Raw Material

Why invest in pulp in a digital world?

In 15 years’ time we will need 150 million tonnes more paper in the world.

Magnus Björkman, President, Södra Cell International, explained the rationale behind the company’s announcement that it will invest heavily in softwood pulp expansion at its Värö mill.

In an increasingly digital world, why would anyone think of investing in paper pulp? There have been proclamations of the paperless office since the 1990s and while that scenario has yet to materialise fully, there is no doubt that demand for graphic papers in the mature markets is in long-term decline.

However, at Södra we still see a bright future for pulp without the need for reinvention; in doing what we know and do – softwood pulp. The way we communicate and distribute information is changing fast, but one of Södra’s main reasons for optimism when it comes to pulp is the prediction that in 15 years’ time we will need 150 million tonnes more paper in the world, despite the invasion of digital media. That means 36 new world class pulp mills, some 200 million m3 of pulpwood (equivalent to Europe’s total consumption of pulpwood today) and 120 million tonnes more recycled paper. Where will this fibre come from?

Second, the global consumption of fibres for textiles has been growing at 2-3%/yr in recent years. With a population growth of two billion, projected demand for textile fibre is 240 million tonnes by 2050. In 1960, three billion people consumed an average of 5 kg/textiles per year or 15 million tonnes. In 2012, seven billion people consumed 12 kg per capita, or 84 million tonnes of fibres.

Cotton farming is limited as it is a drain on increasingly precious resources, and this be an increasingly important factor as the global population increases. Synthetic fibres have largely taken the place of cotton but these are fossil-fuel based. If cellulose were to replace synthetics, this would represent all of the world’s current woodpulp consumption. So again, where will the fibre to supply these new markets come from?

Mega trends point to growth

The mega trends, including those driving the textile industry, are of great interest. The number of consumers in the world is increasing and more are moving from poor to lower-middle or middle class. That represents significant changes in consumer behaviour. Increased buying power from two billion new citizens will result in higher paper demand. The potential in the Bric countries with their three billion inhabitants is obvious. They may never reach western consumption levels of paper, but they will grow.

In 2014, 400 million tonnes of paper was equal to 57 kg per capita. In 2044, 57 kg per capita and nine billion people equates to 530 million tonnes of paper. Consumption patterns will change and personal care and packaging will do well, with growth rates of 5-6%/yr in some areas. At the same time, the quality of recycled fibre is under threat. Fewer people are reading printed newspapers, so less newsprint is ending up in the recycling bin. Cash-strapped paper producers use an increasing number of fillers in their mix to keep their costs down but that is not great for secondary fibre yield. So virgin pulp is needed in the mix and the growth grades, namely tissue and packaging, require good strength properties from their pulp. High-value speciality papers are also growing and these too require optimum performance from their fibres – which means an influx of premium-quality virgin fibre is needed.

Post-2008, global economic growth has been flat, but it will recover. Current global demand growth for softwood pulp is 1.8% per year and this means a new pulp mill should be built every two years. The big question is where the fibres will come from. At the same time, the pressure on wood for uses in textiles and bio-energy is still growing.

Södra’s perspective and new strategy

From Södra’s local perspective, Sweden has doubled its forest reserves over the last century. At the same time, local wood flows are changing as printing/writing mills close, releasing wood for other purposes. Södra also closed its Norwegian pulp mills which has had an impact on wood flows into the north of Sweden.

To move forward, Södra needs a secure supply of wood, which it has thanks to its unique membership structure: A secure fibre supply is a key advantage for Södra because the company is owned by 52,000 forest owners, who together are the largest private forest owner in southern Sweden.

So Södra has total control of the wood coming into its mills – every second tree in southern Sweden is a Södra tree – and sustainability is second nature to the company. Its mills are already bio-refineries with an array of by-products from bioenergy to district heating. As such the mills play a vital role in their local communities.

Södra’s new strategy, finalised in 2013, includes a commitment to growth, headed up by a $610-million investment at its Värö mill as well as smaller but none the less significant investments in its other two facilities, Mörrum and Mönsterås. As a dedicated, non-integrated pulp producer, Södra’s aim is to focus on growing its softwood pulp capacity for its customers.

Värö will have best-available technology and produce premium-quality pulp with outstanding environmental credentials. It will offer TCF and ECF grades certified to both Pefc and Fsc. Fixed costs will be highly competitive with only 20 additional people needed to run the mill. In short, it will be a highly-competitive mill reinforcing the Södra brand and strengthening the company’s product portfolio in a growing market, supported by a new sales office in Munich.

Stability, reliability and consistency are key requirements for customers and hence for future profitability. An expanded Värö will help deliver exactly that.

Meeting customers’ increasing demand for pulp will secure an outlet for pulpwood in Sweden. Several previous Södra CEOs searched the globe for pulp mill opportunities from South Africa to Russia, but they came to the same conclusion – the company’s future lies in investing much closer to home, on its members’ doorsteps.

Since Södra announced the investment at Värö to increase capacity from 425,000 tpy to 700,000 tpy, there have been several new expansion announcements from competitors. At the end of 2014, Risi figures estimated total global market pulp capacity at 63.9 million tonnes, up by 1.8% from 2013, equal to a 1.1 million-tonne increase. Global bleached softwood capacity stayed virtually flat last year, but bleached hardwood supply increased by 3.7%; equal, says RISI, to an extra 1.1 million tonnes. Its baseline forecast shows world market pulp supply increasing by 8.3 million tonnes during the forecast period (2014-2018), at an average annual growth rate of 2.5% per year. Softwood capacity is forecast to grow by 2.1 million tonnes, while hardwood capacity is expected to surge by 6.3 million tonnes.

This is no surprise in an industry which uses the same consultants and analysts – a golden opportunity in a free market is seldom a lone discovery. But Södra will be focusing on what cannot be copied – a unique structure and forest ownership, with resources in its backyard over which it has extremely good control.