Industry Focus – U.S. Paper Outlook

More than a third of the timber cut in the United States each year is processed into paper and paper products. Pulp logs are shipped to a mill where they are converted into chips. Sometimes the logs are chipped in the field and shipped to the mill in chip form. At the pulp mill, wood chips are converted by mechanical and chemical processes into wood pulp, the basic ingredient of paper. Wood pulp is then subjected to a series of mechanical and thermal processes to manufacture paper or paperboard. These intermediates are then converted into a wide variety of products, including printing and packaging paper, containers and bags, and construction materials. Two types of products, printing paper (including newsprint) and paperboard containers, account for most of the output of the paper industry.

Virtually everything that is produced, marketed, or sold is packaged in paper. Manufacturing control processes require a huge volume of paper in the form of order forms, packing slips, and management reports. Product marketing is dependent on a mountain of paper including newspaper and magazine advertising, direct mail, promotional flyers, store displays, and so forth. More importantly, everything that is shipped is packaged, and packaging materials consume enormous amounts of paper in the form of boxes, bags, padding and cushioning, wrapping, and labels. This ubiquity of paper and paper products in manufacturing and marketing means that demand for paper should to some degree follow the output of the manufacturing sector.

The U.S. paper industry has been struggling since the mid-nineties. Major production declines during the 2000 – 2001 recession were never recovered. The industry has been plagued by many of the same problems that overtook the steel industry in the eighties and nineties. Competition from foreign markets has increased. Plastics materials have replaced paper in many packaging and shipping applications. Growth of the internet, and of electronic communications in general, have had a negative impact on the demand for paper as a communications medium. Domestic producers have not kept up with their foreign competitors in embracing new production technologies, although they are catching up. Like the steel industry, the paper industry is engaged in an ongoing program of reorganization, downsizing, and consolidation to meet the challenges of technological change and foreign competition.

To an even greater extent than steel, paper is a commodity. All paper is pretty much alike, after all, and variations in quality are minimal. This creates a market where producers compete almost exclusively on price, and, for manufactured products at least, price competition is not ordinarily advantageous for U.S. producers.

Although paper production had been declining since the late nineties, output fell off sharply during the recession, declining more than 16% in 2008. Over the next four years, about half of these losses were regained, but output has been declining for the last five years. Production is currently about 75% of the peak value attained in 1995.

Newsprint is a significant component of the output of the paper industry. The continuing decline of newspaper publishing can only serve as a drag on paper production. After years of annual 3% declines, the industry dropped more than 18% in 2008 alone. Since the recession, uniform declines have continued. Newspaper publishing is currently running at about 20% of the peak output attained in the late eighties.

Production declines would have been worse if not for the rise of e-commerce, which has increased the demand for containers and packaging materials. Growth in these markets has partially counterbalanced the decline in newsprint manufacturing.

Manufacturing capacity for paper reached a high in 1999 and has been declining more or less ever since, although capacity declines seem to have slowed over the two years. Utilization had been nearly constant or slightly declining through mid-2008, at a level of about 85%, but fell to a low of 73% in the early months of 2009. After a strong recovery in 2009, utilization has been growing slowly for the last eight years and is now around 87%.

Shipments declined sharply during the recession and made a partial recovery over the next couple of years. Since 2010, shipments have been constant or slightly declining. The U.S. is a net exporter of pulp, paper, and paper products. From 2001 through 2008, imports slightly exceeded exports, but since the recession export tonnage has always exceeded import tonnage. From 2002 through 2011, the quantity of net exports grew steadily but the value has stabilized in the last eight years. During this time, the trade situation has stabilized. Neither exports nor imports have grown significantly for the last eight years.

Logging activity declined continuously in the 2006 – 2009 period. After recovering about half of the lost production, logging has been slowly declining for the last five years. Logging output is more closely tied to the lumber industry than to paper production.

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