It’s Paper… But Not As We Know It

Although protected by the nature of its business, the specialty sector needs to keep its edge by looking at new processes

THE SPECIALTY PAPERS secTOR is a rather diverse group of materials that resembles many packaging grades sold indirectly to the end user/consumer. They are unique in being performance rather than commodity products, where the selling price they command is justified by their efficiency in end use.

Some specialties are well-established lines where high value:low volume ratios are guaranteed by limited capacity, high raw material and processing costs and demanding end uses. Examples include teabag grades, currency paper and furniture decals. Other specialties are former commodity products where demand has declined to the point where they are no longer of interest to bulk producers, but there is sufficient demand to enable small specialty producers to make a living. Examples include dielectric paper, thin printing paper, glassine and some MG (machine-glazed grades). Today’s commonplace is tomorrow’s specialty.

A third category of specialties includes niche products within larger market segments, especially coated printing papers. Examples include coated coverstock, CIS woodfree board (e.g. for greetings cards) and graphic art board.

DEMAND

Given the great diversity of these products, demand figures will be highly specific to a particular end-use. Therefore some specialties are vulnerable to the whims of consumer fashion, especially those selling into the decorative products sector. Others are vulnerable to changes in technology, which can mean some end uses become obsolete. Environmental or health scares may also destroy markets if companies cannot sustain the cost of major product or process changes in a short timescale.

However, these effects, while deterring large-scale producers, can create openings for small mills that have the skills and flexibility to handle awkward raw materials, to contain environmental problems and to deal with small lots: the production of highly dyed colored grades is a case in point.

The diversity of products is reflected in the array of manufacturers operating in this sector. There are a number of key large players operating in this field, often running these operations as a specialized division, e.g. International Paper. In addition there are a large number of small or independent companies that have created and are serving niche markets.

THE PRODUCT

Products falling into the specialty class include: Food contact materials – teabags, coffee filters, sausage skins; laboratory products – filter papers, bench protectors, chromatographic products, diagnostic papers; decorative materials – high quality wallcoverings, printed foils for laminates, watercolor and fine art papers, ceramic decals; specialty imaging materials – drawing vellum, thermal sensitive papers; security and banknote papers; filtration products – water, oil, air; etc; protective and insulation materials – electrical insulation and capacitor papers.

These products can be characterized by having some or all of the following attributes:

* High development costs

* Knowledge rich product

* High value:volume ratio – justifies shipments over long distances; energy costs relatively small part of overall costs

* Made on small capacity paper machines or forming units

* Formed at low consistencies

* Have a high content of thermoplastic polymers as binders

* Use thermosetting resins for water resistance

* Incorporate synthetic and other non-wood based fibers.

The strength of this segment of the industry lies in the intellectual property that is allied to the product and means of production. The corresponding weakness is one of secrecy and insularity; given the amount invested in the product, there is an understandable reluctance to tamper with the ‘winning formula’.

Companies operating in this sector usually have a deep and effective knowledge of the particular market and its requirements. However, the corresponding weakness is often an over reliance on one specialized market area, which is itself vulnerable to technological change. Frequently, the specialized nature of the process and the internal culture of the producer make it difficult to diversify into radically different areas. However, there is the possibility of moving laterally within a market to sell non-paper items, either manufactured within the company or bought in from external suppliers. An example would be a move from medical and laboratory papers into other products for those markets.

The high value of the product justifies investing in expensive raw materials and specialized plants. The production equipment may itself embody unique features developed and incorporated over the years by the mill. The corollary to this is that high product value can deter beneficial innovations to secure process efficiency.

OPPORTUNITIES AND THREATS

As mentioned, specially producers are often well placed to pick up markets discarded by the large producers as uneconomic. In this case the scarcity of the product coupled with the unique nature of surviving applications gives a good price. The countervailing situation is that what may begin as a specialty market product grows in line with an expanding market to become a commodity one, for example, coated inkjet papers.

Specialty producers with sufficient flexibility and a particular expertise, such as those making papers with polymeric additives or with mineral fibers, can transfer this technology to diverse markets. The ever-present threat is that new materials developed outside the paper industry may render their expertise obsolete.

A particular threat to those specialty mills operating as a division within a large company is that they cannot compete with the normal investment criteria applied to commodity production, namely the increase in output per tonne per unit of investment. A more relevant criterion for investment in a speciality mill would be the increase in product revenue per unit of investment, a rationale generally found only in the nonwoven sector.

The nature of the specialty market gives real opportunities to develop expertise – intellectual property – but in a global market this may run foul of patented intellectual property developed by another company and not necessarily a direct competitor. On the other hand, the technology involved in specialty grades provides a considerable barrier against ‘me too-ism’ and market entry by non- specialty producers.

THE FUTURE

The high intellectual property content of many specialties provides some barrier to competition from the developing economies; the problem will be to maintain that edge with new materials and processes. It is possible that another similar product made by a quite different process could supersede an existing product with defined performance characteristics: for example, an air filter where the fibers are bound by electron beam curing rather than by a thermal cured polymer. Competition may come from innovation within the specialty sector or by a company outside the sector seeking an additional return on its technology.

Specialty producers in Europe could face a problem from the EU’s mooted Registration, Authorization and Control (REACH) regulations on the supply of low-volume specialty chemicals. Many of these materials are surface-effect grades used in small quantities, e.g. biocides, coating additives and dyestuffs. Some of these materials may be discontinued as the volume demand and revenue derived will not justify the costs of testing and registration by the chemical supplier. This will then force the re-formulation of the specialty paper product.

An opportunity is offered by the development of chemicals and polymers from renewable resources. These may be incorporated into specialty grades to provide ‘green credentials’ or unique properties. Examples include microbial fermentation products, such as poly lactate and plant polymers, e.g. proteins and highly modified starch polymers.

From the investment perspective the viability of a specialty producer can be defined by:

* Technology and market changes in the industry into which its sells

* A company’s ability to adapt its technology portfolio to alternative products

* Marketing skills to identify those products

* Breadth of sales network and customer portfolio

* Environmental sensitivity of raw materials and processes.

The key to survival will be a change in mentality from: ‘How-do- we-ffll-the-machines?’ to a market-led strategy of ‘how-do-we- identify-market-gaps-and-opportunities-to-capitalize-on-our- existing-skills-and-knowledge?’

Nigel Jopson and Graham Moore are consultants with Pira International. For further information please contactthe authors on +44 (O) 1372 8021451802127 or email nigelj@pira.co.uk or grahamm@pira.co.uk

Copyright Paperloop, Inc. Aug 2005