Major, rapid change in the paper and forest products industry is nothing new. A hundred years ago, wood for fuel was the main product from forests; over time this transitioned into pulpwood and sawtimber. Today, forest products play a key strategic role for customers across a range of areas, and consumers are surrounded by products that are fully or partially from the forest industry, from wood for housing to packaging products to newspapers and magazines. Forest products have played a crucial role for customers during the COVID-19 pandemic (for example, as tissue products for the health and hygiene sector, as raw materials in the production of facemasks, and as corrugated board for e-commerce packaging as consumers transitioned to work from home). Going forward, forest products are emerging as real alternatives to help address sustainability challenges in textiles, building materials, and packaging.
In recent decades, however, the pace of change in the industry has accelerated, with more and more frequent disruption outpacing development. To help CEOs navigate the ongoing changes over the next decade, we have identified three eras of substantial change since 2000, with the current period emerging as the most transformative (Exhibit 1).
Era 1: Global moves (2000–10)
The first era of change in the paper and forest products industry was characterized by global shifts, with several megamergers and production changes, as well as the rise of large Asian corporations. This period was also characterized by geographic shifts in pulp and paper production, with scale-up of greenfield capacity in new regions: in the east for paper (particularly in China) and south for pulp (Exhibit 2). As a result, the industry experienced strong growth among Chinese, other Asian, and South American market participants, which went on to develop into major players. As a counterbalance, several megamergers occurred in Europe and North America, with an ambition to create truly global corporations.
Era 2: Forced restructuring (2010–20)
The second era of change witnessed the demise of graphic paper, accompanied by a heavy focus on a forced restructuring of the pulp and paper industry, with asset closures and mill conversions. This was a challenging era for the industry: substantial decline in demand for graphic paper prompted companies to shift their assets into packaging and tissue capacity, but the period was also characterized by mill closures. To manage this market phase of forced restructuring, several global diversified pulp and paper corporations were also engaged in divesting adjacent business areas and exiting some geographies to focus back on their core businesses.
During this period, China strongly influenced the industry: for example, environmental concerns and trade policy led China to intensify restrictions on imported recovered paper, resulting in increased demand for virgin pulp globally, with large capacity additions. In this era, we witnessed a growing appetite for innovation in the industry but very little successful, large-scale commercialization. Despite a shift in the economic center of the industry, the same European and North American companies remained within the industry top ten, albeit with continued focus on consolidation (for example, in the containerboard market).
Era 3: Looking ahead—transformational change (2020–30)
The 2020s, however, are ushering in a very different type of change. This third era of transformational change will be characterized by the next wave of industry disruption—digital and analytics—coupled with increasing efforts in sustainability. Unlike other industries, such as energy, demand for current paper and forest products is structurally increasing (for instance, as a substitute for packaging and construction materials)—hence the next level of disruption will involve an increase in productivity and output combined with a sustainability-led transformation.
In addition, some permanent behavioral changes (such as the increase in online shopping) and new environmental regulations—especially post-COVID-19—are likely to accelerate during this period, causing further disruption. This will make it harder for pulp and paper companies to plan reliably without taking preemptive action. To preserve value and capture growth in this revolutionary era, we recommend four priority areas for any leading pulp and paper company to address, regardless of region or focus.
How should CEOs think about the transformational change in this decade?
The immediate future of the paper and forest products industry will be characterized by two principal dimensions of change: sustainability and digital and analytics. Although these are overarching dimensions, several specific megatrends are also influencing them (see sidebar, “Transformational change unlike any other”). In addition, three key external forces are directly affecting this scenario: the repercussions of the COVID-19 pandemic, new value-chain dynamics (for example, the shortage of wood products such as timber has resulted in stronger regional trade and more protectionism), and the regulatory environment (such as packaging-waste regulations). These external factors are likely to have a greater influence on the industry than ever before. As the implications of these factors unfold, it will be vital for CEOs to understand them and respond proactively.
As in nearly every global industry, there is a significant sustainability revolution under way in the paper and forest products sector, with the rapid emergence of new regulations and global consumer concerns. This phenomenon is creating growth opportunities for the industry to serve as a substitute for other substrates such as plastics. Notably, our global consumer surveys indicate that paper-based packaging ranks quite high for sustainability both in the United States and among surveyed European countries. Similarly, wood-based textile and building materials are the focus of increased interest and growing demand. Meanwhile, more products are competing for forest raw materials (for example, textiles based on alternatives to cotton and other materials, which are boosting demand for dissolving wood pulp).
Simultaneously, the industry is faced with critical questions about its core resource, as climate change and biodiversity concerns affect forest usage and spur regulations. Forest biomass has traditionally been seen as a net-zero asset in terms of CO2 emissions because the source is biogenic; however, in relation to forests, this interpretation is increasingly being questioned. Regulatory policies that are expected to be implemented within the next few years are likely to favor forest products that enjoy extended usage: for example, wood construction over pulp and paper, which in turn is preferred over biofuels. It is clear that the role of forests is critical, with reforestation being a crucial component of meeting overall decarbonization targets.
The paper and forest products industry is faced with critical questions about its core resource, as climate change and biodiversity concerns affect forest usage and spur regulations.
Another challenge is climate risk related to sourcing and operations. Supply of recovered paper is approaching practical limits in many regions, which is leading to higher costs and lower-quality fiber for papermaking. Today’s transformational era is setting up significant dynamic tension: at a time when the industry is under increasing pressure to produce more “green materials” for its downstream industries, limited supplies will create challenges for the sector to maintain its sustainability efforts.
Digital and analytics
The other dimension of change in this third era relates to digital and analytics. Although digital and analytics have been priorities within the industry for the past five or more years, throughout this decade their full implications will become apparent. Companies looking to distance themselves from laggards should focus on three key areas:
- Productivity optimization. Winning in this industry—as in many industries—has always been about productivity and cost differentiation. In the past, success on the cost curve meant coupling the most modern and sizable machine with the right fiber source. Going forward, digital and analytics can provide the next step change: for example, by applying already-proven digital and analytics applications, companies can improve productivity and throughput by 10 to 15 percent—representing significant gains on traditional cost-curve differences between many players or individual machines and mills. This opportunity can be further extended by using digital and analytics to optimize the end-to-end value chain—from fiber (forest or recycled) to end product—in order to harness the full value of the data along the supply chain.
- E-commerce. Across paper and forest–based products, e-commerce will fundamentally change how consumers demand the industry’s output—both as end products (such as tissue paper) and as crucial enablers (such as packaging). This demand will accelerate key product-development and innovation trends, such as lightweighting and new, cheaper materials (for instance, hybrids of virgin and recycled paperboard grades), as well as format changes (such as packaging). Broader innovations will include the use of new materials, such as with the production of tissue paper (an area of experimentation for many leading players today), as well as more extensive advances in packaging (like combining primary and secondary packaging to help reduce overall packaging materials).
- New commercial models. In parallel with the considerations discussed above, the industry is also in dire need of an upgraded commercial model. Similar to other basic-materials industries, this industry can expect to encounter several years of extraordinary volatility and likely inflation. Having a robust, data-driven understanding of costs—by machine, product, and customer—and therefore pricing and margin volatility, will be crucial. The historical revenue model of an annual contract with price levels negotiated for the entire period could now be outmoded. Many products will likely see a more considered mix of spot and contracted business, as well as a more deliberate and analytically driven view on the optimal contract length, rather than being driven by legacy approaches. Direct and online-driven sales models will likely increase, both to optimize and reduce costs and also to move toward the customer-interaction model increasingly preferred by many customers in this and similar B2B industries.
CEO priorities: How to lead proactively
The continued evolution of these trends will require pulp and paper CEOs to think through their strategy for navigating the current era. Companies should consider the following four priorities:
- Future-proof your company. Proactively manage future risks in relation to regulations and the changing physical climate. Carefully think through forestry regulatory scenarios and the potential to implement “precision forestry”—for example, to increase digital usage in harvesting. Consider if your wood or fiber supply is resilient enough to support production and if there are any opportunities to create a competitive advantage by proactively moving to new forest-management standards.
- Lead on environmental, sustainability, and governance (ESG) issues. Embrace this once-in-a-lifetime transformation. It starts with being clear on “this will happen” not “it might happen.” This will undoubtedly create opportunities for many companies, with a premium over the short term for companies that take action and make those actions clear internally and externally. The entire ESG spectrum (not only the E) is increasingly crucial—today, banks and investors are already using various ESG teardowns to assess where and with whom to place their investments.
- Invest in productivity 2.0. Harness digital and analytics to strengthen the competitiveness of your value chain. Actions to consider include full Industry 4.0 implementation in your operations, employing data and analytics to make a step change in commercial excellence, and implementing digital processes and analytics to improve sourcing practices and reduce costs. This transformation will require new investments in people, systems, and processes.
- Win the big bets. Carefully think through the positioning of the product portfolio against these fast-moving trends, leveraging both organic and inorganic (M&A) options to move ahead. Focus on opportunities across the full value chain, from novel pulps (for instance, textiles) and capturing growth from megatrends (such as e-commerce) to pursuing targeted paper and packaging innovation (for instance, functional papers to substitute plastics).
The current pace of change within the paper and forest products sector is unprecedented. The speed and scale of action will undoubtedly create a significant performance divide between those that understand the nature of the transformation and act accordingly and those that don’t.