Letter from Australia
By Rob Ryan
LOOKING BACK, LOOKING FORWARD
It was with a sigh of relief that 2008 came to a close, and we said farewell to a year of
financial calamity. Now is a good time to look at the past year, and reflect on the future.
Firstly, let's look at equity markets. When Wall Street coughed last year, the Australian Stock
Exchange caught a cold. And the Australian pulp and paper sector shared the general bear market pain. The printing and writing paper producer and merchant PaperlinX suffered more
than most. PaperlinX shares, which had been fetching about $Aust2.50 ($US1.75) each, are now only worth about Aust70¢.
Why such a remarkable slide? PaperlinX took a tumble in October 2008 along with the rest of the sharemarket. Then,
in December, investors punished the papermaker for breaching lending convenants following delays in planned asset sales; the delay was a direct result of the global financial crisis.
However PaperlinX has reported some good news recently as well: it has just completed a major bleached eucalyptus
kraft pulp upgrade at its flagship Maryvale mill. This mill is up for sale, as part of a strategic divestment of Australian
Paper assets worth $Aust1 billion plus, and completion of the work boosts its appeal for the various interested parties
carrying out due diligence on Maryvale. Hopefully PaperlinX will not be pressured by worried stakeholders into a fire sale of this valuable asset.
Shares in the forestry company Gunns have also suffered during the bear market. The Tasmanian-based company's
shares, which traded at about $Aust 3.50 at the beginning of 2008, fell to as low as Aust 62¢ soon after the October
2008 sharemarket collapse (although the share price has improved since then). On top of these market woes Gunns
has had to endure a long, drawn out approval process for it's proposed $Aust 2.2 billion pulp mill in Tasmania.
At the beginning of January this year, things were looking brighter for Gunns, when Australian environment minister
Peter Garrett gave his approval to most of the environmental modules that had been submitted for approval. The
minister did withhold approval for a final three modules, which was initially seen by some observers as a setback for
Gunns plans. However Gunns chairman John Gay welcomed the minister's statement, and said that the way was now clear for construction work to begin on the project.
But the would-be market pulp producer faces a final hurdle in finding additional financial backing or a partner to take a
substantial equity stake in the project. That's not the easiest task to accomplish during a credit crunch.
Prospects for some pulp, paper and board grades look a little bleak for a region heading into an economic slowdown.
So let's have a look at a sector that traditionally copes well in difficult economic times: household and sanitary paper grades.
In the tissue business, consolidation was the name of the game at the beginning of 2008. In February last year,
Encore Tissue snapped up the assets of Merino, its troubled Queensland-based rival. The move left the Australian and
New Zealand household and sanitary paper sector with just four producers: global giants Kimberly-Clark Australasia
and SCA Hygiene Australasia and two smaller but steadily expanding privately-owned rivals — Encore and ABC Tissue.
The tissue sector downunder is a tough business. Smaller players have to contend not only with the superior premium
brands turned out by Kimberly-Clark and SCA at the top end of the market, and cheap imports at the lower end. And
the modest-sized combined Australian and New Zealand population of just 25.7 million people is dispersed over a large
area. And big retailers demand heavy discounts from tissuemakers. So perhaps it's no wonder that Merino landed in difficulty.
On the other hand, the household and sanitary paper sector is not a bad business to be in. As economies start to
slow down, sales of recession-proof tissue tend to stay stable, although some consumer switching to cheap private
label brands takes place. Add to that some good news at the beginning of 2009: the Australian government will take
steps to protect domestic producers following a lengthy Customs Service investigation that found tissue made in China and Indonesia had been dumped in Australia.
So goodbye, year of the rat in Chinese astrology, which winds up at the end of January 2009. And hello year of the
ox. Maybe it's too much to expect that this heralds the return of bull markets. But let's hope that economies and
markets in 2009 will resemble the character of the ox in the Chinese calendar – steadfast, stable and dependable.
Robert Ryan is based in Sydney, and covers the paper industry in Australia, New Zealand and Asia for industry
publications.
