Price increases in the paper industry are likely to relieve cost pressures on European paper producers, however this may only provide temporary relief to the sector, a new report from Moody’s has stated.
Moody’s made its assessment following the decision by Spanish paper giant Lecta to increase prices on its different paper grades last month by 7%.
Other paper producers have increased paper prices across a number of grades by up to 10% against the backdrop of rising input costs, especially for pulp.
Supporting Price Increases
‘We believe that there are fundamentals that support increases in paper prices during the first half of 2018,’ Moody’s said in a statement .
‘Pushing through price rises for most graphic paper grades has often proved difficult for producers in the past because the market in Europe has suffered from persistent oversupply and capacity reductions have failed to keep pace with ongoing demand erosion.’
Moody’s said that price rises are unlikely to significantly enhance the credit quality of rated paper producers such as Lecta, The Navigator Company, Sappi Limited, Stora Enso Oyj, Mondi Plc or UPM-Kymmene.
Foundation For Increases
Moody’s outlined three reasons why it believes paper producers will be successful in pushing through price increases; firstly, price increases ‘have been requested by a number of the key paper producers and most of the grades are already fairly consolidated, with the three to four largest players representing vast majority of the market’.
Secondly, an increase in pulp prices by as much as 20% in each of the key pulp grads during the past year was the biggest jump in seven years.
‘Even though we forecast that pulp prices will moderate somewhat during the course of 2018 as material new supply ramps up, we still think that on average pulp prices this year will be roughly around high 2017 levels, a factor that could support paper producers in their negotiations with their key customers’, said Moody’s. ‘Similarly, recycled paper prices were also inflated in 2017, although not to the same extent.’
Thirdly, Moody’s noted that while most paper grades continue to be oversupplied, ‘the industry has made substantial reductions to excess capacity over the last couple of years’.
The ratings agency said that it expects demand for most paper grades to decline at a rate of 3% a year on average across all grades in Europe over the next two to three years.
‘As such, a successful outcome to the pricing negotiations might temporarily ease some negative pressure on issuers that are weakly positioned in their rating categories, such as Lecta,’ it said.
‘However, it would be unlikely to move the needle significantly for strongly positioned issuers, such as Stora Enso or Sappi, where the key drivers of credit quality are the ability to further strengthen the degree of business diversification beyond graphic grade paper while maintaining a strong balance sheet.’
© 2018 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine.
