Little Surprise About Demise of Papermakers

There was palpable shock and surprise in the industry at the news that Portals is to wind down production of banknote paper, focusing instead on non-banknote paper and features. But on reflection, perhaps there shouldn’t have been.

Portals is the last standalone independent commercial papermaker – Arjowiggins and Fabriano having gone into liquidation or wound down their activities respectively, and Landqart having been acquired by the Swiss National Bank.

Those private companies that continue to produce banknote paper are now subsidiaries of three out of the four leading commercial banknote printers. The other papermakers are all state-owned; some supply their own central banks only, but an increasing number are also supplying the commercial market too, adding to over-capacity with, inevitably, lower prices for all.

Portals’ exit will be attributed by many to the souring of relations with De La Rue following its move into security features, and to the growth of polymer, but in reality, the reasons for its demise, and that of its peers, are more complex and rooted in the overall ‘direction of travel’ that affects the whole banknote industry.

Certainly, the growth of polymer has played its part, but the vast majority of banknotes are still produced on paper. The move to more durable substrates – be these polymer, composite (hybrids) or coated paper – is probably more pertinent at the moment than just polymer. It is estimated that some 95% of the world’s banknotes are still printed on paper, and that 85% of all banknotes are post-print varnished. The increased longevity of banknotes obviously reduces long-term demand for replacement notes, which is good news for the environment. Not so much for the substrate producers.

In addition to longevity, demand for paper has also reduced due to the indigenisation of supply, particularly in Asia, that once provided a captive, and lucrative, market for the (principally European) manufacturers. India, with its annual requirement of c. 20,000 tonnes per year, is now self-sufficient. Other countries with large populations (and high cash usage) are also not only producing paper themselves but competing for export markets too.

To add to increasing supply and falling demand, paper makers have been faced by margin pressures. First from rising input costs. Over the last few years comber prices have been increasingly volatile and now energy prices have risen sharply in a short period of time. Paper production is, of course, particularly energy intensive.

Second prices have not kept up with the complexity of banknote paper, which can now include components such as high cost security threads and machine readable features, as well as additional processes such as coatings and applied features such as foils and iridescence. This has driven up capital, material and staff costs. The value has flowed to the component supplier rather than to the paper maker.

The result of all this is that the paper making part of banknote paper has become a commodity business. The substrate comprises a large portion of the costs of each banknote (up to 40%). For printers not affiliated with a papermill, driving down substrate prices is an obvious strategy for reducing the overall cost of banknotes. And with over supply in the paper market, they have been able to do so.

What will the future bring? Perhaps the question is not whether demand will fall, but by how much.

Whilst demand for banknotes increased during the pandemic, this was as a store of value, with much of the increase in the high denominations. With COVID-19 (hopefully) behind us, central banks are likely to start winding down their contingency stocks.

Added to this, even though on-going geo-political events and global uncertainly will ensure that a certain level of precautionary holdings will be maintained, rising inflation and interest rates are likely to see the return of many notes. When both are low, or even zero, then it makes economic sense to keep banknotes under the proverbial mattress. With both on the increase, however, the value of cash diminishes by the day, and it could be better utilised, or its value retained, in investments or interest-bearing accounts.

And, finally, is overall demand for cash, outside of specific events or circumstances such as the pandemic or conflicts. We have covered this extensively in previous issues so don’t intend to dwell on it further at the moment, other than to say there is one direction in which it is heading, and whilst few are predicting a totally cashless future, most agree that there will be less of it.

All in all, the demise of Portals’ banknote paper production is sad, but not a surprise. But its name will live on, just not as a producer of the product for which it is best known, and has been for the past three centuries or so.