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COVID-19 to permanently drop demand for coated P&W papers?

Edited by Mark A. Spaulding  
​Electronic media as a means of communication has contributed to the long-term decline in demand for coated printing and writing (P&W) papers. Now, the COVID-19 pandemic is accelerating this trend, causing a permanent drop in demand, and thus putting additional pressure on near-term P&W papers’ selling prices and forcing industry capacity closures/conversions to other grades and restructurings, says a new report by Chicago-based investment firm Mesirow Financial. 
“We are already seeing developments in industry structure that will help stabilize the significant supply/demand imbalance that has been created,” says John Chrysikopoulos, MD-Investment Banking. 
Demand for coated mechanical and coated free-sheet papers have fallen 46% and 42% respectively, YOY in the month of May (see top bar chart). Similarly, these two coated-paper types have seen demand decline 10.9% and 7.8% respectively, during Q1 2020 compared to Q1 last year (see bottom bar chart).
The COVID-19-related loss of demand should result in valuation declines of P&W companies to reflect the reduced levels of profitability going forward, Mesirow says. For example, coated-paper prices have recently dropped to levels not seen since June 2018. 
Although this loss of demand is permanent, developments have been identified that will stabilize the industry supply/demand balance, Mesirow says.

Key trends and their impacts include:

  • Capacity closures = Costs associated with such closures but long-term savings due to reduced expenses. In one example, Verso Corp. will indefinitely stop production at its paper mills in Wisconsin Rapids (WI) and Duluth (MN) to offset market decline due to the COVID-19 pandemic, laying off more than 1,000 workers. The company says that its North American P&W paper demand fell by 38% YOY in April. 
  • Conversions to other paper grades, typically kraft packaging/containerboard = Significant capital-expenditure requirements.
  • Consolidation among P&W papermakers to better manage capacity = Companies may be “doubling-down” amid declining end markets.
  • Diversifying to other categories with positive demand trends = availability and scale of potential acquisitions, which may be more expensive than the purchaser’s valuation.
  • Divestitures and restructurings = A last resort in distressed situations?

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