Oliver Lansdell, Director, Hawkins Wright
Trends in a country’s GDP are popularly accepted as an indicator of growth in paper and board demand. More accurately, it is that component of GDP which comprises Private Consumption (Consumer Expenditure) which is the main driver of P&B demand*.
The chart below demonstrates this relationship in 40 countries.
Figure 1: Relationship between private consumption and P&B consumption
Source: Hawkins Wright
Note: In calculating China’s ratio we have used our estimates of New China paper and board, and split out that which is attributable to China’s export sector as this is disproportionately large relative to other countries.
Generally, it shows that every $US 100,000 of private consumption in an economy stimulates about one tonne of paper and board demand. The ratio varies according to structure of the different economies. For example, a country with a strong export manufacturing base may consume more board than one whose income is derived from heavy industry, services, or agriculture.
Since the start of the great recession in 2007, the intensity of paper demand has fallen significantly. For example, in 2005 the United States generated one tonne of paper consumption from expenditure of $98,000. In 2012, more than $150,000 was needed.
The principal cause of this decline is the substitution of electronic media for graphic papers. However, the relocation of manufacturing activity to lower cost countries has also negatively impacted demand for packaging boards in many Western countries.
Figure 2: Private consumption/P&B consumption as an index
Source: Hawkins Wright
Note: In calculating China’s ratio we have used our estimates of New China paper and board, and split out that which is attributable to China’s export sector as this is disproportionately large relative to other countries.
In the eight countries shown in this graph, the average spend to create a tonne of paper demand has risen from $91,000 in 2005 to $130,000 in 2012 i.e. by 43%.
By measuring paper demand in terms of private consumption, we can start to separate the impact from the economic cycle activity from that of substitution and changing consumer behaviour. However, there are still some flaws to the model. For example, we measure paper demand as “apparent consumption” (i.e. production + imports – exports) and this approach does not take into account inventory movements. This explains why the ratio fell most dramatically in 2008 and 2009, but improved again in 2010.
Nevertheless, the trend is fairly clear for all countries to a greater or lesser degree, and we would argue that this kind of approach is more useful when attempting to forecast future demand, than say, using per capita measures.
The spectre of austerity which haunts Europe and the huge indebtedness of the USA and Japan do not augur well for growth in private spending during the next decade. The proliferation of new media devices suggests to us that the intensity will continue to fall, although the speed of future substitution is obviously debatable.
Private consumption in China and other emerging economies continues to grow rapidly. However, China’s intensity of paper demand appears similar to that of the West, and it is questionable whether spending can accelerate sufficiently to offset the impact from substitution.
Oliver.Lansdell@hawkinswright.com
HAWKINS WRIGHT LTD
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*Export manufacturing is another important driver of paper and board demand. However, in the majority of cases net exports (or imports) are a relatively small component of GDP. The other components of GDP are gross investment and government spending but these contribute little to paper consumption directly
