Currency on a Slide (November 2010)
For the manufacturers of security features, paper and banknotes, the last five years prior to 2010 were exceptionally good. The same feel-good factor applied to the post-production side of the industry, the cash handling sector being driven by increased demand for banknotes worldwide, the move to automated cash dispensing and recycling machines and their associated clean note policies, and the trend to outsourcing.
Demand and growth were high, with prices that gave businesses reasonable returns and the confidence to invest in the future. New technologies, banknote series and cash handling scenarios seemed to abound at every conference. Competitors even began to cooperate, especially on licensing IP. Put succinctly, there was a confidence and positive buzz in the currency industry!
But it was not to last! The post-issue side of the industry was the first to feel the effects of the financial crisis and subsequent recession, whereas it did not permeate through to the banknote supply side until this year. And we are sure the downturn currently being experienced in this supply side is not all due to the economic situation.
Paper prices have been falling since the beginning of the year, and in this issue we cite two very recent tenders that are cases in point - in Indonesia where there was a 25% fall compared with 12 months ago, and in Vietnam where there was also a very low price quoted. In both cases all those participating were eager to win business.
The sudden increase in competition is no mystery. In one case a company had increased its capabilities and thus qualified to tender, but in virtually all others the paper mills had spare capacity they needed to fill and were prepared to price accordingly. They are short of work not because paper volumes have fallen dramatically but because capacity has increased - we estimate as much as 15,000 tonnes capacity has been added in the last year or is in the pipeline, which is equivalent to 25% of the currently tendered annual volume of paper.
Thus, the banknote paper market has gone from being in balance, with supply equalling demand, to one with 20% overcapacity. And the situation will get much worse when India brings its new paper machines into production.
There can only be one outcome in such a classic situation - some paper mills will close down and maybe companies will too - only the fittest will survive. This particular wound largely has been self- inflicted.
But if the paper industry has only itself to blame, the same cannot be said of banknote printers. Hardly any capacity has been added in the last few years yet, according to De La Rue's Board, the company will experience a 20% downturn in banknote sales this year. The Board made it clear this shortfall has nothing to do with DLR's paper quality problems. Is this downturn occurring in other printing companies? It would appear so - the general consensus being that orders have declined and backlogs have reduced. Prices too have fallen as evidenced by recent tenders in the Philippines and Malaysia. Banknote prices appear to be tracking paper prices.
Worrying though the downward pricing trend is, there is an upward trend that is equally worrying - the increasing price of raw materials and especially cotton and metals used for coins. Polymer users will not escape either, as products and materials from petroleum are also rapidly rising in price and lead times extending.
Most industries are cyclical and the currency industry is no exception. It has been on a peak, and enjoyed the ride. Now it appears to be sliding down the other side. There is a saying that 'what goes up must come down'. It remains to be seen what the industry does next to ensure that saying also works in reverse.
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