Sep-1

3

Mar-

14

Sep-1

4

Mar-

15

Sep-1

5

Mar-

16

Sep-1

6

Mar-

17

Sep-1

7

Mar-

18

Sep-1

8

Mar-

19

Sep-1

9

US

D p

er

tonne

China Germany USA0 100 200 300 400 500

Asia

NorthAmerica

Europe

China

Canada

Russia

EUR / Tonne

Collapse in Asian prices and weak US market making

Europe an attractive market

23

European uncoated mechanical


80.0%

82.0%

84.0%

86.0%

88.0%

90.0%

92.0%

94.0%

96.0%

300

350

400

450

500

550

600

650

2014 2015 2016 2017 2018 2019 2020 2021

Euro

s p

er

ton

ne

Price Production costs Operating rateDEMAND: Declining more than

three times faster than historical

average due to higher paper

prices, weak economy, destocking

and better availability of newsprint

PRICES: Currently trending down

due to low operating rates and

lower production costs

Ample margins for producers

contributing to insufficient capacity

reductions

UPM Rauma PM2 (265,000

tonnes) the only meaningful

change so far

More reductions are needed to

tighten the market

24

European coated mechanical


82.0%

84.0%

86.0%

88.0%

90.0%

92.0%

94.0%

96.0%

300

350

400

450

500

550

600

650

700

750

2014 2015 2016 2017 2018 2019 2020 2021

Euro

s p

er

ton

ne

Price Production costs Operating rateDEMAND: Declining almost 11%

in 2019 due to the migration of

print catalogs (OTTO, H&M,

IKEA) to digital and

underperforming magazines

PRICES: Declining due to lower

operating rates during the

summer period and lower prices

for grade substitutes

The conversion of Burgo Verzuolo

PM9, Sappi Lanaken and closure

of UPM Plattling PM10 are

bringing operating rates back up

to 92%

Operating rates will trend down

late in 2021 due to fewer capacity

reductions

Coated mechanical pricing gap with SC


Red zone: coated

mechanical becomes too

expensive, demand

moves toward uncoated

mechanical grades

Little grade shifting when

pricing gap stays within

EUR 100 – 115/tonne

Green zone: difference

between SC and LWC at

the lowest level, demand

moves to LWC

26

80

90

100

110

120

130

140

EU

R p

er

tonne

European coated woodfree


80.0%

82.0%

84.0%

86.0%

88.0%

90.0%

92.0%

94.0%

96.0%

300

350

400

450

500

550

600

650

700

750

800

2014 2015 2016 2017 2018 2019 2020 2021

Euro

s p

er

ton

ne

Price Production costs Operating rateDEMAND: Declining 9.2% in 2019,

similar reductions foreseen for 2020

and 2021

PRICES: Dropping €50-55/tonne

between May and September due to

low operating rates and falling pulp

prices

Closure of Arjowiggins Besse-sur-

Braye, Lecta’s Condat PM8,

Feldmuehle’s Uetersen and Arctic

Paper’s Grycksbo PM7 have

removed 500,000 tonnes since 2019

Operating rates rising due to

capacity closures

Oulu exiting coated woodfree will

bring operating rates back to 90%

Coated mechanical pricing gap with CWF


An €80/tonne price gap

between these two grades is

as high as it can be

(historically)

It triggered demand to migrate

to coated mechanical between

2018 and the first half of 2019

Since then, weaker market

conditions in CWF have

reduced the pricing gap

Under these circumstances,

the chances of users shifting

back to CWF are higher than

before-100

-80

-60

-40

-20

0

20

40

EU

R p

er

tonne

28

CWF prices (reels) already on the cost curve


• Many non-integrated

players already in cash

negative position

• More closures likely

• Something similar is

happening in the

uncoated woodfree

market

29


European exports trending down

0 100,000 200,000 300,000 400,000

United States

Russia

Turkey

Mexico

India

Switzerland

China

Brazil

Egypt

Canada2019 2018

Weak global demand kept European

exports down by more than 10% in 2019

• US, the largest EU overseas trade partner,

down by almost 13%

400

500

600

700

800

900

1,000

1,100

1,200

1,300

CW

F,

US

D p

er

tonne

China Germany USA

30

European uncoated woodfree


82.0%

84.0%

86.0%

88.0%

90.0%

92.0%

94.0%

300

400

500

600

700

800

900

1,000

2014 2015 2016 2017 2018 2019 2020 2021

Euro

s p

er

ton

ne

Price Production costs Operating rateDEMAND: Dropped almost 4% in

2019, significantly more than the

2.5% average seen in the

previous five years

PRICES: Declining due to

demand weakness, insufficient

capacity closures and lower

market pulp prices

Exports to the USA rising as

former Port Hudson customers

shop for alternatives to high

priced domestic UWF

Strengthening of the US dollar

making the US a very attractive

market for overseas suppliers

31

Capacity changes in Europe, 2019-2021


-2,800 -1,800 -800 200

New

sp

rint

Cm

ec

CW

F

Thousand tonnes

Net change

Assumptions

GRADE COMPANY MILL COUNTRY CAPACITY DATE

CWF Stora Enso Oulu Finland -1,080 2020

CWF Lecta Condat PM8 France -230 2019

CWF Arjowiggins Besse-sur-Braye France -275 2019

Cmec Burgo Verzuolo Italy -400 2019

Cmec Sappi Lanaken Belgium -200 2019

Cmec UPM Plattling PM10 Germany -155 2019

Umec UPM Rauma Finland -265 2019

UWF UPM Nordland Germany -200 2019

European capacity

changes, 2019-2021

Assumptions accounting for 40% of the total

32


What can we expect in 2020?

• With prices down from peak in 2019,

demand will not decline as much.

• European net exports under pressure due

to weak global graphic conditions

(oversupply and weak demand growth).

• production costs for newsprint and

mechanical grades not increasing much in

the short term

• Production costs for woodfree to increase

gradually.

• Paper producers will face a more

challenging 2020 from a results point of

view.

400

450

500

550

600

650

700

750

800

850

900

Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20

EU

R p

er

ton

ne


- 4%

- 8%

- 5%

- 12%

- 15%

33

Thank you

PAPER TRADER EUROPE

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