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11 Aug 2014

Paper demand stacks up

Jonathan Brandt

by Jonathan Brandt

Senior Equity Research Analyst, HSBC

Paper demand stacks up

The increase in demand for paper has been led by China

Paper consumption is rising despite the advance of digital technology and growth is set to accelerate as demand in Asia and emerging nations increases. If you live in a country which has adopted the “paperless office” and where e-readers proliferate, the fact that paper consumption is growing might come as a surprise.

New technology has led to a drop in consumption of newsprint in the United States and Western Europe. But less than half of the wood pulp produced in 2013 was made into printing, writing and newsprint paper. The rest was made into other products including cardboard packaging, toilet tissue and paper towels, and demand for these products is rising in emerging markets.

China has led the increase in demand. Ten years ago, China accounted for about 15 per cent of global paper demand. Today, it accounts for around 25 per cent, making it the largest consumer of paper in the world ahead of the US and Western Europe at 18 and 17 per cent respectively.

Worldwide paper use has grown an average 1.7 per cent each year over the past decade

Despite this, China’s paper use per person is still only a third of that in the US (74kg against 228kg). As China and other emerging markets continue to grow, with an estimated 650 million people set to join Asia’s urban population in the next 20 years, we think consumption will increase further. Urbanisation tends to be associated with increasing demand for hygiene and consumer products containing paper, such as toilet tissue, hand towels and cleaning wipes.

Worldwide paper use has grown an average 1.7 per cent each year over the past decade. We expect consumption to grow at an annual rate of 2.4 per cent over the next five years, driven by emerging market demand.

Recycled paper accounts for around 55 to 60 per cent of global production. However, paper can be recycled only a handful of times before the fibres break down and become unusable. Some countries mandate the use of non-recycled paper in certain types of packaging, for example, when it comes into contact with food. This means that increasing demand for paper also drives up demand for wood pulp, the main raw ingredient for new paper.

The US is the world’s largest producer of wood pulp, followed by China and Canada. Global patterns of production are changing, however. Improved cultivation techniques have significantly increased the potential yield per hectare of some species of tree. Eucalyptus, originally from Australia, has become popular, and grows well in Latin America – a region that is increasingly important in pulp production.

Brazil, for example, has more than doubled pulp production in the last 20 years, overtaking countries such as Sweden, Finland and Russia. Eucalyptus can grow all year round in Brazil and reach maturity within six to seven years. Trees in North America or Scandinavia, where growth stops during winter, can take 25 years to be ready for harvest. Brazil currently produces 40 per cent of the hardwood pulp sold worldwide. We think this could increase to 60 per cent over the next 10 years.

Though China is a significant producer of pulp, domestic demand continues to outstrip domestic supply. Around 30 per cent of Brazil’s pulp exports go to China. With China’s demand for paper likely to continue to rise, Brazil’s pulp exports to China are set to grow in the coming years. Paper is another sector demonstrating the south-south trade flows that are increasingly important to the global economy.