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Pulp, paper and packaging in the next decade

Pulp, paper and packaging in the next decade

If you thought the paper industry was going to disappear, think again. Graphic papers are being squeezed, but the industry overall has major changes in store and exciting prospects for new growth

From what you read in the press and hear on the street, you might be excused for believing the paper and forest-products industry is disappearing fast in the wake of digitization. The year 2015 saw worldwide demand for graphic paper decline for the first time ever.

But the paper and forest-products industry as a whole is growing. Packaging is growing all over the world, along with tissue papers, and pulp for hygiene products. The paper and forest-products industry is not disappearing—far from it. But it is changing, morphing, and developing.

In this article we outline the changes happening across the industry

Changing industry structure

The structure of the industry landscape is changing. At the aggregate level, the world’s largest paper and forest-products companies have not grown much, if at all, and several of them have reduced in size. What they have done is focus their efforts on fewer segments. In some segments, such as North American containerboard and coated fine paper, ownership concentration, as defined by traditional approaches to drawing segment boundaries, may be reaching levels where it would be difficult for companies to find further acquisition opportunities that could be approved by competition authorities.

Changing market segments

The graphic-paper market will continue to face declining demand worldwide, and our research has yet to find credible arguments for a specific floor for future demand. But this decline should be balanced by the increase in demand for packaging—industrial as well as consumer—and tissue products. The one hazy spot in demand might be concerns over how fast it will grow in China. Given China’s weight in the global paper and board market, even relatively modest slowdowns can have significant impact.

Challenges for the next decade

There are three broad themes that paper and forest-products CEOs will have to address through 2020 and beyond:

  1. Managing short-to-medium-term ‘grade turbulence’

    The past couple of years have seen increased instability in some forest-products segments. The negative impact of digital communications on graphic paper has led many companies to steer away from the segment and into higher-growth areas, either through conversion of machines or through redirection of investment funds.

    A case in point is virgin-fiber cartonboard. Several producers in Europe have converted machines away from graphic paper and into this segment, creating further oversupply in Europe, and leading producers to redouble their efforts to sell to export markets.

    This development is likely to persist for several years until markets again find more of an equilibrium, and it poses challenging questions for companies. How do I protect home-market volumes? How do I protect my export volumes?

    For CEOs looking to move into a new market segment, it will be equally important to make the right assessment of which segments to enter as they shift their footing. Where will I be the most competitive?

  2. Finding the next level of cost optimization

    Even though we see new ways of creating value in the forest-products industry, low cost is, and will remain, a critical factor for high financial performance.

    Operating costs for paper and board production are an area where companies need to get a tighter grip. Despite the fact that this area receives continual focus from management, our experience suggests there is still significant potential for cost reduction by using conventional approaches to work smarter and reduce waste in the production chain. This is particularly the case in areas that are less the focus of management attention, such as converting.

    The paper and forest-products industry has much to gain from embracing digital manufacturing: according to our estimates, this could reduce the total cost base of a producer by as much as 15 percent. New applications, such as forestry monitoring using drones or remote mill automation, present tremendous opportunities for increased efficiency and cost reductions.

  3. Finding value-creating growth roles for forest products

    For any paper-company CEO who looks out ten years, the really different challenges will not be around cost containment. Global trends are moving the industry into a new landscape, where the challenges and opportunities for finding value-creating growth roles for forest products are changing radically. Here are some interesting examples of how these and other trends could play out.

    • Staying relevant (and increasing relevancy) in a fast-changing packaging world.

      The packaging market is multifaceted and continuously morphing. Packaging CEOs will have to address a number of choices and trade-offs as they seek the appropriate strategic posture. To stay relevant, many companies in packaging are trying to move closer to the brand owner or end user.

    • Finding the right path in next-generation bioproducts.

      Wood is a biomaterial with exciting properties, from the log on down to the fibers, micro- and nano-fibers, and sugar molec ules. A healthy niche industry making bioproducts has existed for many years alongside large-volume pulp, paper, and board products.

      We believe wood-based products will find new ways to enlarge their footprint in a more sustainable global economy. But the challenges are legion, particularly for finding cost-effective production methods that can withstand competition not only from oil-based materials but also from other biomaterials.

    • Finding growth in adjacent areas.

      Over the past decade or two we have seen the larger forest-products companies performing a focus adjustment. Most companies have moved from being fairly broad conglomerates present in various forest-products segments to focusing on a few core businesses.

      Finding new value-creating growth for forest products will also put the spotlight on a number of functional executive topics. We believe that the most importat will be innovation, talent management and commercial excellence.

We believe the paper and forest-products industry is moving into an interesting decade, one that will see nothing less than a transformation of large parts of the industry.

Source: McKinsey
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