No easy answers to paper’s hard questions – Print21 magazine article

Buffeted by the GFC and facing a long-term decline in demand for different grades, paper companies continue to face uncertain times. One thing is assured though – the era of steady year-on-year growth is over, as Tony Duncan explains.

It’s difficult to make a firm call on the paper supply scene for next year. A number of changes this year have confirmed the difficult state of many sectors of the paper industry – primarily those directly competing with electronic communications - and reinforced the need for credible and robust environmental credentials, as amplified recently by Gunn’s decision to exit native forestry.

This pattern will continue for the foreseeable future. Pricing is unlikely to pick up in most graphics paper sectors, as mills compete for market shares in non-growth markets. We are already seeing machines swinging between newsprint and coated grades as flexibility becomes a competitive advantage over scale for older machines in particular. New capacity from developing countries continues to gain more customers as local distributors search for competitive advantage in no growth markets.

The growing complexity of the marketplace across all sectors is, to me, what characterises the current business environment.

In the print business, complexity has increased markedly in the past five years. Investment decisions are based not only on whether offset/digital/other is the appropriate way of putting ink on paper but must also take into account the much more difficult forward market outlooks. The continued fragmentation caused by more and more ‘e’ technology platforms means the days of automatic market growth are gone – often to technologies which were not around when most decision makers entered the business. Markets which traditionally had consistent year-on-year growth are disappearing, and diminishing markets are hell to play in – just ask the continuous business forms guys and gals, if you can find them.

On the other hand, it is always exciting to talk with printers who are prepared to make commitments to developing new business in the new markets ‘e’ technologies provide – eg adding internet hosting capability for SME customers. It’s not easily done and requires a considerable medium-term commitment, but it shows courage and, ironically, commitment to the print business as both print and ‘e’ capacity provide cross-selling opportunities.

Diversify or die
To see a global distribution company such as PaperlinX report revenue drops in Europe and North America of 21 per cent over the past two years, and 12 per cent in Australia/New Zealand in the past year, provides a clear indication of the state of traditional paper distributor markets. These results, along with public statements from other local paper companies, confirm a structural change in the industry.

It’s difficult to judge accurately, but probably 25 per cent of the downturn had been predicted with the balance exacerbated by the GFC, and a reasonable percentage of that tonnage is not coming back. So gone are the good old days of guaranteed year-on-year tonnage increases. To avoid losing further revenue these companies will have to do what many in the print industry have been doing for a number of years – diversify into new business sectors, while continuing to address cost bases to maintain enough profitability to fund the new investments. There are, however, two further scenarios which we are likely to see occur in the medium term: either buy-outs to unlock value sitting in a specific sector within the merchant, or perhaps purchase by a company looking for downstream distribution certainty.

Difficult decisions
From a macro sense, it is reasonably easy to look at markets long term and establish likely trends – up and down. However, God and the Devil are in the detail, and developing new profitable business plans to support continuing (needed) re-investment is an increasingly difficult task. These decisions are complex enough given the long investment timeframes involved, but in recent years further variables have been added.

While papermakers have always had to consider the environmental issues surrounding a possible investment in a new pulp mill or paper machine, complexity has increased as the number of people/groups who now demand to be considered ‘stakeholders’ in the paper business has increased. Governments and local communities have always had an input into paper-making investment decisions – in Australia that means three levels of government – but now more and more issues around environmental sustainability are being represented by a range of interest groups and organisations.

Making paper in Australia means addressing all these groups, plus local communities, unions, State governments, without forgetting shareholders – and one thing is for sure, there is no magic bullet which will satisfy everyone. Likewise, there is no single solution which will work as a one-size-fits-all; every mill has its own particular issues and priorities within the local community and the technology it chooses. How do you manage your business when your major customers are being picketed because they are buying your product? To change fibre sources would cost tens of millions of dollars per year and cost jobs. The alternative for the customer leads potentially to perverse outcomes with imports from a less sustainable source.

The straightforward answer is there is no straightforward answer. Issues like these develop over long timeframes and cannot be resolved over night. Like train wrecks, there are usually a number of issues that have not been addressed over time, or short term fixes put in place to obscure longer term issues, usually because management has not had the foresight to recognise the longer term trends.

Dealing with complexity is why CEOs are paid the big bucks, and some have obviously been better at it than others.