Paper360 - July/August 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. North American Containerboard With packaging grades being one of the bright spots in the paper industry for U.S. and Canadian producers, the sector has attracted investment. Since 2005, mergers have shifted ownership among companies, but with no additional growth of overall market capacity which in North America is about 37 million tpy—just as it was eight years ago. Factors that have changed, however, are the ownership structure and market share distribution as well as the upgrading of production assets. Figure 1 shows market share of the top ten producers; the top two have been gaining share at the expense of smaller producers, and gaps are getting wider primarily through strategic acquisitions. With recent acquisition activity, the largest producer has stepped over the 30 percent share threshold, potentially changing the dynamics of the segment. In general, segments with market leaders with more than 30 percent share, experience margin improvements and more balance in supply and demand. The Herfindahl-Hirschman Index (HHI), which measures the concentration of competitors in a given market, is another way to look at consolidation. Government regulators often use HHI to help decide whether to allow proposed mergers to proceed. Typically, figures under 1,500 are viewed as indicating that a market is unconsolidated, while scores over 1,800 to 2,000 often are judged to be highly consolidated and can encounter regulatory resistance to additional consolidation. Figure 2 shows that the HHI for the segment since 2005, is today below 1,800 which indicates that there is room for more consolidation. During the “mini-mill” boom between 1990 and 2000, 24 new machines came online producing just over 7.5 million tons per year. Since then, however, there have been only two new machines put into service (with one coming at Niagara) and some conversions (e.g., Dublin). There also has been “creep” of capacity coming from upgrades of existing machines. Ninety-four containerboard machines in North America have received upgrades to at least one major component. North America’s capacity to produce containerboard has been upgraded enough that the region produces about the same number of tons per year, but at a higher level of efficiency and lower cost. To see this, look at the relative Technical Age—which takes into account rebuilds on each machine in order to measure its competitiveness—of each machine by tracking the date of installation and each component’s date of upgrade (Figure 3). The fact that there are few North American containerboard machines left with high Technical Ages indicates that the segment’s fleet should be competitive. The largest threat to North American containerboard comes from outside the segment. The markets served by Newsprint and P&W papers are contracting, causing the owners of machines making those grades to look for other markets and convert machines. The bigger question is whether new capacity will enter the market and, if so, will new entrants disrupt the newly consolidated segment. Fisher models show a delicate balance between the number of machines that could economically be converted and the ability of the segment to absorb them. The future health and profitability of the segment will be influenced more by this factor than any other in coming years. This analysis was compiled by Jon Kerr, Senior 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. Market share of top ten North American containerboard producers. SOURCE: FISHERSOLVE TM, 2013 FISHER INTERNATIONAL, INC. Figure 2. North American Containerboard HerfindahlHirschman Index. Figure 3. Technical Age of North American Containerboard Machines SOURCE: FISHERSOLVE TM, 2013 FISHER INTERNATIONAL, INC. Paper360º JULY/AUGUST 2013 35

Table of Contents for the Digital Edition of Paper360 - July/August 2013

Over the Wire . . . News Summary
Ready for Print 2.0?
Eldorado Brasil Begins Operations in the Pulp Industry
Newark’s Frank Papa on Leadership and Innovation
Tissue Mill Dewaters Pulp with Innovative Disc Filter
TAPPI Journal Summaries
Next Generation Enzymes for the Paper and Pulp Industry
The Best Resources for Your Best Resources
Consolidation Watch
Association News
What’s New on

Paper360 - July/August 2013