Banknote Substrates – a Different and, for Some, Difficult Future

The last few months have seen a number of developments that will impact the banknote substrate market, which has enjoyed a 4-5 year boom, with manufacturers reporting full order books and good profits after a lean time in the preceding years.

Most notably, in the past couple of weeks, the Bank of Canada announced the adoption of Guardian® polymer for its new series to be launched in 2011. This is a major coup for Securency and a blow to the conventional cotton-based paper producers, many of whom doubted that Securency would ever succeed in this traditional market.

But the pace of acceptance of Guardian has increased in the last four years, in some instances (such as Nigeria) because the paper mills could not meet the demands of the market. With Canada joining other large countries such as Mexico, Nigeria and Chile (where it is being used in the lower denominations), and with smaller countries like Paraguay and Nicaragua doing the same, it is estimated that approximately 1,500 tonnes will have moved from cotton to polymer.

And we should not forget that India is trialling polymer with a view to using it in its low denomination as well. Nor should we forget that the traditional paper makers are launching new durable substrates of their own, some of which comprise polymer laminates or fibres.

More Bad News

Some other potentially bad news for commercial substrate manufacturers comes from Indonesia, where the public tender for the sale of Bank Indonesia’s stake in the PN Kertas Padalarang paper mill has been abandoned, and the government printer, Perum Peruri, has taken a majority stake in the company. The mill is currently making a number of security paper grades for tax banderoles and passports, but is reported to have plans to invest in a new paper machine capable of producing banknote paper. Indonesia is one of the largest markets for banknote paper, consuming nearly 6,000 tonnes per annum.

Even larger is India, where the annual consumption of (commercially-produced) banknote paper of around 18,000 tonnes is also under threat from the installation of new paper machines in the country. Despite a number of delays, the project at Hoshangabad to install a new paper machine with an annual capacity of 4,000 tonnes looks likely to proceed. So does the establishment of a new paper mill at Mysore, which would add at least 6,500 tonnes, and potentially 13,000 tonnes if two machines are installed.

Capacity Increasing

But while the market for commercial banknote paper is shrinking, capacity on the supply side is increasing. Fortress-owned Landqart is increasing its capacity by 7,000 tonnes per annum from 2011. Louisenthal, meanwhile, has recently added 4,000 tonnes capacity.

The combined new capacity of 11,000 tonnes per year will be on stream in a market that could shrink by as much as 20,000 tonnes in a few years. Given that the current market is in balance, there could be over 30,000 tonnes of surplus capacity in the commercial banknote paper sector within 3-4 years if all of the proposed investments and changes go ahead.

The consequences are not difficult to predict – price-dumping and closures for a start. There is also a strong likelihood that patented features such as special watermarks, threads, fibres, and durable constructions will be used to control the market, with licences to other suppliers limited (particularly to state mills). And with these licences limited, competitors will seek to work around them, leading to litigation that, with a couple of notable exceptions, has not been a feature of the industry in the past few years.

Furthermore, investment in substrate production and features is set to decline if the rewards are not there.

In a free market situation, the market itself is said to be the closest thing to the perfect regulator. But the currency market, with a mixture of state and commercial organisations supplying its needs, is not a free one – and it remains to be seen how it adjusts in light of the imperfect conditions that prevail.