Low Canadian dollar boosts competitiveness of Canadian newsprint producers
February 22, 2017
In the previous blog post we showed that the current low value of the Canadian dollar allows Canadian NBSK producers to maintain their competitive advantage over international competitors; a situation that is unlikely to change anytime soon. We ran some exchange rates scenarios to see if the situation was similar for newsprint producers.
Canada is the largest producer and exporter of newsprint worldwide. In 2015, newsprint exports were valued at $2.3 billion. Sixty percent of our exports are destined for the US market, and American producers are our main competitors in the regional North American market.
Currently, the North American higher cost producers are all concentrated in the United States, but exchange rate movements could significantly alter our competitive position. The graph below illustrates how Canadian production costs increase when the Canadian dollar appreciates to 90 cents (Scenario 1) and to parity (Scenario 2) against the US dollar. In Scenario 1, Eastern Canada remains the low cost North American producer, while Western Canada producers become higher cost producers than Western US. Scenario 2 shows that further appreciation of the Canadian dollar erodes the competitive advantage of all Canadian producers compared to their US competitors.
Exchange Rate Scenarios: Canadian dollar appreciates to 90 cents (Scenario 1) and at par with the US dollar (Scenario 2)
Additionally, we considered the cost of getting product to market and found that Eastern Canada remains the lowest cost producer once transportation cost is factored in — that is, until the Canadian dollar is at par with the US dollar.
Canada is in a good position and is likely to remain the lowest cost producer over the medium term. However, the low Canadian dollar offers a limited buffer in the long run against permanently lower newsprint demand.
- Newsprint demand in North America has fallen by 72% since 2000 and there is no sign of a recovery. In fact, demand declined by 9.5% annually from 2013-2015 compared to the 2000-2010 average of 7.5%. Similarly, demand is declining in other markets but at a lower rate.
- On average, two to three North American mills would need to close per year to keep pace with declining North American demand and offshore exports. Given Canada’s currency advantage, most analysts expect the next few closures to be in the US.