Paper360 - March/April 2015 - (Page 61)

the bottom line | CONSOLIDATION WATCH Conventional wisdom says that the pulp and paper industry is consolidating, which is necessary to its long-term health. In this and future issues of Paper360°, this column, provided by Fisher International, will analyze consolidation within different grades of pulp and paper. global Consolidation To better understand the current state of global pulp and paper industry consolidation, it is necessary to break the business into regions and grades beginning with the largest region-grade segment, packaging in Asia Pacific which, as shown in Figure 1, is not consolidated. There are many players and the largest three control less than 30 percent of market capacity. Considering all pulp and paper grades in Asia Pacific, the region is not consolidated to any large degree because there is still organic growth opportunity as paper use grows. Between new users and more export opportunities made possible by a low cost position, sufficient capacity growth rates will moderate any M&A activity for some time. North America's pulp and paper industry is also dominated by packaging grade production which, unlike Asia Pacific, is highly consolidated as the top three shareholders control over 30 percent of total production capacity. Typical of a mature consolidated industry, companies are looking for growth by focusing on core products, shedding unprofitable segments, or perhaps spinning off more profitable segments into markets that are less consolidated and where margins are easier to earn. Europe does not exhibit conditions similar to North America as it has been in the paper business much longer, yet it is less consolidated (the top three European producers control only 20 percent, while small market share holders represent 43 percent of the total). Residual respect for political boundaries keeps the European market dispersed. With implementation of the Euro and positioning of Europe as one economic region, we expect to see M&A activity increase, especially as demand shifts and Europe sees more pressure to balance supply. The Herfindahl-Hirschman Index (Figure 2), is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. When tracked over a period of time, it reflects the dynamics of a consolidating market. For instance, in North America there has been considerable consolidation over the last 10 years or so, specifically in the containerboard market (Figure 3). North America may be reaching the limits of consolidation for containerboard, and perhaps for other grades. Consolidation may happen but, as with the Verso-NewPage merger, it will include the shedding of some businesses and the repositioning of companies. Europe, on the other hand, is expected to have more M&A activity, specifically in packaging grades which have been resilient with a stable and increasing production rate. Declining printing and writing grades will likely see more consolidation as players reposition themselves to sustain profits. The continent's markets are mature and have low concentration currently, so there is a lot of room for movement. Asia will have consolidation in the foreseeable future, but not until the cost of building new capacity to meet growing demand exceeds the cost of purchasing existing capacity. Demand will eventually plateau and market leaders will see the need to consolidate in order to balance supply and support prices. Opportunities will exist across the broad spectrum, but it is logical to assume that packaging and printing and writing grades will be the first to see any significant M&A activity. Latin America is already highly consolidated because monopoly regulations are less stringent and the geography effectively presents market barriers. Market pulp, the primary product of Brazil and Chile, may never see consolidation only because the current producers are so large and highly specific to their wood baskets. Within the various geographic regions, kraft market pulp production is fairly concentrated with a few big players providing the majority of the capacity market share points. Figure 1. Asia Pacific distribution of packaging grade capacity. Source: FISHERSOLVE™, © 2015 FISHER INTERNATIONAL, INC. Figure 2. Herfindahl-Hirschman Index for North American containerboard production capacity. Source: FISHERSOLVE™, © 2015 FISHER INTERNATIONAL, INC. Figure 3. North American containerboard capacity. Source: FISHERSOLVE™, © 2015 FISHER INTERNATIONAL, INC. 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. To learn more, please visit Paper360º MARCH/APRIL 2015 61

Table of Contents for the Digital Edition of Paper360 - March/April 2015

Guest Editorial
Over the Wire
TAPPI's Centennial: A Celebration 100 Years in the Making
Precision Alignment of Winders
Single-stream Waste Processing
iRoll at Irving
Fully Automated Continuous Digester
Twin Roll Press Upgrade
TAPPI Journal Summaries
Effluent Treatment
Microfibrils to Transform Paper Furnish
Consolidation Watch
Knowledge Builder
New Energy Windfall
Power from Waste
Safety Survey
Association News
Online Exclusives
Advertisers Index

Paper360 - March/April 2015