Weathering a Stormy Paper Market Forecast
The second reason mills tend not to adjust capacity tightly to demand is that there are two levels of competition for the U.S.-paper dollar. Domestic mills battle each other, and then they balance foreign paper sources with all the extra complications of currency exchange.
For the last several decades, whenever demand edged sharply above U.S. capacity, European and Canadian mills were a handy safety valve. Asian and South American sources have also entered the mix. For much of this time, the dollar’s currency strength has made exporters keen to court the large market in this country.
However, we’ve all but lost this safety valve against supply/demand tension now that the exchange rate with both the euro and the Canadian dollar is so poor. A Finnish mill would very much prefer to sell paper to Germans, in euros, than to Americans.
Then again, what exactly is a “Finnish mill” these days? The paper industry is consolidating into international entities. But that doesn’t provide any relief under our current conditions. In fact, the consolidation is not merely a compression of sources, but a new style of ownership.
Five paper companies—NewPage (which has acquired Stora Enso North America), Verso, Catalyst, Pine Bluff and West Linn—are now owned by private-equity concerns. Add up the volume these mills represent, and you’ll find that private equity controls 62 percent of the coated groundwood market in North America, and 57 percent of the coated freesheet.
These companies play by new management rules. They want return on investment, they want it promptly, and, presumably, they want to sell the underlying assets as soon as they’re sufficiently buffed up to make the sale worthwhile.
To some degree, even paper buyers could benefit from the new management style. Perhaps an industry that’s struggled for so long to scratch toward decent margins can and should be shaken up. But it’s fair to say that the new trends in management, which may spill over to other, publicly traded mills, are not designed to ease the buyer’s sufferings. If a price increase can be supported, a price increase will be made.