Pulp markets stable worldwide in December, with a few producers pushing for price hikes; hardwood still particularly tight

Dec 4, 2009 — Forestweb
By Diane Keaton

LOS ANGELES, December 4, 2009 (Forestweb) — Pulp markets around the world are about the same in December as in November, with this marking the first month during the current price run-up in which only a few producers are trying for higher prices.

In addition, some producers are implementing what was left to implement of increases announced earlier in the quarter, particularly for non-contractual customers.

Sources continue to report that no let-up in the tight supply of bleached hardwood kraft pulp (BHKP) and some say it is tighter yet this month than in recent previous months.

Overall global bleached softwood kraft pulp (BSKP) continues to be fairly well balanced, but there have been recent mill restarts and proposed restarts.

Looking at seasonally adjusted statistics, October stocks of World 20 chemical paper-grade market pulp producers remained at 27 days, according to figures released Nov. 24 by the Pulp and Paper Products Council (PPPC) in Montreal. Bleached softwood pulp stocks fell to 21 days from 22 days in September and bleached hardwood pulp stocks rose to 32 days from 31 days.

Even though there is quite a bit of paper downtime, customers are still buying pulp because inventories are so low, supplier sources said, and Canadian NBSK and Latin American bleached eucalyptus kraft (BEK) suppliers have been saying for several months that they need a chance to build inventories.

Restricted supply of both BHKP and BSKP due to mill shuts this year has enabled producers to steadily increase their prices, and they are concerned now about the anticipated capacity increases that are underway now and in the first quarter.

So far, though, China is still buying pulp and demand is steady enough from North America and Europe to keep pricing in producers' favor and global markets solid, sources said.

“Consumers are not trying to buy extra,” said a market pulp consultant. “It’s just solid.”

And contrary to the typical December, when suppliers try to unload tonnage before they close their books for the year, there is no extra tonnage to unload, and no “fire sales.” Likewise, suppliers said that customers, especially in North America and Europe, as so low on pulp inventories that they have to keep buying regular quantities this month, instead of backing off as they typically do in December.

Even though December prices are mostly unchanged following a succession of monthly increases, this is not being interpreted as a sign of weakness.

And there continues to be talk that there will be a new round of global price increase plans for January. This would especially be likely if the U.S. dollar remains weak against the Canadian dollar (it has been hovering close to US$0.95 in recent days), noted a sales executive for a North American supplier.

Pulp prices in China and elsewhere will continue to move up during the next months, but not as fast as they have during the past half a year--unless the U.S. dollar continues to weaken against the major pulp currencies, said a sales executive for a major European integrated producer. “However, we continue to be very cautious regarding any significant improvement in paper markets outside of Asia, so in the event that pulp demand from China would drop, then we would face an overcapacity problem once again,” he said.

Various sources doing business in China have said that business is still steady overall, though they continue to be nervous about when demand will slack off. “It’s going to get worse,” said a market pulp consultant. “The paper business is not great shakes (and pulp demand) always slows seasonally.”

Commenting that pulp market analysts seem to be more pessimistic about next year than the pulp sellers, the European executive added, “To a large extent this has to do with what people think will happen to pulp demand in China.”

China has seen the bulk of the few announced December price hikes; announcing for China were Chile’s Celulosa Arauco y Constitución SA and Russia’s Ilim Group—both up $20/tonne for BHKP and $10/tonne for BSKP--and South Korea’s Donghae Pulp, also up $20/tonne for BHKP.

Also Canada’s Alberta-Pacific Forest Industries Inc. (Al-Pac) on Nov. 30 announced a global $20/tonne increase for BHKP. And Weyerhaeuser Co. announced a $20/tonne increase for fluff pulp for the North American and European markets.

Capacity, supply. In a Dec. 2 research note, paper and forest products industry analyst Paul Quinn of RBC Capital Markets commented that the pulp market remains “very tight,” with the October World-20 inventory figures indicating a balanced market. Noting the consequent rise in prices in response to the tight supply, Quinn wrote, “Unfortunately, the rise in prices has led to a flurry of capacity restart announcements, totaling 1.5 million tonnes or roughly 7% of World-20 softwood capacity.”

On Nov. 30 there was another announcement of a restart: Stora Enso Oyj’s 360,000 tonnes/year mill in Sunila, Finland, which has been down since April. A source familiar with the plans said the start-up would probably occur at the end of December, with very little commercial production in December, then perhaps as much as 20,000-25,00 tonnes in January, with full production in February. Negotiations are still underway with the Russians regarding their export tax for wood, he noted, but if a solution is found, then Stora Enso would produce a large quantity of birch pulp (instead of NBSK) at the company’s recently restarted 650,000 tonnes/year Enocell mill in Uimaharju, Finland. This would provide a balanced situation for the two mills in combination, he said. (In the past, Enocell was producing about two-thirds NBSK and one-third BHKP, and since its early November restart, it has been producing mostly NBSK.)

In announcing the re-start of the Sunila mill, Stora Enso said that while the state of the pulp market has improved since the beginning of the summer, there are still uncertainties concerning trends in the market, the profitability of the Sunila mill in the long term and the availability of reasonably priced wood in Finland. Therefore, it said that next spring, it would reassess the option of permanently closing down the Sunila mill.

North American producers, in particular among BSKP producers, are worried about the potential effect on the market if Buchanan Forest Products Ltd.’s Terrace Bay Pulp mill restarts. As has been reported, the company is talking about a startup before March. But it is in bankruptcy protection and still has financial hurdles to overcome.

“A lot of their former customer base is skittish about growing into a dependency” on the mill, and this implies that the company “would have to buy itself back into the business,” said a sales executive for one of the competitors. Among others, he is worried that such a scenario could quickly lead the market down. An NBSK buyer said he has received a recent communication about start-up schedules. While noting ongoing questions about the mill’s viability, he added, “It’s good pulp.”

Also in Canada, Tembec Inc. plans to restart its 240,000 tonnes/year high-yield pulp mill in Chetwynd, British Columbia, and is targeting the restart for Jan. 1. The mill was idled Feb. 2 for market reasons.

Even not counting the restarted or possibly restarted mills including Sunila, Terrace Bay, Chetwynd, and a 310,000 M-real Corp. BHKP mill, the additional capacity for the first quarter is adding up to the millions of tonnes, a market pulp consultant said. Any by January, mills that were down in previous months for scheduled maintenance wlll be running full he commented out. Supply changes can occur in big blocks, the moves on the demand side are typically smaller, and the accelerated buying season is over now in the U.S. and ending in Europe in two weeks through early March, he said, so the current market tightness is “not sustainable.”

As for the cessation of the alternative fuels (“black liquor”) tax credit in the U.S., scheduled to end Dec. 31, it is not clear once the credit is no longer available, to what extent certain mills will continue to produce pulp, including roll pulp on paper machines.

Another supply-related issue for North American producers is the ongoing Canadian National Railway Co. (CNR) strike. As of Dec. 2, there had no break in the impasse, CNR said in a statement. A sales executive for a Canadian producer who described NBSK supply as balanced-to-tight said the strike was aggravating the situation to some extent. He said that it is too early to determine whether there are any backups and that his company has been able to ship pulp as usual. But he said there is concern about whether the strike will lead to a shortage of empty cars being returned to mills—especially on top of the usual problems that occur with winter storms and other weather. And if the strike is not settled, the clogged logistics could contribute to “an appearance of demand,” the sales source said.

And in the U.S. South, there have been heavy rains, but so far there are no reports of pulp production problems due to a lack of chips. However, there are calls being made to line up additional pulp supply (if the price is right) as a contingency if it develops that chips are unavailable locally, said source for a Canadian producer. With all the rain so far, there is concern among the woodland workers about what the winter will bring. “It’s being closely watched,” said a pulp supplier.

North America, Europe. Prices in the U.S. this month are quite solid, sources said. List prices, unchanged from November for softwood, are at $830/tonne for NBSK and $780/tonne for southern bleached softwood kraft (SBSK) (one SBSK producer is at $810/tonne). This month and last, buyers said spot and transaction prices are anywhere from $680-$735/tonne for NBSK and from $620-$665/tonne for SBSK, unchanged from November.

The announced November list prices of BHKP were $730/tonne for BEK, $710-$715/tonne for aspen and $720-$725/tonne for maple northern bleached hardwood kraft (NBHK), and $700/tonne for southern bleached hardwood kraft (SBHK). Sources said North American-produced BHKP spot/transaction prices have been in the mid-$500s/tonne in November and December, though more on the higher end this month.

The BHKP contractual prices went through in October and November pretty much as announced (mostly up $50/tonne and $30/tonne, respectively). As previously reported, some sales for spot and non-contractual tonnage went through in October at around $30/tonne instead of $50/tonne, but as of December, the full $80/tonne announced for October and November has been implemented, sources said. A sales executive for a supplier who stepped in such pricing—not all did--said that in order to be competitive and maintain his position, his company had to be flexible.

A U.S. spot customer who paid less than the full announced price in October/November said all of his BHKP prices increased by $30/tonne in December. He added that he thinks BHKP is tighter now than a month or two ago.

There were mixed responses to Al-Pac’s last-minute announcement of a $20/tonne global aspen pulp price increase, which was the only BHKP announcement for North America (bringing Al-Pac’s price to $740/tonne) or Europe. Even though other BHKP suppliers haven’t followed it, sources underscored that supply in the U.S. is very tight and that perhaps Al-Pac would be able to drive through the higher price.

An executive for a company that produces BHKP in North America said it would be hard for Al-Pac to succeed without other announcements and without BEK on board. This would especially be the case for players working off of list prices if indexes don’t move, but spot and non-contractual regular customers might have more leeway, he said. But single announcers can create “a lot of animosity, so I doubt if there would be much of a price bump other than to reduce the discount a bit for non-contractual customers,” he said.

Sources said discounts domestically for North American-produced BHKP still approach 20% or so in many quarters, though there are also efforts to reduce them to the mid-teens. Meanwhile, a portion of the tonnage is being sold to overseas spot markets for good prices, helping prop up North American pricing, noted a supplier source.

A buyer said that during the summer and fall, suppliers were reducing discounts on spot sales and some would only lock in the numbers for a specified number of months, apparently thinking that the market would weaken in the fourth quarter.

FOEX Indexes Ltd. has shown little price movement for NBSK in the United States in the past two weeks. For the week ending Nov. 21, it said the price increased by $2.09/tonne, to $820.93/tonne, and for the week ending Nov. 28, it said there was no change.

FOEX continues to show upward pricing movement for NBSK in Europe, where the list price, announced for Nov. 1, is $800/tonne. For the week ending Nov. 21, it showed a $7.90/tonne increase, to $784.84/tonne, and an additional $6.12/tonne, to $790.96/tonne, for the week ending Nov. 28.

For BHKP, it said the price in Europe during those two weeks jumped by $10.42/tonne and then by $5.53/tonne, to $698.61. The list price, announced for Nov. 1, is $700/tonne.

China stable. As has been previously reported, Chinese customers accepted $10/tonne increases for Russian and Chilean softwood pulp. This brought Ilim Group’s BSKP price to $620/tonne at the border and $650/tonne at port, and Arauco’s bleached radiata pine pulp price to $650/tonne. The two companies also announced increases for unbleached kraft pulp (UKP).

Both companies also raised BHKP by $20/tonne, bringing Ilim’s prices to $620/tonne at the border and $640/tonne at port, and Arauco’s BEK price to $650/tonne. Also Donghae Pulp raised its price to China by $20/tonne.

Meanwhile, NBSK pricing was unchanged in December at $700/tonne.

Noting Arauco’s Dec. 1 $20/tonne price hike in China, to a net price of $650/tonne, Americas/Brazil paper and forest products industry analysts at Credit Suisse said in a Dec. 1 research note that assuming an 8% discount for Chinese customers, the Chinese equivalent of BEK list prices--other BEK producers name list prices while Arauco names a net price--should be close to $700/tonne, and that this implies a $40/tonne increase from November levels.

The analysts noted that over the first 10 months of 2009, during which overall pulp shipments grew by 78%, Brazil, among the main players, posted the highest market share gain in the region. (Credit Suisse said that on average, pulp price discount in North America and Europe should stay close to 14%.)

For the week ending Nov. 21, FOEX showed a slight decrease ($0.53/tonne) for BHKP, to $647.51/tonne, in contrast to months of weekly increases. But the price recovered, by $2.31/tonne, to $649.82/tonne for the week ending Nov. 28.

Pulp imports to China in October totalled 1,064,194 tonnes for a 55.4% increase over October 2008 but a 21.0% decrease from September 2009’s strong showing of 1,347,751 tonnes. The year-to-date total soared to 11,631,714 tonnes, up 41.6% year-over-year.

Chinese customers have been buying “a lot less” since August-September and inquiries are down, said a sales executive for a Canadian producer. But he said North American and European customers have taken up the slack and he noted that the shipment numbers show this, as well. Citing low inventories, he said perhaps traders are holding on to spot tonnage.

Another such producer said that even with lower demand, inventories, particularly of NBSK, are so low that it would take a couple of months for the impact to be felt. “We’re very tight,” he added.

A sales executive for a European integrated producer said, “Logic says pulp demand will have to slow down, but in practice we experience that there is a continuous demand for additional annual pulp supply contracts from the Chinese paper producers. I am the first one to agree that no one really knows, but purely from a business perspective the situation is encouraging.”

A North American pulp agent said business is “just ticking along and that he has not seen Chinese customers “turn down any tonne.” As well, he said, his customers elsewhere in Asia and around the world have taken all the softwood (NBSK and other) tonnage he wanted to sell. There was a “stutter” when NBSK suppliers raised their price to $700/tonne from $670/tonne last month, he said, but in Asian markets where the pricing has lagged, December spot prices have gone up $15-$20/tonne, he said. Market watchers “keep pushing back” the timing of a downturn in Chinese demand, but it could happen as more mills restart, he said. He added that suppliers have been behind on shipments.

Pulp players worldwide are trying to get a sense of what Chinese demand will be in the next month or so, going into and out of the Lunar New Year celebrations, which begin in mid-February. “We will all learn more about China in the next week or two,” said a sales executive for a North American pulp producer. “They and Korea have sustained the pulp rally…China surprised us all by continuing to buy.”

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