In this report
- Introduction: Pressure is building
- Key forces reshaping the landscape
- Table: Direct and indirect impacts on forest products markets
- Complexity of the European landscape
- Predicting durable change
- Spotlight: Ripple effects from the decline of graphic paper
- Conclusion: Look up and out
- Webinar series: Join industry experts at free virtual discussion panels
Pressure is building
Covid-19 is a shock to the system: to the economy, our well-being, and our collective way of life. The forest products industry has scrambled to meet immediate hyper-demand for masks and toilet paper, which created tension in stores and highlighted the relevance of the industry. In the weeks and months that followed, some mill managers started to curtail production, logistics and procurement teams struggled to move raw materials, and executives debated how to navigate uncertain conditions.
But this is not a story about Covid-19; this is a story about how dynamics revealed by Covid-19 will disrupt the forest products industry for years to come.
The pandemic has unleashed behavior shifts and supply disruptions that have the potential to permanently alter the landscape. The forest products industry will not snap back like an elastic band; instead it will adapt and morph towards a "next normal."
Decision-makers must keep up with the underlying forces and their unpredictable effects, and the price signals and other indicators that will guide the market forward.
This report, and its supporting webinar series, will explore market and economic indicators that may have been stable and predictable, but will be less so going forward. Specifically, we review 6 forces that have the collective power to reshape the future of forest products. Some of these may be obvious to you, but others have perhaps been hidden, brewing beneath a seemingly stable economy. The next 12 to 18 months are critical. Understanding these forces and their potential will put you and your business at an advantage.
Heightened hygiene and personal protection
The immediate response to Covid-19 created acute demand for masks, gowns, and other personal protective equipment (PPE), including cellulose-based nonwovens, tissue, and paper-based cleaning products, such as disinfecting wipes. There are signs that demand may remain high as governments, health care, business and consumers strive towards heightened standards of hygiene and personal protection.
Fluff pulp is used in many absorbent hygiene products (AHP). COVID-19 has sparked higher AHP demand in 2020, which has helped reverse a declining price trend. Higher prices for raw materials can directly affect consumer prices.
- Governments: National, regional and municipal governments will likely continue to strengthen sanitary regulations and standards. Other relevant government actions can include direct purchases of health and hygiene supplies, and restrictions on exporting some essential products.
- Health care sector: The influx of new patients, greater demand for care and testing, and repercussions for the general population will continue to strain the health care sector for an indefinite period of time.
- Businesses: As economies try to reopen there is immense pressure on restaurants, stores and offices to safeguard employees and customers from the virus. This places extra demand on hygiene and PPE as business activity picks up.
- Consumers: Demand has moved past the initial panic-driven spikes, but consumers appear to be maintaining larger inventories of tissue, cleaning products and masks. It is uncertain how the virus will evolve and how consumers will react to ongoing risks. Will masks and other items become weekly consumables for the grocery list, like dish soap and sponges? Or will PPE become like a household fire extinguisher, bought but stored until crisis sparks
The question is what will be the sustained normal for the next 2 years as institutions and consumers seek to protect themselves on a day-by-day basis.
Rise of remote work, school, and more
The digital office has been a long-term vision for businesses. But in reality, it never materialized as old habits and business needs overwhelmed digital opportunity. Until now. The paperless office could finally become a reality, as so many office workers have become “office-less."
The shift towards doing more at home – from work to school to dining to vacations – will have far-reaching implications:
- Graphic paper: With lower demand for commercial copying and printing paper, the already-declining graphic paper sector is falling to new lows. Many graphic paper mills will either shut down, convert machines to make other products, or sell off devalued assets. Also, the removal of waste office paper from the recovered paper markets will disrupt global fiber supply chains.
- Tissue: As away-from-home tissue and hygiene product demand declines, the industry must shift towards serving the expanding at-home products market. Products for at-home use are manufactured and packaged differently, are sold in smaller quantities, and generally require higher-quality fiber than away-from home products.
- Lumber and wood products: Although US housing starts plummeted 30% in April, there were bright spots for "DIY" wood products, as many people renovated their homes. Lumber prices rallied. If working and learning remotely sticks, then many people will likely relocate to cheaper and/or roomier areas. The median-sized single-family home uses about 3 times more lumber than the median multi-family building. A sustained jump in home starts and renovations will have a palpable impact on lumber demand and place pressure on supply.
Lumber demand and home starts are correlated. Could remote working trigger a burst in home starts to drive demand to pre-2008 highs?
Remote working has become normal: the question is whether homeowners continue renovations and whether the flexibility drives new construction away from cities.
WEBINAR: Lumber and wood products: forces driving the next normal 18 Aug @ 2PM GMT
Register now >
Expansion of e-Commerce
While e-Commerce has eaten into brick-and-mortar retail, it represented less than 20% of overall US retail spending in 2019. Then came Covid-19, and online spending shifted from a preference to a necessity for many households. Online shopping increased 100%-200% depending on the category. In response, retailers expanded their online models, jumped in with new models, or faced declining sales and even bankruptcy.
The recessionary decline in economic activity has suppressed overall demand for paper packaging. However, e-Commerce helps to prop up containerboard demand. E-Commerce is more “box intensive” than brick-and-mortar channels, using 7 times more corrugated material per US dollar spent than traditional storefront retail sales.
As economies recover, will consumers return to brick-and-mortar stores and restaurants at pre-pandemic levels? Will the stores they seek even be there?
A campaign for sustainability
Sustainability strategies to reduce emissions, target zero-waste and reduce plastic pollution were well underway before Covid-19. These trends all support a shift towards paper packaging. However, the crisis has triggered a surge in plastics for two reasons: perceived cleanliness and affordability.
To reduce the spread of germs, many reusable items have been replaced with single-use items. For example, many food retailers and local governments banned reusable shopping bags at grocery stores, and restaurants are using more single-use plates, containers, utensils and cups. Many of these items are made from plastic, which is typically cheaper than comparable paper products.
As the recession takes a toll, consumer willingness to pay a premium for eco-friendly paper-based packaging might falter. Despite this, businesses are continuing to invest in sustainability. Key players like Dunkin Donuts, PepsiCo and L’Oreal all announced paper-based packaging innovations in the midst of Covid-19.
Sustainability efforts, and ambitions to develop the circular economy, will regain momentum and drive up paper demand. The question is how sharp the future growth curve will be – especially as the industry seeks to align its output with short-term fluctuations in demand.
WEBINAR: Paper & packaging strategic buying: forces driving the next normal
Watch now >
Geo-political influences on global trade
Economic nationalism, populism, changes in leadership, and other political trends can all potentially destabilize the forest products supply chain.
For example, global “trade wars” have had profound implications for global recovered paper (RCP) and fiber prices. In 2016, China tightened restrictions on waste paper imports, which have since dropped 70%. In 2021, it will stop permitting waste paper imports all together. While the original intent was to reduce issues with low-quality unsorted RCP, the ban has become a point of contention with the US, which had been the largest exporter of waste paper to China.
China official announces ban in July 2017 at which domestic Chinese prices and domestic prices of other regions like US start to diverge.
These restrictions have had a direct impact on global fiber markets. Without imports of old corrugated containers (OCC) from the US, China's paper packaging producers must pay more for other sources of fiber. This increases costs for both packaging and finished products, which may then be passed to global consumers. Meanwhile, the US now has a glut of OCC, creating downward pressure on fiber prices for its domestic industry.
Other geo-political developments that can affect forest products include:
- Brexit's re-establishment of trade barriers between England and the EU
- US tariffs on Canadian lumber imports
- Brazil's aggressive forest clearance practices under President Jair Bolsonaro
- Covid-19 related restrictions, such as bans on the export of masks and PPE
Even when market conditions may seem stable, they are subject to politically-driven change. For instance, if the US elects a Democratic president, then the US/China "trade war" might end, and American support for leaders like Brazil's Bolsonaro and England's Conservatives could also weaken. Also, the world's leading governments could take a different approach to tackling the pandemic. Each of these geo-political scenarios demands attention going forward.
WEBINAR: Global pulp and paper: forces driving the next normal Watch now
As bad as recent economic trends have been, they could still have been worse. Governments have played an essential role in sustaining economic activity, even as the crisis response has caused a worldwide recession. These interventions have included:
- Fiscal stimulus like unemployment benefits, tax reductions and deferments, or direct payments to employers to prevent layoffs.
- Monetary stimulus like low interest rates, increased government debt, purchases of private sector assets, including equities, mortgages, and corporate debt
- Other market interventions like direct purchases of supplies, mandated closures of businesses, environmental regulations, and restrictions on imports/exports.
For example, interventions aimed at consumers contributed to the US wood products market's surprising strength in the first half of 2020. Building construction, especially for housing, is the primary driver of demand for lumber, plywood and related materials. Conventional wisdom would be that housing demand should plummet during a recession, and lumber demand will drop as well. Why hasn't this happened?
As shown by this chart, many people actually have more cash in their pockets now than they did before the pandemic. The gray line is total personal income from ordinary employment; the purple line is that income plus income transfers (stimulus) to individuals from governments. Without this support for consumer income and spending, the housing market – and all the businesses that depend on it – would be at risk of a 2008-level collapse.
Governments can spend at a larger scale than any other economic actor. But when will emergency economic interventions expire? When they do, this artificial stability will dissolve, and the consequences could be devastating for the industry - and the economy as a whole.
Direct and indirect impacts on forest product markets
We’ve summarized the major forces and their impact on key sectors in the table below. Unfortunately, each force does not work in isolation. The various forces can push and pull on the supply chain in unexpected ways, directly affecting one market segment while indirectly affecting others.
Complexity of the European landscape
Europe is facing additional nation-specific and EU-wide factors that complicate the outlook for its recovery. These include:
- Tensions among member states, and between those states and the EU government in Brussels
- Travel and potential trade restrictions with non-EU countries, such as the US and China
- Post-Brexit repercussions for the pulp and paper sector, and its customers
- The vulnerability of important small businesses, such as printers, to the Covid-19 recession
- Crisis-driven decline in RCP availability (and increased RCP prices) has hurt the profitability of recycled board producers
WEBINAR: European Pulp and Paper: forces driving the next normal
Watch now >
Predicting durable change
The stakes are always high in the face of uncertainty – but the risk is highest for the unprepared. Developing a reliable, evidence-driven outlook can protect you from being blindsided by change. Typically, decision-makers consider indicators that directly impact their markets today, such as price indices and expected supply and demand levels. But in uncertain times, they should also look at indicators that reveal the macro-level forces that are shaping the future of the forest products industry.
The following is a simple way to start building an outlook that considers these forces, and helps strengthen your decision-making resilience in the face of durable change.
What signals can be observed?
Some indicators tell you what's happening; others can indicate what is likely to happen. By balancing leading and lagging indicators, you'll gain a better understanding of whether an imbalance is temporary, or likely to persist.
What level of transparency exists?
Some markets are easier to evaluate than others. Reliable signals for one market may be misleading in another. Some markets may have very few signals to depend on at all.
What signals can be observed in adjacent markets?
What could happen in your market space, in response to changes in a seemingly unrelated market? As shown in the examples above, changes to forest products markets are often driven by disruptions in other supply chains.
How to recognize durable change?
What combination of signals (both quantitative and qualitative) meets the threshold to warrant strategic action? What combination signals structural change? There are two key principles to consider, in determining if an imbalance will lead to a lasting impact:
- How imbalanced is the market compared to historical trends?
- How persistent or durable is that imbalance?
Economics and history teaches us to take a conservative approach to structural changes. However, disruptions do not need to lead to structural change to have a lasting impact on one’s business.
This matrix offers a means to evaluate if an imbalance could develop into a durable change. Understanding where markets sit and how they might be moving between quadrants can improve your strategic decision-making.
The bottom left green quadrant represents markets that are essentially stable. Supply and demand are working in tandem and there is little volatility.
The top left yellow quadrant represents markets experiencing relatively small imbalances that are corrected or adapted to easily and/or quickly. These small changes have little consequence in isolation, but many small changes can gradually transform a market.
The bottom right yellow quadrant represents markets experiencing relatively large imbalances that can be observed across multiple indicators. These large changes can have near-term consequences, but markets may return to normal levels.
The top right red quadrant represents markets that are headed towards durable change. Here you are observing strong and strengthening evidence that has persisted for a longer period of time. You have gathered multiple secondary signals inside your immediate market that may also have corroborating evidence across other grades and regions. Your evidence is both qualitative and quantitative and is it incorporates macro-level forces in related markets.
SPOTLIGHT: Ripple effects of the decline of graphic paper
End-use products like office paper and magazines have been on a gradual decline for decades. Some producers of graphic paper have shut down, while others are converting their machines to produce other grades or selling off devalued assets.
The drastic shift to remote work during Covid-19 has accelerated graphic paper’s downward trajectory, and there are signs the sector may be approaching a new permanent low. Prices have plummeted, mills are taking downtime or shutting down entirely, and behavioral and societal trends have aligned and strengthened. In the context of the matrix, graphic paper moved from the top left yellow quadrant into the top left red one. Durable change is afoot.
This decline is not entirely a surprise. However, many are unaware of the ramifications it could have throughout the forest products ecosystem. Over the next two years, the interdependence of seemingly unrelated markets will be brought to the surface and will play out in unusual ways.
If macro-forces collide, we might be faced with a number of imbalances that the supply chain is not prepared for:
Shrinking woodfiber and pulp demand, forcing suppliers to seek new customers Graphic paper mills consume nearly 30% of market pulp production, plus significant volumes of woodchips from sawmills and other sources, including recovered waste paper. As mills cut back or close, suppliers of these materials will scramble for new customers in other forest products segments.
Constrained recovered paper supply
The industry is expected to remove nearly 3 million tons of paper production from North American markets by the end of 2021. A significant portion of office paper is typically recovered and used to make new forest products – especially at-home bathroom tissue. This means that a key fiber source will decline just as demand is growing for this seemingly unrelated product category.
Increased competition in packaging and specialty grades
Some mills will convert machines to containerboard, boxboard, and specialty paper. This will increase competition at the same time demand for those products is in decline, which could lead to oversupply.
Look up and out
At one level, the dynamics affecting the forest products markets are well-known and have been long anticipated by many. The inevitable but slow push towards sustainability, the decline of graphic paper, and societal shifts towards buying, working and learning online all are unsurprising. At another level, the crisis era's unforeseen demand for hygiene and PPE, the potential consequences from graphic paper's sudden demand plunge, and massive government support for the economy are all completely new terrain.
The question is not if the forest products ecosystem will change. The question is how and when these macro-level forces exert enough collective pressure to establish the next normal.
Predicting the timing, severity, and repercussions of change is hard. Decision-making is even harder. And the risks are high if you get it wrong.
Competitive advantage does not go to those who maintain a narrow view of the markets they depend on. The winners will be those who look up and out – those who actively observe seemingly unrelated markets and dynamics, and draw relevant lessons from that perspective. Understanding how changing conditions impact the broader forest products ecosystem will afford you the footing and stable ground you need to emerge on top – no matter how complex the landscape.