In the capital-intensive pulp and paper industry, investment in new capacity is a critical lever that determines the fortunes of producers, suppliers, and other stakeholders. So, one would think that new capacity decisions would be made so carefully that the industry would always produce just the right amount. One could be forgiven for expecting capacity and the economy to always grow hand-in-hand. But, as everyone in the paper industry already knows, capacity rarely matches consumer demand with the precision that such high stakes warrant.
New capacity comes in waves and usually too much at a time. Operating rates fluctuate greatly causing gyrations in producers’ profitability. Firms and their investors often find that new investments made when conditions looked good end up delivering disappointing returns. Clearly, the industry would be better off if it were possible to predict capacity fluctuations better. For that, we need to understand how and why the industry behaves as it does.
In this and future articles, we’ll take a look at cycles in the pulp and paper industry. As we’ve just noted, capacity cycles are one important type of cycle to understand. We’ll start with capacity cycles and show what they are, how they happen, and how you can get your own insights into the future with simple analyses done with FisherSolve™. Other types of cycles to be considered include pricing, inventory, demand, etc.
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