Most markets for fine paper have long been plagued by overcapacity because producers rushed to take advantage of a business where demand is growing more rapidly than it is in many other pulp and paper segments. Demand for coated and uncoated fine paper—used in applications such as books, copy paper for office copiers, high-end catalogs, and annual reports—is soaring in China and other emerging markets. As a result, the European and North American incumbents now anticipate a rosier future.

Indeed, the hope that China's booming demand will solve overcapacity problems is shared by Western producers of many commodities, including steel. But for the fine-paper producers, battling for share in a 72-million-metric-ton world market, celebrations may be premature. Several forces are working in parallel to turn fine paper—the most exclusive class of products in the printing- and writing-paper industry—into a globally interconnected and more competitive business. Western producers will find it even harder to sell their offerings at a profit.

Winds of change

In emerging markets, demand for fine paper, made from chemically produced (wood-free) pulp, is expected to grow by 4.3 percent a year until 2009. Yet this growth will give Western producers only temporary relief. Fine-paper capacity is exploding...