FOEX Pulp & Paper Indices - Jan. 5, 2010

Jan 5, 2010 — FOEX

HELSINKI, January 5, 2010 (press release) — General economy: USA – The faith in the recovery got a boost from the ISM index depicting the performance of the manufacturing activity. The value jumped in December to 55.9 points, up 4.3% from November, the best monthly performance in 3 years. Orders were up even more, by 8.6%. Separate indices measuring production and employment also moved up. Inventories held by manufacturers' customers are reported to be still falling. This signals potential future gains as additional sales need to be filled from new production rather than from existing stocks. But, final consumer spending is still not very active. Also, construction activity fell more than expected in November as spending on both residential and commercial projects declined.

Europe – The hopes for the recovery are dampened in the EU by the emerging debt crisis. The public debt within the Euro-zone may reach 84 % of GDP in 2010, up 18 %-points from 2007 and almost 1/3 above the Zone’s limit of 60%. Situation in the UK is no better. The weakness of the growth and the rising unemployment prevent the governments from getting an increase in tax revenues. Money supply is proving to be an additional problem. M3 of the Euro-zone fell in November. This speaks for keeping the interest rates as low as possible well into 2010 and the stimulation programs going. If not, the EU-economy risk facing a double-dip.

Japan – Economy came out of recession in mid-2009, but the outlook remains clouded by falling wages and prices. The labor market remains weak, and a strong yen threatens to shrink corporate profits. Government’s 2%+ GDP growth target for 2010 sounds over-optimistic even though PM Hatoyama presented a record budget of about one trillion USD hoping to boost the dormant household spending with bigger welfare programs. The up-end loaded age structure, the ongoing deflation and the high national debt level hinder further major stimulation efforts and are the main obstacles for growth which the Consensus pegs at 1.5% for 2010.

China – Government has set an 8% GDP growth target for 2010. Outside analysts expect the growth to be clearly faster, between 9.5-10.0%. The growth is supported by the stimulation efforts, including generous lending, and weak Yuan. Another factor, boosting the growth in is the formation of the ASEAN free trade area in 2002. The average tariff on Chinese goods sold in ASEAN countries came down to just 0.6% on January 1, 2010 and the rate on ASEAN goods sold to China was reduced to 0.1%. Helped by this ASEAN trade, the manufacturing grew in December at the fastest pace in almost 20 years. The country's job market has continued to improve. The purchasing managers' index jumped to the highest levels since late 2007/early 2008.

Paper industry – The first positive monthly comparisons in paper demand in 2009 were seen in November against November 2008 in the US with both coated mechanicals and coated free sheet showing a 10%+ gain. This may finally mark a sort of a turning point. The absolute shipping volumes remain very weak but there is at least some relative improvement taking place. This relative improvement also shows in the number of ad pages, still down but not nearly as much as 2-3 months ago. In addition, the inventories in the supply chain appear to be quite low across the board, both in the US as well as in Europe. So, whatever orders turn up, they need to be filled from new production.

While some more positive data is available, the outlook for the year 2010 paper consumption and production remains bleak in the industrialized world. The rapid growth of paper capacity continues in China and exports of at least coated free sheet and bleached board risk going up again. Chemical pulp, recovered paper and transportation costs are moving up. The price negotiation environment at the turn of the year is very challenging. Higher costs around the world and the expiration of Alternative Fuel Tax Credits in the US will squeeze the paper producers’ margins and have prompted them to announce price increases. Buyers are reluctant to accept any. Major capacity reductions, especially in the US, will reduce the over-supply problem, improve operating rates and support those looking for price hikes.

NBSK pulp Europe – BKP shipments were up in November by 15%, compared to very weak November 2008 volumes. BSKP deliveries were up by nearly 8%. Shipments to Western Europe were flat against November 2008 but increased to all other regions. Capacity re-starts drew shipment to capacity ratio from above 90% down to 88%. A further decrease in producer stocks to near record-low levels kept the market tight. The USD weakened last week by 0.1% against the Euro. With some sales reported in Euro, the PIX NBSK index retreated by 14 cents, or 0.02%, and closed at 798.63 USD/ton. With the slightly weaker dollar, the EUR-price index came down by 41 cents, or 0.07%, to 554.37 EUR/ton.

BHK pulp Europe – The shipments of BHKP were up by 23% against November 2008 and more than 6% cumulatively. Shipments were up to all major regions. Producer inventories fell by 2 days in absolute terms and by 4 days, seasonally adjusted. Deliveries represented 91% of capacity in November and the annual ratio is approaching 90%. Market is tighter than what these theoretical numbers suggest. USD weakened against the EUR by 0.1%. The weakening of the USD pulled the PIX BHKP index down by 27 cents, or 0.06%, to 485.91 EUR/ton. The USD-price remained again unchanged at 700.00 USD/ton.

BHK pulp China – Market BHKP shipments to China and other non-Japan Asia showed another nearly 200 000 ton, or 54%, monthly increase in November, compared to November 2008. The cumulative gain exceeds already 2.2 million tons from the countries reporting to PPPC and even more if shipments from the rest of the world, mainly Indonesia, Thailand and Russia were included. Several producers have announced price hikes from January 1, in BEKP most commonly by 30 USD/ton. The PIX BHKP China index value rose again, this time by 4.57 USD, or 0.7%, to 662.09 USD/ton. Converting this to the Chinese currency meant an increase of 30.53 RMB, or 0.68%, to 4520.10 RMB/ton.

Newsprint – In 2009, demand fell approximately by 22% in the US and 12-13% in Europe, compared to 2008. This is largely explained by similar reductions in advertising spending. E.g. in the US where total ad spending was down by little less than 15% over the first 9 months, spending on the US ads was down by nearly 23%. In Europe, numbers are less dramatic. The spreading distribution of free delivery newspapers has partly compensated the losses in deliveries against subscription. The rate of decline against 2009 has been flattening out but over-capacity remains a problem in Europe and the price negotiation environment is very challenging. An upward-push effect was contributed by the roughly 1.2% weakening of the EUR versus the basket of non-EMU currencies. The PIX Newsprint benchmark inched up by 65 cents, or 0.13%, and closed at 509.13 EUR/ton.

LWC – Among printing and writing papers, coated mechanicals are down the most against 2008, together with coated woodfrees. They have, however, also showed the fastest relative improvement in the recent months, especially in the US where November 2009 shipments were 15% above the very weak November 2008. Over-supply and pressure from coated woodfree imports complicate the pricing outlook. The approximately 1.2% weakening of the EUR against the weighted basket of non-EMU currencies helped the benchmark higher. The PIX LWC index moved up by 2.38 EUR, or by 0.36%, to 667.81 EUR/ton.

Coated woodfree – In the US the rising postal rates and the move of the advertising to electronic media are expected to reduce the direct mail spending. At least the latter cause is valid also in Europe. These reductions impact many grades with coated woodfrees among the worst hit. International competition continues to increase with China expected to export growing volumes in 2010 and with also European exports back up, at least in October, against 2008. The weakening of the EUR against the weighted basket of non-EMU currencies provided an up-force to the benchmark. The PIX Coated woodfree index moved up, even if rather marginally, i.e. by 24 cents, or by 0.04%, to 668.35 EUR/ton.

Uncoated woodfree – The worsening unemployment problem dampens the outlook for uncoated woodfrees on both sides of the Atlantic. Also, many administrative forms can now be filled in electronically which is beginning to actively reduce the paper consumption in public offices. Oversupply remains a problem. The re-rising fibre and other costs would require an increase in prices but the supply/demand balance maintains, on the other hand, the downside pressures. The weakening of the EUR against the weighted basket of other European currencies brought a positive effect to the benchmark. Regardless of this upward push, the PIX A4 B-copy index moved down by 1.58 EUR, or 0.20%, to 774.51 EUR/ton.

Packaging – November was not as weak a month as the previous ones in terms of the US corrugated box shipment volumes. Inventories continued at a low level. Price increases of typically 50-70 USD have been announced from January for domestic market, at the same time when the earlier announced large capacity cuts materialise.

In Europe, brown kraftliner producers have announced price increases of typically 50-60 EUR from Jan 1. For brown recycled grades no price hike announcements have been made for 2010. All of our containerboard benchmarks moved upwards from last week, mainly due to the weakening of EUR by some 1.2% against the non-EMU currency basket. The PIX Kraftliner index gained 35 cents, or 0.1%, closing at 416.04 EUR/ton. The PIX White-top Kraftliner index headed north by 1.25 EUR, or by 0.2%, to 621.88 EUR/ton. The PIX Testliner 2 index gained 62 cents, or 0.2%, ending at 340.73 EUR/ton, the PIX Testliner 3 went up by 63 cents, or 0.2%, to 321.19 EUR/ton, and the PIX RB Fluting gained 52 cents, or 0.17% closing at 308.26 EUR/ton. Compared to their values in the beginning of 2009, both kraftliner benchmarks are now down by about 70 EUR and recycled fibre based indices down by 20-40 EUR.

Recovered Paper – Shortage of container capacity and continued quite good demand in both Europe and China have been supporting prices of recovered papers, especially OCC export prices. In Europe, December was a quite stable month in terms of pricing (especially for ONP/OMG) and collection volumes remained at a low level. UPM has recently announced it will invest in a new recovery facility at their Shotton mill.

The PIX OCC 1.04 dd benchmark continued its way up, this time by 51 cents, or 0.7%, closing at 75.87 EUR/ton. The differential to Testliner 2 grew marginally, by 11 cents to 264.86 EUR/ton and to Testliner 3 it increased by 12 cents to 245.32 EUR/ton. The gap to RB Fluting grew by a most marginal 1 cent to 232.39 EUR/ton. The PIX ONP/OMG 1.11 dd benchmark gained 43 cents, or 0.5%, to 88.63 EUR/ton, and the difference to Newsprint index grew by 22 cents to 420.50 EUR/ton.

US NBSK pulp – November was a strong month in BSKP shipments to the North American market, primarily to the US. Against November 2008, deliveries were up by 10.5%. Cumulative decline is still substantial, 13%, or 600 000 tons. The tightness of the global market and the substantial increase in the US producers’ costs through the expiration of the Alternative Mixed Fuel Tax Credits has triggered, further pulp price increase announcements from the producers also in the US market, typically by 20 USD/ton from January 1. The PIX US NBSK index, representing sales still within 2009, moved up by 43 cents, or by 0.05%, and closed flat at the earlier announced 830.00 USD/ton.

US Newsprint – The drop in the shipments to the regional market continued but the rate of the decline flattened out further in November. Shipments were down by 14% in the month-to- month comparison and now 29% below the 2008 cumulative volume. Exports went down slightly less, or by 12%. With more capacity out of action, operating rate improved a lot to 88%. Some of the improvement was, however, due to inventory build-up. Price increase attempts continue. Both of the benchmarks moved upwards. The PIX US Newsprint 30lb benchmark jumped by 7.14 USD, or by 1.39%, to 519.09 USD/ton and the PIX US Newsprint 27.7lb index by 7.45 USD, or 1.36%, to 553.82 USD/ton.

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