Sappi NA in price protection mode as CFS paper mill inventories shoot up by 43% in January

Demand for CFS paper has slowed as printing and writing paper buyers in North America continue to work through their inventories

Sappi CEO Steve Binnie said last week that prices for coated freesheet (CFS) printing and writing paper have not changed in the first two months of 2023, even though demand has slowed down.

“Our focus has been to protect our selling prices,” Binnie said on the company’s earnings call. “Costs are still high. … We’re striving to keep selling prices, and we’ve been able to do that and we haven’t seen declines yet.”

The CEO said Sappi has taken downtime because of lower demand and noted that “lower prices would not have attracted more demand, because there’s an inventory destocking underway.”

Improvements in global supply chains and transportation resulted in faster delivery times and a large amount of paper imports entered North America in the last quarter of 2022. This now has inflated the inventories of print customers. Sappi, the No. 1 CFS producer by capacity in North America, expects CFS paper demand to remain slow in the first part of this year because of the ongoing inventory bubble.

Demand ‘bounce back’ in 3Q?

“Some of our large customers are working through their high inventory levels (right now). We think there will be a bounce back (in demand) as we move into Q3,” Binnie said during the earnings call on Feb. 8. Sappi Europe CEO Marco Eikelenboom said during the call that paper distributors also have higher stocks.

You have the effect of paper merchants that have slightly bigger swings in their inventories. They’ll probably need a little more time to work out their overstocked positions.

Marco Eikelenboom, CEO, Sappi Europe

“On the specialty side, it is very much related to brand owners, who usually have less of this volatility. Label and flexible packaging have a much faster recovery, although it is not happening in the second quarter,” Eikelenboom said.

Sappi North America CEO Mike Haws noted that “converter finishing goods inventories are high, but they’re starting to come back in line, and it’s mainly sheets.” He explained that the majority of machines Sappi has in North America run web products.

Only three consistent CFS producers remain in the US: Sappi North America, Billerud, and ND Paper.

Billerud is the second largest CFS producer in North America. At the end of January, Billerud CEO Christoph Michalski also said on his company’s earnings call that he expected US graphic paper prices to remain stable in the first quarter of 2023, with “a little bit softer volume considering the economic environment in the US.”

North American CFS paper inventories are not only high at merchants and customers, according to contacts. Levels at mills were at 178,000 tons in January, or 43% higher than January 2022, according to the latest Pulp and Paper Products Council (PPPC) data. Also, the mill operating rate decreased to 77% of capacity in December from 92% in the same month 2022, according to the PPPC statistics.

Binnie said that CFS demand “was bigger than what everyone had anticipated” in the last three years, when a lot of graphic paper capacity left the market and supply was limited.

There will be a higher decline in (demand in) the coming year, because last year was so good.

Steve Binnie, CEO, Sappi

He anticipated a 10-15% decline in European CFS demand for 2023 and then a 5-6% global decline in 2024 and onwards. For North America, Fastmarkets’ Paper Trader reported and forecast that after a 13% expansion in 2022, CFS demand is expected to decline 6% in 2023, approximately double its 2011-18 average.

Somerset conversion update

Providing an update on Sappi North America’s conversion from CFS to solid bleached sulfate (SBS) boxboard at its Somerset mill in Maine, Binnie said project engineering has been completed and the equipment orders should be placed in the second quarter of this year. Sappi North America plans to convert its 260,000 tons/yr CFS paper machine No. 2 to 520,000 tons/yr of SBS. The startup is scheduled for the second half of 2025.

Sappi expects to invest $418 million in the conversion of the machine, of which $70 million will be spent in 2023, according to Binnie. Billerud has plans to convert possibly its PM Nos. 3 and 4 at its Escanaba, MI, mill from coated print paper to folding boxboard (FBB) between 2025 and 2029.

“There are essentially two large domestic producers left (in North America), and we both are planning to take out capacity, and that is going to contribute to keep the market tight,” Binnie cited.

Sappi also exports CFS from Europe into North America, Binnie said. The company has mills in Belgium, Austria, Germany, and The Netherlands. “We’re going to be looking for opportunities to sell more of our European volumes (after the Somerset conversion), and we’ll benefit from that. …We’ll look for customers that want our paper,” Binnie said.

North American CFS imports climbed 45.2% to 1.1 million tons in 2022 vs 2021, according to PPPC statistics.

“The inventory bubble … is a short-term issue. In the long term, there are a lot of opportunities for Europe,” Haws agreed. Binnie also said that Sappi is ramping up a modernization project on a CFS paper machine (No. 11) at its Gratkorn mill in Austria. The project includes a new broke handling system, which is being supplied by Andritz.

“The new broke handling will be part of the production line (for) PM 9 (that is) producing high-quality wet strength paper, such as label paper in the future,” Andritz said in a press release. The Gratkorn mill production is about 950,000 tonnes/yr double- and triple-coated papers, as well as one-side coated label papers, according to the Andritz release.

Graphic paper results

In fourth-quarter 2022, Sappi North America sold about 170,000 tons of graphic papers, which was 22% lower than in fourth-quarter 2021.

The company’s “production was adjusted to match softening demand,” the company said in its earnings release. Sappi added that a series of price increases in 2022 that “neutralized the impact of cost inflation and lower sales volumes in the graphic papers segment.”

This article was first published in PPI Pulp & Paper Week, the industry’s most trusted pulp and paper market news and prices for North America. Speak to our team to find out more and subscribe to our newsletters.

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