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.
This article is a collaborative effort by David Feber, Felix Gruenewald, Oskar Lingqvist, Daniel Nordigaarden, and Gregory Vainberg, representing views from McKinsey’s Paper, Forest Products & Packaging Practice.
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).
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.
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).
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.
The immediate future of the paper and forest products industry will be characterized by large changes centered around sustainability and digital. Additionally, various external forces, such as the repercussions of the COVID-19 pandemic, new regulations, and new value-chain dynamics, will further disrupt the landscape.
Industry as a net-positive emitter
New channels and customer interfaces
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.
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:
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:
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.
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