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Declining paper demand signals weak economy

The signs of global economic weakness are multiplying (sharp recent slowdowns in retailers’ sales trends, falling monthly retail sales, numerous trucking company bankruptcies, cycle-low truckload spot rates, rising credit card and auto loan delinquency ratios, major corporate layoff announcements, etc.) and the global pulp and paper industry is no exception. 

We wrote last week of continued poor box demand trends in the U.S. into April, bearing in mind that box demand is among the best economic indicators in the packaging industry. And earlier this week, the European paperboard and pulp producer Metsä Board issued its first negative profit warning in over four years, which the company primarily attributed to “the weakened demand situation for market pulp in both Europe and China.”

Market pulp accounts for an estimated 40% of the global virgin pulp market of roughly 170 million tonnes (integrated pulp production accounts for the remaining 60%) and predominantly goes into the tissue and printing and writing paper industries but also into packaging and other areas. In other words, it’s demonstrably economically sensitive, and the global economy is suffering. 

Market pulp accounts for 15% of Metsä’s sales; the majority (57%) of the company’s sales come from what’s called folding boxboard, which is converted to folding cartons (think cereal boxes, cigarette boxes, consumer electronics boxes, etc.) and paper cups, plates and bowls. Metsä Board indicated that part of the weakness in European market pulp demand came from prolonged production shutdowns by paper and paperboard producers, the result of poor demand in those industries. 

And in China, the economy has been worse than the company expected; it’s unclear precisely what Metsä was expecting along those lines given how weak the Chinese economy has been for several quarters.

We expect downbeat demand commentary virtually across the board on global paper and packaging companies’ upcoming Q1 earnings calls, and that limited demand visibility will be a recurring theme. Many of these companies will benefit from falling input costs (i.e., natural gas), but those falling costs are at least partly the result of weak demand. Many such companies provide full-year profit guidance; of interest will be their embedded updated demand/volume assumptions for the year given how poor so many economic indicators are.