Brazilian producers shift capacity from graphic to packaging paper grades

Pandemic accelerates the digital evolution and the decline of printing and writing demand but packaging paper oversupply could be in the future

Decline in printing and writing paper

Graphic paper production capacity cuts have been a reality across the globe and are also materializing in Latin America. The Covid-19 pandemic accelerated the transition from paper to digital solutions, even in a region where access to technology is more restricted than in developed countries.

In lower printing and writing (P/W) consumption across the board, the pandemic fostered trends that boosted packaging paper demand, including higher demand for electronic commerce and transition from plastic to renewable packaging.

Brazilian producers are adapting to a global shift to the digital evolution

In Brazil, P/W producers adapted to the moment and invested to shift production to packaging paper grades, thus reducing supply of newsprint and other grades - including coated and uncoated woodfree (CWF, UWF) papers.

Non-integrated paper producers that depend on purchasing market pulp and have tighter margins were among the first to transition to packaging. Companies such as Bignardi, Santa Maria and BO Paper are now producing containerboard.

But large integrated producers, including Sylvamo and Suzano, also caught the wave. Both have reportedly been offering adapted white paper grades, such as linerboard and white top liner (WTL), since mid-2021.

Fastmarkets’ sources estimated sales of white paper converted to containerboard currently vary between 10,000 tonnes and 17,000 tonnes a month.

A buyer source said:

I am getting offers of significant volumes of white linerboard coming from printing and writing producers.

Producers are investing in new packaging innovation

Suzano recently said it was investing in new products, such as flexible packaging. The company reported sales of such products related to packaging totaled 30,000 tonnes in 2021, approximately 5% of the company’s total paper volumes in the domestic market. The number includes flexible packaging but also cupstock and paper straws.

Production of cupstock occurs at the company’s Suzano mill, while other packaging papers are being produced mainly at the Limeira and Rio Verde mills, the company told Fastmarkets.

Chilean producer BO Paper also moved to packaging. The company is currently able to produce packaging grades in both of its mills in Brazil. Formerly focused on newsprint, the company’s Jaguariaiva Pisa mill was producing approximately 4,500 tonnes per month of both linerboard and medium prior to an unplanned maintenance stoppage in December, Fastmarkets has learned. The mill resumed activities by late January.

The company is also shifting the production of its Arapoti mill from coated mechanical publishing papers to labels and lightweight packaging grades.

Non-integrated UWF producer Santa Maria also started moving to packaging grades during 2021, market sources said. Market participants said the company has been regularly offering linerboard.

Machine conversions will add capacity to the paper packaging market

Also a non-integrated producer, Bignardi converted its two paper machines from P/W to containerboard. Before the conversion, Bignardi’s PM No1 was able to produce 1,300 tonnes per month of colored P/W paper and No2 could produce 3,600 tonnes per month of offset paper, including lightweight UWF for textbooks.

In containerboard, the company cannot specify its precise capacity due to the extensive nature of its portfolio with different basis weights.

Executives believe the move toward packaging grades will continue even though there might be some flexibility for producers to enjoy good short-term trends for printing and writing.

“Some of the uncoated woodfree producers might be able to shift back a small part of their capacity according to demand,” one source said. “But the reduction of capacity in P/W is a strategy that is not going to change.”

Uncoated woodfree paper (UWF) was used in place of lacking OCC

Because of the impact of Covid-19 on several supply chains, the lack of recycled containerboard at the beginning of the previous year led graphic paper mills to start selling UWF to box converters that would apply it as a replacement for medium.

Market participants estimated that some 130,000-150,000 tonnes of UWF were sold in 2021 to be used in corrugated boxes. The amount is equivalent to half the growth seen in total apparent consumption of printing and writing papers in Brazil, according to data from the Brazilian Tree Industry Association (Ibá).

According to Ibá’s latest statistics, P/W demand in Brazil totaled 1.5 million tonnes in 2021, an increase of 242,000 tonnes from the same period the previous year.

Slowing demand could lead to oversupply

Market players are now questioning the impact of the additional supply of paper for packaging.

After reaching record highs at the start of 2021, Brazilian corrugated box shipments have slowed since the second half of the year. Unoptimistic views on overall economic performance for 2022 are now driving concerns on whether the Brazilian domestic containerboard market could soon face oversupply.

Some of the additional supply of containerboard seen in 2021 could be taken off the market, though. Aside from local P/W producers entering the packaging market, Brazil saw an increase in imports of packaging paper in 2021. According to Ibá, imports were 14.3% higher year on year, at 112,000 tonnes. In 2019, prior to the Covid-19 pandemic, imports of packaging paper amounted to only 52,000 tonnes.

Paper distributors and traders that were not used to operating in the packaging market took the chance to import tonnages while demand was stronger. Now, these players are seeing opportunities diminish.

One new market participant said:

It is becoming increasingly difficult to make money importing packaging.

A combination of higher imports of old corrugated containers (OCC) and containerboard in 2021 along with increased production by several local producers led to a rebalancing in the market, and recycled containerboard prices are moving down.

“We are not sure if due to current low prices, P/W producers will continue in this market. They are part of the volumes expected for packaging now, and if they [all of a] sudden leave the market. I believe supply can get tight again and prices, consecutively, move up,” another source said.

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