The winds of chage

India's intention to become self-sufficient in banknote paper within the next few years is not breaking news, and the ceremony last month to lay the foundation stone for the new banknote paper machine in Hoshangabad is simply another step in its much-publicised plans. But the images of this ceremony, attended by the Minister of Finance, serve as a stark visual reminder that the most radical changes to date in demand for commercial banknote paper are now imminent.

In a global banknote paper market that currently amounts to around 150,000 tonnes per year, around 65,000 tonnes is produced by commercial (as opposed to state owned) paper mills. The loss, therefore, of India's 18,000 tonnes per annum (around 30% of global commercial demand) will be a major challenge.

And, as has been previously reported in Currency News, the sector is also facing challenges from changing circumstances in countries other than India. Additional capacity at Goznak in Russia and news that China Banknote Printing and Minting is also upgrading old machines and will build a complete new paper mill in Guangzhou - their fourth site - is a further blow to the commercial banknote paper makers. China, which recently has imported about 10,000 tonnes of paper per year, should be self-sufficient by 2015.

The impact of the move from imported to domestic banknote paper supply in a number of major markets, will be exacerbated by the rise in the use of durable substrates: De La Rue has its first order for its polymer substrate Flexycoin, Giesecke & Devrient has won a significant contract for a new series printed on its Hybrid© substrate, and the new Swiss currency will be printed on Landqart's Durasafe.  Securency, meanwhile, has landed the whole of Canada's banknote production and the two low denominations in Malaysia's new series, which account for more than half of Bank Negara Malaysia's volume. All the major commercial paper makers, and some state mills which export paper, now have one or more durable substrates in their portfolio.

In addition to substrate durability, major progress on increasing circulation life is also being made in banknote design, printing and processing. For example, the new digital engraving systems eliminate the need for a border on banknotes, enabling the intaglio print to extend to the edge of banknotes, thereby strengthening the most vulnerable areas and reducing dog eared corners and worn edges. The new digital systems also enable deeper engraving, thus enhancing the strength imparted to the banknote by intaglio printing. Additionally, virtually all banknote printers, both commercial and state, are now offering varnish as an option to enhance banknote life.

And in banknote processing, major progress to increase banknote life is being made by technical and management innovation, especially in the sensor technology used for fitness processing. The US, for example, now reports an 80-100% increase in circulation life for the $20 and $1 bills respectively in 2009 compared with 2002, thanks to new sensors which better differentiate unfit from fit banknotes. If that experience could be emulated in all countries, banknote circulation life - especially for low and mid denominations - would increase substantially, and banknote demand would fall accordingly.

There have already been two casualties of these changes. The decision by the Bank of Canada to switch to Guardian substrate has resulted in banknote production at G&D's Ottawa facility being terminated. And Radece Papir, having invested in additional paper capacity last year, is currently filing for insolvency. There is undoubtedly a link between the market changes and these events, although one could argue they came about as much through other factors, with the tightening market just providing the final tipping point.

But looking at the bigger picture, what is taking place in the market is actually very healthy. Banknotes are under ever-increasing pressure, not least from alternative payment systems. To stay competitive, currency as a product must change in order to become more cost-effective and remain attractive and convenient to use. In other words, companies must continue to innovate and improve if they are to survive and thrive in the changing market environment.

After all, as the old proverb goes, 'if you're not riding the wave of change, you'll find yourself beneath it'.