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Revised: Pulp prices climbing mostly by US$30-US$50/tonne in October amid ongoing tight supply, but slowing reported in some markets

LOS ANGELES , October 9, 2009 (Forestweb) —

Forestweb Editor's Note: This report has been expanded from its original posting.
It is still a pulp supplier’s market in October, but this month does not have the same intensity as in recent months and many sources doubt there will be further price increases in November.

Suppliers continue to report very tight supply, of both softwood and hardwood pulp. And for the most part, their announced price increases are going through around the world. Suppliers mostly announced US$30 per tonne higher for softwood and $50/tonne higher for hardwood pulp.

Bleached eucalyptus kraft (BEK) suppliers appear to be achieving their $50/tonne increases in markets that have already settled and they are likely to get them in the rest.

But there is resistance to other $50/tonne bleached hardwood kraft pulp (BHKP) increases in some, but not all, markets. In the U.S., some business for North American-produced BHKP has already settled at $30/tonne up, rather than $50/tonne up, but some is also settling up $40/tonne or $50/tonne higher.

As previously reported, Chinese buyers have resisted the $30/tonne increase for northern bleached softwood kraft (NBSK) pulp, to $670/tonne--some is said to be priced at $660/tonne, up $20/tonne--but there are also scattered reports of acceptance of the $30/tonne hike. The picture is supposed to be clearer in the coming week, with Chinese customers returning from an early October holiday.

Sources also report that customers in such markets as the Middle East, India, and Malaysia are not as eager to buy softwood pulp in October as in recent previous months, and/or to pay the full $30/tonne increase. They are watching signs to see what develops as the month unfolds.

Nevertheless, many pulp sales sources report ongoing tight supply. A European trader said there is “demand from everywhere and we cannot find a fraction of the pulp we are looking for.” There are inquiries every day from customers that buy every month, such as from the Middle East, that his company cannot fill, he said.

In the Middle East, prices for North American BHKP and BEK have risen in October. A North American pulp agent doing business in the region said the northern bleached hardwood kraft (NBHK) pulp price has increased so far by about $30/tonne or so, to about $560-$580/tonne. “They need the hardwood” for tissue production, he said contrasting it with the smaller softwood pulp market in the Middle East.

The Chinese resistance to the October NBSK prices could be an early indicator of an overall pulp demand back off that was expected sooner or later after so many months of strong demand.

Noting reports suggesting that shipments to China could ease, Deutsche Bank paper and forest products industry analyst Mark Wilde said in an Oct. 5 research note that the key question is whether the October price hike will stick. He observed that five North American companies have announced mill restarts and that there are reports the pricing rebound is drawing high-cost Chinese pulp mills back into production.

Still oversold. But NBSK suppliers aren’t voicing big concerns at this point, at least partly because they are generally still so oversold and so behind on shipments. “It sounds like suppliers are sold out through November anyway, so there’s no big panic yet,” said a sales executive for one such producer. Like others, the source noted that while prices tend to come down in December as producers offload excess inventory, there will not be much to get rid of this year. “I don’t think there will be much room at the end of they year for much of a decrease,” the source said.

A North American pulp agent said some Canadian suppliers tell him they are still sold out for October but that November demand from China “could still be iffy.” Suppliers could tolerate as much as three or perhaps four months’ cutback in demand from Chinese customers, he said.

The thinking is that if China slows down, the few inventories suppliers have could be moved into North America, where tens of thousands of tonnes could be absorbed, he said. But he said if the volumes amount to hundreds of thousands of tonnes, it could be a different story. “Paper demand is picking up but it’s not gangbusters, “ he said, adding that some of the pick-up is seasonal but other factors include the improved economy, the mill shuts, and merchant restocking.

A major U.S. pulp buyer said emphatically that once the demand from China drops, the difference would be significant. “It doesn’t take much time for the market to change,” he said. “We saw that in September (2008).”

Not all buyers are convinced this is the price peak. “I think that every time,” commented a U.S. buyer. Nevertheless, after so many increases, with talk that the China market is slowing, and with prices approaching what they were before the late-2008 crash, he said he said he would be surprised if there are any more increases. “If they push too much there will be trouble,” he said.

Some sources note that at the end of August, the World 20 chemical paper-grade market pulp statistics showed that bleached softwood kraft pulp (BSKP) producers had only 23 days of supply, down two days from July. BHKP was down to 30 days from 31 days. However, recent Canadian NBSK start-ups could start boosting supply again.

Due to demand and various production glitches at mills, BEK supply remains extremely tight around the world, suppliers continue to report. One supplier said that although he expects a pause in the market, this would give his company the time it needs to build its inventory. “We are oversold in all our markets and over-contracted,” he said.

(Separately regarding BEK supply, Chile’s Empresas CMPC SA, which is buying Fibria’s Guaiba, Brazil, unit—the $1.43 billion deal is to be concluded Dec. 15--does not expect to expand pulp production at the site before 2015, according to Fibria, Credit Suisse’s Latin American Equity Research pulp and paper team reported in an Oct. 8 research note. The expansion would be for 1.75 million tonnes/year. Meanwhile Fibria is talking about using the proceeds of the Guaiba sale not only to reduce debt, but to also revive plans to expand the Veracel Celulose SA pulp mill it owns jointly with Stora Enso Oyj, Bloomberg reported Oct. 8

The ongoing weakening of the U.S. dollar and the strengthening of currencies of such major exporting countries as Canada, Sweden, Brazil, and Chile have helped to stiffen the resolve to push through price increases. Seller sources continue to point out that although pulp prices have increased in U.S. dollars in recent months, the prices when converted to their own currencies have barely moved.

A sales executive for a Canadian pulp producer expects a short-lived price relaxation in the first half of 2010 before a full recovery. “We’ll see inventories go up in December and early January and create some small uncertainty, but between now and then, I have no concern” because inventories are currently so low, he said.

He said his main concern in the short term is restarted capacity. But, he said, some pulp producers don’t have enough of a “war chest” to get through a downturn, and he expects a couple of million tonnes of capacity to come off the market in 2010.

U.S. prices. Softwood and hardwood pulp prices in the U.S. are steadily rising in October, sources said. “Demand in North America is pretty steady,” said a domestic pulp agent. “The price just continues to go up.”

Sources said the $30/tonne BSKP increases in the U.S. have gone through, to a list price of $800/tonne for NBSK and $750/tonne for southern bleached softwood kraft (SBSK) for at least two producers (another is at $780/tonne). And for the week ending Oct. 3, FOEX Indexes Ltd. said the NBSK price in the U.S. was $779.77/tonne, a $20/tonne jump from the previous week and following three weeks of unchanged prices.

The agent said the domestic BSKP picture is about the same and that SBSK is tighter than NBSK, but that NBSK supply also remains limited “as long as China keeps buying.” He said non-contractual regular tonnage his company supplies is mostly priced at $640-$660/tonne, but that some is lower depending on the supplier. He said the $20/tonne fluff pulp price increase also appears to have gone through (at least one major producer’s list price is $800/tonne in both the U.S. and Europe).

A U.S. buyer said there might be a bit more SBSK available in recent months. “I am able to get all I need but I spread the business around,” he said. He said he is being offered U.S.-produced roll pulp, which wasn’t the case in previous months. (Sources have said China has backed off its previous months’ demand for roll pulp, and this has led to speculation that more might be offered closer to home instead.)

Sources said the $50/tonne increase for BEK, to $700/tonne, has been implemented. Suppliers of North American-produced hardwood pulp had also announced Oct. 1 $50/tonne domestic increases, following the BEK lead, as they have done for months.

A sales executive for a BEK producer said the U.S. price is solidly at the new list price of $700/tonne, up $50/tonne. “We don’t have a pound (to spare),” he said, and customers, particularly so in consumer products, are more concerned about availability than price.

But buyers of the North American hardwood pulp contacted this week said they have paid only $30/tonne more than September or that they expect to pay no more than $30/tonne up. Buyer and agent sources report prices of regular non-contracted North American-produced hardwood tonnage in the $500-$550/tonne range. The buyers said there wasn’t much discussion and that suppliers backed off when buyers said $50/tonne was too steep. Sources said that in some cases and if the market warrants it, the rest of the increase would be implemented in November, but other sources said there have been no such discussions.

The agent said spot and non-contractual regular NBHK tonnage is up mostly $30-$40-$50/tonne. “I thought there would be more resistance,” he said, but the market is so tight that producers are saying, “’here’s the number,’” and there is probably someone who will accept it, he said. “If they need and want the tonnage there are not a whole lot of options out there.” He said another factor is that trucking costs have begun rising again.

He said suppliers aren’t calling on him to sell blocks of a few thousand spot tonnes, but that they have a few hundred tonnes here and there because some paper suppliers’ demand is off. Overall the available tonnage and demand is about the same as in previous months, he said.

He said wet-lap deinked pulp has also gone up about $30/tonne, but that some have agreed to step in the price during October and November.

There is “some local hardwood around,” said a market pulp consultant. Suppliers “hope to get some share off of eucalyptus and eucalyptus producers know it,” he said, but they are not that concerned because their supply is so tight.

Some sources said a U.S. NBHK mill that has been selling its tonnage to China has seen a cut-off in that demand, and that this could lead to more tonnage available for the U.S. and possibly elsewhere. However, the expected end of the U.S. alternative fuel (“black liquor”) tax credit at the end of the year could also influence whether the mill will continue to run. Whatever its future business in China or lack thereof, a New England buyer is hoping the mill will be a future source of pulp for him. “I’ve got a vested interest,” he said.

Elimination of the black liquor tax credit could also dry up the output of roll pulp by some major integrated companies that have been taking advantage of the credit by producing it this year.

U.S. pulp buyers have been trying to recover some of their increased pulp costs via higher paper prices, with varying degrees of success. Pulp producers “are not considering end-use markets and what is going on,” said a pulp buyer for a specialty producer. “The U.S. market has not recovered fully yet.” The buyer reported varying degrees of success in implementing higher paper prices and difficulty in retaining volume when competing with other companies that are running at less than capacity.

Another pulp buyer said his companies’ backlogs are good, describing orders for specialty paper as doing well, while orders for coated paper are lackluster.

Yet another pulp buyer said his company has been tailoring capacity to demand and focusing on grades with higher profitability. “It has been working very well,” he said. “We are smarter about what we run” and this is leading to “a fairly good year.”

Europe market. October price negotiations are still underway in Europe or have concluded with higher prices, depending on the supplier and customer.

Sources generally expect the full $30/tonne BSKP and $50/tonne BHKP price increase to go in. The announced Oct. 1 list prices for NBSK are $770/tonne (from Canadians) and $760/tonne (from Europeans); the SBSK price is $720/tonne.

For BEK and birch pulp, the announced $50/tonne increase brings the list price to $650/tonne. Southern bleached hardwood kraft (SBHK) is priced at $630/tonne, also up $50/tonne.

For the week ending Oct. 3, the FOEX price of NBSK in Europe was $731.69/tonne, up $11.13/tonne and a sizeable increase from the previous week’s $0.48/tonne gain. The BHKP price was $606.77/tonne, up $8.26/tonne and following the previous week’s $2.75/tonne increase.

Pulp supply is still limited and statistics continue to show that customers’ inventories are much reduced, as well. Europulp statistics released Oct. 9 revealed that September stocks had dropped to a historic low of 820,699 tonnes from August, marking three months of stocks registering under 1 million tonnes.

“Our mills are completely sold out. There is no room for spot or anything else,” said a sales executive for a European BSKP producer. “It has been the same situation for several months. Our mills are running flat out and demand is strong.”

A sales executive for a softwood and hardwood pulp producer said inventories at his mills in Europe are “unacceptably low,” citing just five or 10 days of softwood pulp.

And a sales executive for a BEK supplier said his company has been cutting people back on tonnage due to its lack of supply.

China quiet. Increasing numbers of sources say the China market is slowing or appears to be slowing, but many are quick to add that there isn’t much change overall. Now that Chinese customers are returning from their early October holiday, the picture will become clearer, they said.

“In Asia there is the odd comment on NBSK,” a Canadian NBSK supplier said this week, “but I can’t tell you today if I have a true sense of a lot of pushback on the increase.” He said the coming week or week after would provide the answer. Meanwhile, he said, his information is that paper machines in Asia are running full and that the paper appears to be being consumed, without much stocking up of pulp.

He said his company has no inventory, “no softwood whatsoever.” Though buyers are “making noise,” they “don’t have a leg to stand on,” he said.

Nevertheless, a major NBSK buyer in China said it is comfortable with its softwood and hardwood pulp stocks now, and resisting softwood price hikes, said a market pulp consultant. And prices can fall because “there are always a couple (of pulp suppliers) that want to sell what they’ve got,” he added.

Sources said Chinese buyers quickly accepted the $40-$50/tonne Oct. 1 increases for BEK, to $580-$590/tonne net, depending on the producer.

A sales executive for an international agency said his colleagues in China report that “things are starting to slow down” and he said October-November could be the end of the current price run. His colleagues also report that 50%-70% of shuttered non-wood mills—some of them fairly large-- have stayed down, as the government has restricted permits due to environmental factors, he said. While the mills were down, paper mills found that using the higher-priced BEK as an alternative was compensated by better speed and other efficiencies, he said.

A North American buyer for a major international papermaker said he does not expect China to come back to full strength soon. Like others, he thinks that with so many new machines starting up, paper stocks are surely increasing. “Where is the paper going?” he asked. He said papermakers in Asia are moving more toward the use of hardwood to the extent that they can, given the price differential.

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