Paper360 - May/June 2013 - (Page 35)

Conventional wisdom says that the pulp and paper industry is consolidating and that such consolidation is necessary to the long-term health of the industry. In this and future issues of Paper360°, this column will analyze consolidation within different grades of pulp and paper. Bleached Softwood Kraft Pulp The Bleached Softwood Kraft Pulp (BSKP) market is fragmented. Figure 1 shows that no one player today owns more than a 10 percent share. Even if we consider just Northern Bleached Soft wood Kraft (NBSK), a sub-segment of BSKP, the largest shareholder has only 13 percent (Figure 2). In HHI (Herfindahl-Hirschman Index) terms, BSKP is far from being consolidated. Figure 3 compares BSKP, NBSK, and three other major paper segments and shows that BSKP is the least consolidated by far. Moreover, there is no clear trend toward consolidation. Trends in repurposing integrated pulp mills, given declining markets in communication papers due to e-media substitution, tend to make the market even more fragmented. It is unlikely that the BSKP market will become consolidated any time soon. For a government regulator to begin to consider the segment consolidated, the segment’s HHI would have to reach at least 1,500. To achieve this, the leading player would have to acquire the next five largest players or close to nine million tons, or the top three players would each have to acquire five million tons of capacity. These scenarios are clearly unlikely in the foreseeable future. Models used by Fisher International show that consolidation becomes meaningful only when the leading player achieves a 30 percent share or greater. Somewhere around that threshold, the segment’s dynamics can change, giving it greater supply discipline and often allowing producers’ margins to increase. The painful reality, however, is that consolidation earns little benefit from marketplace dynamics until the 30 percent threshold is reached which makes it difficult to pay for acquisitions in the early stages of consolidating an industry. BSKP is squarely in this position. On the other hand, the customer base for BSKP is also fragmented. According to FisherSolve, more than one-third of the world’s paper companies buy BSKP and their 829 mills use it to make more than 130 different Finished Product categories. Products using BSKP include a wide range of Printing and Writing grades, Tissue and Towel, Packaging, and Specialties. The impact of both supply and demand for BSKP being fragmented is that it becomes a “perfect” market. Supply and demand forces create cycles in the market for prices, operating rates, and many other factors. Peculiarities of the BSKP market exaggerate the cycles, making it, at times, an exciting segment to participate in and difficult to create and execute strategy for. Moreover, the pulp market does not possess a large liquid futures exchange so hedging with the help of a large financial market is not possible. Predicting future moves of the pulp market, therefore, is difficult and especially important. Fortunately, the BSKP industry publishes significant amounts of data about itself. Whereas it once was possible for people to estimate market movements out only a few weeks, it is now possible to know, with a fairly high degree of reliability, when the turning points in BSKP will be. While the segment is not concentrated enough for any one company to influence the market’s direction, technology makes it possible for buyers and sellers to understand the cycles in BSKP well enough for critical tasks such as estimating cash flows, planning investments, and managing inventories. This analysis was compiled by Jon Kerr, Sr. Consultant, Fisher International Inc., using Fisher International’s FisherSolve™, a data-driven business intelligence tool that contains a paper industry specific database that accurately describes the capacity of every pulp and paper mill in the world making 50 tpd or more. THE BOTTOM LINE Consolidation Watch Figure 1. Shares of bleached softwood kraft pulp by producer. SOURCE: FISHERSOLVE TM, 2013 FISHER INTERNATIONAL, INC. Figure 2. Shares of northern bleached softwood kraft by producer. SOURCE: FISHERSOLVE TM, 2013 FISHER INTERNATIONAL, INC. Figure 3. Herfindahl-Hirschman Index (HHI) for Major Pulp and Paper Markets. SOURCE: FISHERSOLVE TM, 2013 FISHER INTERNATIONAL, INC. Paper360º MAY/JUNE 2013 35

Table of Contents for the Digital Edition of Paper360 - May/June 2013

Over the Wire . . . News Summary
The 2013 TAPPI Award Winners
Successful Asset Management in the Paper Industry from an OEM Point of View
TAPPI Journal Summaries
Managing the Risk of Fire and Explosion in the Pulp and Paper Industry
Broadening the Availability of Carbon Fibers with Lignin
TAPPISAFE Through the Eyes of a Labor Attorney
Bleached Softwood Kraft Pulp
Association News
What’s New on

Paper360 - May/June 2013