The Pulp & Paper Industry serves large, mature markets around the globe that display the accustomed tendency towards stagnant or negative growth in the developed world and vigorous growth in emerging economies particularly China, India and Eastern Europe.
Since the turn of the century, producers in Latin America and South Africa, the most profitable regions, have averaged around 7% Return on Capital Employed (ROCE) which is significantly lower the typical cost of capital of 10-13%. The average ROCE achieved by operations in North America and Canada has been in the range 4-6% and this explains the closure of certain mills in these regions.
History of Wood Pulping
It was in Germany in the 1840’s that F.G. Keller developed the process of mechanically pulping wood for the manufacture of paper. Chemical processes soon emerged, led by J. Roth’s sulphurous acid process and then B. Tilghman patenting a process in the US using calcium bisulfite. Sweden was the site of the first commercial sulfite pulp mill almost 10 years later, based on the work of Carl Daniel Ekman.
A competing chemical process developed by Carl F. Dahl in 1879, is known as the kraft or sulphate process and the first mill of this type was commissioned in Sweden too, in 1890. In the early 1930s G.H. Tomlinson’s invention of the Recovery Boiler allowed kraft mills to recycle almost all of the chemical pulping agents with obvious cost benefits. This also enabled them to produce stronger fibres from a greater variety of wood types. Since the 1940s the kraft process has dominated in the development of the pulp and paper industry across the globe.
The sulfite process however, still produces around 10% of the world’s pulp and its survival depends mainly on the demand for sulfite pulp for speciality products like fine paper, tissue, glassine and increasing the strength of newsprint. ‘Dissolving pulp’ is a special grade of bleached sulfite pulp that provides the raw material for producing a range of cellulose derivatives including: rayon, cellophane, cellulose acetate and methylcellulose.
Lignosulfonates, used in the production of concrete, drilling mud, drywall and other materials, are an important by-product of the sulfite bleaching process.
Pulp & Paper – The raw material
The basic raw material for all primary products of the Pulp & Paper Industry is natures ‘wonder fibre’: cellulose. It is the chief constituent of the cell walls of all plants and of many fibrous products, including paper and cloth. Cellulose is by far the most abundant organic substance found in nature. It is a complex polymeric carbohydrate (C6H10O5) n, having the same percentage composition as starch, (44.4% carbon, 6.2% hydrogen, and 49.4% oxygen) and it also yields only glucose on complete hydrolysis by acid.
The cellulose molecule, which appears to be built up of between 150 and 1500 very simple units in the form of a long, thin structure, is referred to as the cellulose chain. Each link of the chain consists of a slightly modified form of the common sugar, glucose, while the strength of paper depends to a large extent on the continuity of these linkages. Destructive agents, which can weaken and open the individual links of the chain, cause it to break into smaller lengths, resulting in what is generally considered to be brittleness in the paper.
Paper is used in a broad array of products essential for everyday life. In fact, per capita consumption of paper is a widely used barometer of economic advancement.
As a country’s gross domestic product grows, so does its demand for paper. Market demand patterns for paper products such as newsprint and office and computer papers are closely related to industrial activity, while other products (such as disposable diapers) are indicators of changes in real personal income or demographic factors.
The US is the world’s leading economy and consequently the world’s largest consumer of paper and paperboard products, with a per capita consumption in excess of 300kg per annum. This contrasts sharply with the 7kg per capita average for India and the global average of 53kg per capita.
In 2008, Countries in the UNECE (United Nations Economic Commission for Europe) Region that includes North America and Canada, accounted for around 55% of global production and consumption of paper and paperboard and produced nearly 75% of the world’s woodpulp.
After many decades, Europe’s paper and paperboard production overtook that of the North American sub-region during 2004 and still remains ahead. During the early 1990s production in the EECCA region (Eastern Europe, Caucuses and Central Asia) decreased, but has been growing continuously since then.
The North America Region experienced contraction of production and consumption again in 2007, but lack of capacity and mill closures have avoided the problem of excess capacity. Together with the weaker US dollar this has delayed erosion in the price of their pulp and paper prices despite the continued trend of falling local demand. The demand for newsprint has continued its downward spiral reflecting the structural shift in advertising spend; away from print to electronic media.
Producers of paper and pulp have felt their profits eroded in most regions by cost inflation, driven mainly by record high oil prices, energy costs from all sources and generally higher raw material costs. By mid 2008, prices of market pulp and most paper and paperboard commodities were at near record high levels.
In addition to global energy and material cost pressure, European producers have also been affected by the implementation of the Emission Trading Scheme (ETS). According to the Confederation of European paper Industries (CEPI), the total cost of the ETS Directive for the European Pulp & Paper Industry would be at least €2bn per annum. Targets set in March 2007 by the Council of Ministers, for a minimum of 20% share of energy from renewable sources by 2020, will further increase demand pressure on wood and woody biomass for biofuels.
China is rapidly gaining ground as the second largest producer and consumer; its rapidly growing production capacity is being largely dependant on imported fibre in the form of recycled paper and imported woodpulp.
Based on demand patterns for conventional pulp and products, this industry could be expected to slowly decline as emerging economies follow the evolutionary path away from printed advertising, already seen in the more mature markets.
The industry is already considered as uncompetitive in terms of the earning potential of invested capital. The wild card however, could be already on the table since the Pulp & Paper industry is already recognised as the largest producer of renewable energy. Most kraft pulp mills provide at least 60% of their energy needs by recovering energy from well established chemical recycling processes.
In both Europe and North America, integrated biorefinery concepts are being explored that could eventually result in the production of greater value in energy products than in pulp and paper, from the same or smaller consumption of forest resources.
It will be of great interest to see whether this strategic impetus will provide sufficient competitive advantage, to attract the capital investment required to transform the Pulp and Paper Industry into a major renewable energy business that sets new standards for sustainable development in the 21st century.