The “Perfect Storm” for Production

“The perfect storm – an event where a rare combination or confluence of circumstances will aggravate a situation drastically”

The commercial banknote industry is facing a dual challenge; one of its own making, and one caused by world events. We have dwelt on both challenges, separately, in previous issue of Currency News. In this article, we draw them together to present a rounded picture of the circumstances that, in combination, are aggravating an already-difficult market.

Rising Prices

Cotton – the staple constituent of 90- 95% of the world’s banknote paper – has increased in price by 150% since April last year (currently $2.00/lb or €3.05/kg compared with the price one year ago of $0.8/lb or €1.22/Kg, according to figures from the Financial Times) and by a staggering 370% since April 2009.

A combination of natural disasters in cotton growing regions of the world (eg. Australia, China, India, Pakistan), a diversification away from cotton to alternative cash crops (USA) and high demand from the garment industry have all led to prices reaching historically high levels. The banknote industry does not use virgin cotton, it uses cotton waste in the form of cotton combers and linters. Even so, these waste cotton prices generally follow raw cotton prices and have done so in the last year, with prices currently in the $1/lb-2/lb range, according to quality.

Also, the cost of polymer substrate, which enjoys 4-5% global market share, will have been impacted by the increases in the price of basic hydrocarbon feedstock used in the manufacture of polypropylene, with oil now trading around $122 a barrel – up from $85 a year ago – an increase of 43.5%.

Changing Supply Situation

Meanwhile, although demand for banknote paper has not changed substantially in the recent past, the supply situation certainly has. There is now much more capacity and, in the highly competitive market, some low denomination banknote paper has been selling for as little as $5,350/tonne (Indonesia this March), which equates to $2.43/lb – not much above the price of the cotton used to make it!

With cotton representing around 45% of the cost of a low to medium denomination banknote paper with standard security features, this raw material cost increase would normally be directly reflected in increases in the price of banknote paper. A 150% increase in the cost of cotton would increase the overall paper cost by 70%, which would increase its selling price accordingly and in turn the price of banknotes.

But it has not. And the market forces of supply and demand are largely to blame.

Excess Capacity

Following around seven years of low banknote papermaking capacity and high demand, there is today an estimated 20-25,000 tonnes of excess banknote papermaking capacity on the world market. This is due to a number of paper machine installations and upgrades over the past five years – eg. an additional 4,500 tonnes each from Arjowiggins Security/VHP, Louisenthal and Landqart, a further 2,500 tonnes form Radece, 7,500 tonnes from Goznak and an additional 3,000 tonnes from other upgrades and from Pura entering the market.

This situation will be exacerbated when the paper mill at Hoshangerbad in India is upgraded (see page 9) and as the two scheduled machines are installed at the planned new paper mill in Mysore, India. Also, in this three-year period around 1,500 tonnes of banknote paper has converted to polymer – Nigeria and Canada primarily.

Prior to these upgrades and market changes, commercial banknote paper supply and demand was in reasonable equilibrium at around 60,000 tonnes a year (out of a total worldwide demand of 140,000 tonnes), but the extra 25,000 tonnes of paper now available to the market represents at least 40% surplus capacity. This will increase further as the machines in India come on-line.

But there are more factors determining the future structure of the banknote paper making industry than just capacity issues alone.

Problems of Productivity

Modern cylinder mould-made banknote paper machines can operate at speeds of between 100-150 metres per minute, three Supersize sheets across, depending on the complexity of the paper, which is enough paper in one hour for around 800,000 banknotes. Consequently the days of running banknote paper machines at 60 metres a minute, two sheets across, are over!

The industry standard maximum operating speed for banknote printing presses, meanwhile, is 10,000 sheets per hour, 820mm wide and, in contrast to banknote paper making where productivity gains are being made, this output is unlikely to be challenged any time soon from machinery developments.

However, the net output figures per machine/hour are much less, around 60% of the maximum or 6,000 sheets per hour. The extra capacity in the commercial banknote market sector is emerging not from faster machinery or even new capacity, as few commercial banknote printers are expanding their operations, but from state-owned banknote printers supplying central banks in other countries with finished banknotes.

New Sources of Supply

This is not new. For many years state printers have supplied other countries’ banknote requirements – often for historical reasons. For example, the Banque de France still supplies many francophone African countries, and state printers in Europe compete with the commercial sector for euro print contracts. Goznak (Russia) and Perum Peruri (Indonesia) have supplied a limited number of countries, OeBS supplies Azerbaijan and other countries and Note Printing Australia prints Guardian polymer substrate for a number of Securency’s customers.

However, this state-owned ‘commercial’ printing trend seems to be gathering momentum. At April’s banknote printing tender in Venezuela, Brazil’s Casa da Moeda, which has recently invested some $200m in new production lines, was awarded a 43 million banknote contract to add to its large supply contracts with the Argentinean government.

Continuing Growth

During the last seven years the banknote market has been increasing in volume, in some countries much more than others; overall the global rate of growth has averaged about 6% per year. Two key growth factors have been the increasing availability of cash through the use of ATMs, and world economic growth.

But, while the projected threats to banknote demand from credit cards and other forms of cashless payment have never really materialised, it appears that these are now gaining new momentum thanks to much faster transactions with chip-and-pin debit cards and the new threat of contactless payment cards and smart NFC-equipped phones.

More Clouds on the Horizon

Such threats brewing on the horizon could be yet another factor to add to the existing mix in terms of creating a perfect storm. It is quite possible that the next few years are likely to see a much greater change in the commercial currency production sector than has been previously experienced. While printers will be affected (as will mints, who are faced with similar pressures over the rising price of metals and the potential threat from new forms of cashless payment), most of the strain will fall on banknote paper makers.