Paper & Paper Products

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Revision as of 15:34, August 25, 2008

The Paper and Paper Products Industry makes everything from printing paper, to “peel to stick” labels, to cardboard boxes. A look at a grocery store can see how the industry has influence over daily life: the items on the shelves were transported in corrugated boxes from the producer to the store, the cereal is in a paperboard box made from wood pulp, the “on sale” sign is made from a coated specialty paper, the price sticker is a “peel to stick” label, and the receipt is a thin rolled material. The industry provides a diversified line of products that are essential to industries like Food & Beverage, Apparel Stores, and Trucking.

Despite the natural high demand for the industries products, the industry also face many challenges. The industry is full of large companies with a diversified line of products and smaller narrowly focused companies. For example, the industry leader International Paper Company (IP) makes paper, packaging products, and even has its own distribution service, whereas the smaller Neenah Paper (NP) makes only writing paper. In addition to the steep competition, companies are also facing rising energy and commodities prices, which are driving up production costs and cutting into profit margins. For example, operating margins for Avery Dennison (AVY) fell from 7.8% in 2006 to 5.9% in 2007.^[1] In addition, a slowing US economy is decreasing the demand on general consumer goods like toys and certain foods. This adversely affects the paper and paper products industry because when spending on these goods goes down the revenues of companies that make packaging products also goes down.

1 Subsets of the Paper and Paper Products Industry
2 Trends and Forces
- 2.1 Rising Commodities and Energy Prices are Forcing the Industry to Make Difficult Choices
- 2.2 ===A Slowing Economy Means Less Demand for the Industry’s Packaging Material Products
3 References

Subsets of the Paper and Paper Products Industry

Paper

The paper subset is the staple of the paper and paper products industry. This subset consists of the production of uncoated writing and printing papers by industry giants such as International Paper Company (IP) and Domtar (UFS) as well as the production of specialty papers. Specialty paper ranges from the production of the coated paper that greeting cards are made of, by companies like Nashua (NSHA), to the production of pressure-sensitive material, by Avery Dennison (AVY) used by other corporations to make labels.

Uncoated Paper:

International Paper Company (IP): International Paper is the world’s leading producers of printing and writing paper. The company also does business making products for consumer and industrial packaging and even has its own distribution business. In 2007, the company generated $21.9B in net sales. ^[2]

Domtar (UFS): Domtar is the second largest producer of uncoated freesheet paper in the world. The company also produces specialty paper, pulp, and has commercial printing and publication business. In 2007, the company generated $6.2B in net sales. ^[3]

Neenah Paper (NP): Neenah’s main business is making premium writing, text, and cover paper. The company also makes specialty paper, filtration media (used in tape and premask), and kraft pulp. In 2007, the company generated $990M in net sales. ^[4]

Specialty Paper:

Avery Dennison (AVY): Avery’s main business is the production of pressure-sensitive materials and adhesives which are used by other corporations to make labels. Avery also does business making office supplies and has a retail information services business that makes barcodes, price tags, and security devices. In 2007, the company generated $6.3B in net sales. ^[5]

Glatfelter (GLT): Glatfelter makes specialty paper for markets such as book publishing, credit card receipts, multi-part forms, and shopping bags. The company also has a composite fibers business which makes paper for tea bags and the labeling of bottles. In 2007, the company generated $1.1B in net sales. ^[6]

Wausau-Mosinee Paper (WPP): Wausau’s main specialty paper business deals with the production of the backing paper from which “peel and stick” labels are dispensed. Wausau also makes printing and writing paper as well as tissues and towels. In 2007, the company generated $1.2B in net sales. ^[7]

Schweitzer-Mauduit International (SWM): Schweitzer is the world’s largest supplier of fine papers to the tobacco industry. Its paper is used to make cigarette paper, binders for cigars, and cigarette packaging. In 2007, the company generated $715M in net sales. ^[8]

Consumer and Industrial Packaging

All items need to be packaged when going from point A to point B in order to protect the item. Consumer goods such as food and cosmetics need to be packaged not only when going from the producer to the distributor, but also need to be packaged by unit to be put on store shelves. Industrial goods like machines and machine parts need to be safely packaged before ending up at its final destination. Packaging can be broken down into two items: paperboard and corrugated fiberboard. Paperboard is a thin cardboard (think cereal box) that can be used as folding cartons and set-up boxes. Corrugated fiberboard (fancy name for a box) is made out of containerboard, which is just multiple layers of paperboard. The multiple layers of paperboard give the corrugated packaging its strength and allow for big and heavy items to be packaged in it.

Paperboard:

Meadwestvaco (MWV): Meadwestvaco primarily makes bleached paperboard – used for high-value consumer products, CNK paperboard – used in multi-pack beverage packaging, and kraft paperboard – used in folding carton applications. The company also provides plastic packaging for DVDs and games as well as office and school supplies. In 2007, the company generated $6.9B in net sales. ^[9]

Sonoco Products Company (SON): Sonoco’s largest business is making paperboard tubes and cores which are used for products that range from Pringles to construction material. Sonoco also provides other types of paper and plastic packaging. In 2007, the company generated $4.0B in net sales. ^[10]

Rock-Tenn Company (RKT): Rock-Tenn is one of North America’s largest producers of folding cartons which can be used for food, beverages, and just about anything else. The company also makes other kind of paperboard, merchandising displays, and corrugated packaging. In 2007, the company generated $2.3B in net sales. ^[11]

Corrugated Packaging:

Temple-Inland (TIN): Temple-Inland primarily makes containerboard and corrugated packaging. The company produces so much containerboard that extra is sold to other companies. In 2007, the company divested away from its timber operations to focus on its corrugated packaging business. In 2007, the company generated $3.9B in net sales. ^[12]

Smurfit-Stone Container (SSCC): Smurfit-Stone’s only business is to make containerboard and corrugated packaging. The company also has an integrated reclamation business as well, which collect fiber needed to make containerboard. In 2007, the company generated $7.4B in net sales. ^[13]

Pulp & Cellulose

Pulp is a dry fibrous material that is used to make paper and can be made chemically or by separating the fibers of wood. Pulp sold in thick sheets and often used at a paper mill is called “market pulp”. Another kind of pulp, “kraft pulp”, is chemically produced pulp using sulfate. Cellulose is a natural fiber from trees and plants that can be used to make a variety of products including paper and packaging products.

Market Pulp:

Aracruz Celulose S.A. (ARA): Aracruz is the world's largest producer of bleached eucalyptus pulp which is used to make products such as tissue, printing and writing paper, liquid packaging board, and specialty paper. In 2007, the company generated $2.1B in net sales. ^[14]

Votorantim Celulose e Papel SA (VCP): Half of Votorantim’s business is devoted to the production of bleached eucalyptus kraft pulp, in which 80% was sold to third parties in 2007. The other half of the company’s business is domestic paper production. In 2007, the company generated $1.3B in net sales. ^[15]

Kraft Pulp:

Mercer International (MERC): Mercer is the second largest producer of northern bleached softwood kraft pulp in the world. The company is the sole kraft pulp provider to Germany, which has the largest pulp import in Europe. In 2007, the company generated $1.0B in net sales. ^[16]

Cellulose:

Buckeye Technologies (BKI): Buckeye makes cellulose based specialty products. The company focuses on producing specialty cellulose because it is used to make unique chemical and physical characteristics to different products. In 2007, the company generated $769M in net sales. ^[17]

Timber

The timber business provides forest products, such as wood and pulp, to third party companies. By managing their own timberland, these business are able to make their products straight from the trees they grow. As of 2008, the only major timber based company was Potlatch (PCH). Prior, companies like International Paper Company (IP) and Temple-Inland (TIN) were major competitors in this business, but decided to divest away from the business in 2006-2007.

Potlatch (PCH): Potlatch is a forest products company that makes commodity wood products and bleached pulp products. The company owns 1.7 million acres of timberland in the US. In 2006, the company went through a restructuring where it became a Real Estate Investment Trust (REIT). In 2007, the company generated $1.7B in net sales. ^[18]

Trends and Forces

Rising Commodities and Energy Prices are Forcing the Industry to Make Difficult Choices

Rising cost of raw materials and commodities has forced many companies in the industry to implement several price increases on its products. Sonoco (SON) for example, rose the prices on its paper tubes and cores by 8% in January 2008. ^[19] Other companies, such as Smurfit-Stone (SSCC), have been forced to shut down facilities to cut costs; Smurfit-Stone shut down its containerboard operations at two facilities. ^[20]^[21]

The ability to obtain raw materials such as wood fiber, reclaimed fiber, paper, steel, aluminum, and caustic soda, at favorable prices is an essential part of the industry’s success. Paperboard prices saw a $50/ton price increase in the summer of 2008 ^[22] and recovered paper costs have reached record highs.^[23] Higher commodities prices translate into higher production costs for companies, which forces them to either raise the prices of its products by placing the burden on the consumer, or to take the burden themselves by absorbing the higher costs and decreasing profit margins. For example, International Paper’s operating margins fell from 14.5% in 2006 to 7.6% in 2007. ^[24]

Higher energy costs are also putting companies in the same predicament as production costs continue to increase. Production plants and its machines are powered by oil and natural gas^[25], both of which are seeing record prices. Higher energy costs translates into higher production costs and once again the company is forced to either pass the burden to consumers by raising prices or take the burden itself and suffer decreasing profit margins.

===A Slowing Economy Means Less Demand for the Industry’s Packaging Material Products

A decrease in the demand for products has forced companies like Sonoco (SON) to shut down mills due to “decline in demand for cores and subsequently in coreboard”. ^[26] The paper and paper products industry is dependent on the average consumer buying typical goods such as food and electronics but a slowing economy spells trouble for the industry. As consumers cut back on spending, ^[27] it leads to a decrease in the demand for these typical goods. The industry, especially the consumer and industrial packaging businesses, is dependent on a high demand of durable goods (goods that are replenished and replaced often) to make money. As the demand for these goods drops, so do the industry’s net sales as there are fewer items that need packaging. In addition, consumers have also cut back on shipping.

In addition, FedEx (FDX) can serve as in indicator to how well the packaging products business is doing. In a slow economy, business and people cut back on the amount of shipping they do in order to cut costs. Less shipping means a lower demand for boxes and paper envelopes that the paper and paper product industry make. In May 2008, FedEx reported that U.S. packaging volume fell by 3.4%. ^[28]

References

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Category: Consumer Products

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 Higher [[energy]] costs are also putting companies in the same predicament as production costs continue to increase. Production plants and its machines are powered by [[oil prices| oil]] and [[natural gas]]<ref>[http://biz.yahoo.com/ap/080718/paper_and_forest_products_sector_snap.html?.v=1 Yahoo! Finance “Sector Snap: Paper Product Makers Set for Rally?” 18 July 2008]</ref>, both of which are seeing record prices. Higher energy costs translates into higher production costs and once again the company is forced to either pass the burden to consumers by raising prices or take the burden itself and suffer decreasing profit margins.
+======'''A [[U.S. Economic Cycles| Slowing Economy]] Means Less Demand for the Industry’s Packaging Material Products'''===
+A decrease in the demand for products has forced companies like [[Sonoco Products Company (SON)| Sonoco (SON)]] to shut down mills due to “decline in demand for cores and subsequently in coreboard”. <ref>[http://phx.corporate-ir.net/phoenix.zhtml?c=82014&p=irol-newsArticle&ID=1171885&highlight= Press Release “Sonoco to Close Montreal, Quebec, Canada, Paperboard Mill” 3 July 2008]</ref> The paper and paper products industry is dependent on the average consumer buying typical goods such as food and electronics but a slowing economy spells trouble for the industry. As consumers cut back on spending, <ref>[http://www.nytimes.com/2008/01/14/business/14spend.html New York Times “Americans Cut Back Sharply on Spending” 14 Jan 2008]</ref> it leads to a decrease in the demand for these typical goods. The industry, especially the consumer and industrial packaging businesses, is dependent on a high demand of durable goods (goods that are replenished and replaced often) to make money. As the demand for these goods drops, so do the industry’s net sales as there are fewer items that need packaging. In addition, consumers have also cut back on shipping.
+In addition, [[FedEx (FDX)]] can serve as in indicator to how well the packaging products business is doing. In a slow economy, business and people cut back on the amount of shipping they do in order to cut costs. Less shipping means a lower demand for boxes and paper envelopes that the paper and paper product industry make. In May 2008, FedEx reported that U.S. packaging volume fell by 3.4%. <ref>[http://seekingalpha.com/article/82639-fedex-and-ups-indicators-of-a-weak-economy Seeking Alpha “FedEx and UPS: Indicators of a Weak Economy?” 25 June 2008]</ref>
 ==References==