February 26, -- Chemical suppliers say they are looking for new services and products to drive volume and revenue in the pulp and paper industry, which has sunk into a trough in the last two years, especially in North America. The pulp and paper industry is maturing, and it offers no significant growth in developed regions, even with an economic recovery, they say.

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Demand for pulp and paper chemicals in the U.S. will grow an estimated 2.4%/year from a weak 2001 base, to 20.5 million tons in 2006, says The Freedonia Group (Cleveland). Growth in market value is expected to increase at a higher rate, 4.5%/year to $7.6 billion in 2006, because demand for low-value, high-volume chemicals such as chlorine, caustic soda, and sodium sulfate will continue to decline as chemical recycling and process changes reduce the amount of chemicals used per unit of paper.

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The world market for paper chemicals is about 63 million tons, with the U.S. accounting for 29% of the total, Freedonia says. "In Western Europe, the situation is very much the same. The industry is large and relatively mature," it says. "Japan is also a mature and relatively slow growing market for pulp and paper chemicals," Freedonia says. But the rest of Asia/Pacific, particularly China, is showing much more rapid growth, it says. The move away from high- volume chemicals, including chlorine, is not as rapid in Latin America, where paper mills have established themselves as low-cost producers, with low-cost labor, and an ample supply of eucalyptus trees used as feedstock, Freedonia says.

Paper industry consolidation will also change chemical demand trends, Freedonia says. "Gains will be strongest in specialty additives, due to the paper industry's desire to reduce production costs, improve environmental compliance, and maximize productivity, objectives which can be achieved through the use of multifunctional specialty chemicals," it says. Paper mills are increasingly under pressure to raise the proportion of recycled paper used in end products, due to cost and environmental mandates. That trend will drive growth in other chemicals, such as fillers, bleaching, and deinking chemicals, Freedonia says.

Consolidation among paper chemical producers is therefore likely to increase as they find it increasingly hard to grow their business, Freedonia says. Smaller players will be required to "redeploy assets to product niches that have more significant growth possibilities," it says. Consolidation of paper chemicals producers includes Ondeo Nalco's acquisition of Geo Specialty Chemicals' paper coatings business, Dow Chemical's acquisition of Reichhold's paper and carpet latex business, and Kemira's acquisition of Vinings (CW, Jan. 30, 2002, p. 17). Rohm and Haas and Omnova Solutions also combined their respective latex binders, synthetic pigments, and specialty chemical additives businesses into a joint venture, RohmNova (CW, May 8, 2002, p. 19).

Other deals include the sale of Cytec Industries's paper chemicals business in separate transactions to Bayer and Ciba Specialty Chemicals in 2000. Bayer acquired Cytec's alpha succinic anhydride internal sizing agents, surface sizing, and wet- and dry- strength resins business, while Ciba bought its retention, drainage, and fixalive paper chemicals business.

Stagnant paper industry growth combined with consolidation have put pressure on chemical suppliers' prices and margins. "It's necessary to aggressively cut costs just to stay in the business," says Brian Pahl, president/pulp and paper at Hercules. "Anyone who does not aggressively cut costs is probably assessing exit options or has exited," Pahl says.

Producers say they can help customers cut costs with new products, applications, and services. About 25% of Hercules' annual sales to the pulp and paper industry are from products less than five years old, Pahl says. The company has introduced several products in the last 18 months, including a proprietary retention aid system, a new microbiocide chemistry, and a dryer release technology. Hercules is one of three global players that are full- service suppliers, analysts say; the other two are Ondeo Nalco and Kemira.

"The decline in North American paper production has made the chemical business within this region very difficult over the past two years," Pahl says. The strong dollar also weakened contributions from its operations in other regions, he says. Hercules has counteracted some of the negative market conditions by developing a complete range of chemicals, processes, and services for the pulp and paper industry, he adds.

"Customers require reduction in total cost, and these expectations have intensified, particularly in North America," Pahl says. Having a broader portfolio of chemicals and services provides more flexibility in formulating a package that meets a customers requirements, he says. It also provides economies of scale and the ability to provide technical support such as on-site troubleshooting at the paper mills, he adds. "Not everyone can afford to provide [adequate] technical support," Pahl says. "Smaller players can't compete on technical support and prices" and this can make it difficult for them to stay in the business, he says.

Increased demands made on paper and packaging producers, such as adapting paper to advances in printing technology, require technical solutions from chemicals producers, says Raisio Chemicals CEO Alan Whitehead. "The service that companies like Raisio have to provide relates to the application of the chemicals-the knowledge of how to apply them in the paper mills in order to be effective," Whitehead says. "In the packaging and fine paper areas, there is a growing need to reduce costs and to use a higher recycle content that requires a broad range of starches, sizers, and functional polymers," he says.

Pahl: Steady growth opportunities ahead.

Scherer Generating new revenues with services.

Ondeo Nalco says it sees growth opportunities in functional chemicals that help improve paper properties, such as increased bulk, and improved wet- or dry-strength properties. The company says it has introduced a high-performance strength aid, as well as a program through a marketing alliance that offers a tool for papermakers to improve paper properties.

Ciba invested SF18 million ($13 million) in 2002 to develop new retention and drainage chemicals as well as barrier effect chemicals, says Steve Tremont, director/marketing, Nafta region. Ciba also introduced a grease repellent last year that has been cleared for a wide variety of paper for food packaging uses.

Bayer says it has developed a full product line-including functional chemicals and colorants, internal sizes, surface sizes, wetand dry-strength additives, retention/ drainage aids, fluorescent whitening agents, dyes, and pigments-to meet a wide variety of paper industry applications.

Eka Chemicals, the pulp and paper chemicals division of Akzo Nobel, says it is focusing efforts on generating new revenue with new services in its bleaching chemicals business as well as realigning its offerings in its performance paper chemicals. Eka produces sizing chemicals, retention aids, wet strength agents, and coating chemicals.

The need to create new revenue streams and to become the preferred supplier is particularly strong in the sodium chlorate business, which serves the pulp industry almost exclusively. Conversion of pulp bleaching to elemental chlorine-free chemicals, which was completed in April 2001, drove the growth of sodium chlorate. The sodium chlorate market will mirror growth in the pulp and paper market, says Gerhard Scherer, manager/marketing and business intelligence at Eka. "There is not much organic growth in sodium chlorate demand," Scherer says.

Eka is offering its services to help pulp producers, which may not otherwise be Eka's customers, optimize the process of chlorine dioxide pulp bleaching. "We've offered that to our [chlorate] customers as a complementary service for many years but only started selling our services to other pulp mills last November," Scherer says. The company also launched the "Across-theFence" chlorine dioxide concept, which includes supplying sodium chlorate to chlorine dioxide generators at pulp and paper mills, as well as tracking operations of those generators. Eka monitors the generators from a remote location in North America, and advises pulp producers.

In some paper chemicals businesses, companies are trying to offset slowing demand by repackaging chemicals and services. "Paper producers are seeking products and services in a package that gives them bulk discounts," says Ian Kirkpatrick, Eka director of corporate services/paper chemicals. Eka often teams up with other paper chemical producers with complementary offerings to provide a complete package to customers. This helps buyers to save time by reducing the point of contacts the customer has with suppliers, he adds.

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