Revised: Global pulp markets continue strong as New Year begins, with supply limited and January price increases being implemented

Jan 8, 2010 — Forestweb
By Diane Keaton

LOS ANGELES, January 8, 2010 (Forestweb) —

Forestweb Editor’s Note: On Jan. 10, this report was expanded from the version initially posted on Jan. 8.

In the first full week of the New Year, pulp producers are implementing price increases throughout the world.

Producers announced the mostly US$20-$30 per tonne Jan. 1 price hikes last month as it became clear that the overall supply situation had continued to tighten.

Not everyone is back from holiday breaks, but buyers and sellers who have returned to their desks are speaking as a chorus about the strong market conditions.

They said the higher prices have already been implemented in China, without resistance. The same is true or is unfolding as such in the U.S. and Europe, they said.

As has been the case for months, hardwood pulp is in tighter supply than softwood pulp, but there is also limited availability of softwood pulp.

And in recent weeks, production in the U.S. South has fallen off, not only because of ongoing wet weather conditions affecting wood harvesting (especially hardwood), but also due to cold weather-related mechanical problems.

With January price initiatives pretty much a done deal, pulp players are now more focused on how much longer the current conditions will hold. Sellers and buyers alike said much depends on Chinese demand in the coming months as well as economic factors as the world slowly climbs out of the recession.

Pulp players have been saying that it is increasingly difficult to predict the future of the global pulp market based on the behavior of past cycles because circumstances have become increasingly complex.

One producer said his company expects the market to flatten out through September and drop in the fourth quarter, but added, “Who knows? We might be able to skate right through this. There are a lot of elements we don’t have a grip on.” (As an example, he said wood issues are continuing to hamper pulp production in Southeast Asia and could also limit production at a new mill starting up soon in China.)

As for the immediate future, some sources are speculating that there could be another round of price increase attempts for February, but it appears to be too early in the month for any firm plans.

Statistical advantage. Producers are buoyed by November statistics showing that supplies are very tight and that buyers’ stocks are very low. They said they have not yet seen a negative impact from recently restarted capacity in British Columbia and in the Nordic region.

The current market dynamics go against trend. Producers’ inventories tend to build in January; on the average in the past 10 years, the increase has been 236,000 tonnes.

“There’s no pushback on pricing (in the U.S. or Europe)…right now we see business as pretty steady, firm,” said a sales executive for a Canadian NBSK producer, adding that customers’ stocks are too low for them to put up a resistance. The ongoing conditions are not what he had expected at this point, he said. “It keeps getting pushed out,” he said. “The barometer is not the same.”

As another Canadian pulp sales executive put it, “The dreaded and long-anticipated downturn will be pushed back (even further).” Commenting that his company is holding less than half of its normal inventories, he said, “Just look at where (global) inventories are today. I have never seen a correction in pricing when inventories are at record lows.”

As reported Dec. 22, the November stocks of World 20 chemical paper-grade market pulp producers fell to just 25 days (standard calculation) and 23 days (seasonally adjusted, according to the Pulp and Paper Products Council (PPPC) in Montreal.

Bleached softwood pulp (BSP) stocks stood at just 20 days and 19 days (standard and seasonally, respectively). The PPPC said the seasonal number was a record low. Bleached hardwood pulp (BHP) stocks were at 29 days and 27 days (standard and seasonally, respectively), down from 31 days in October.

Meanwhile in November, European woodpulp consumers’ stocks dropped to 690,212 tonnes, the lowest on record under the current configuration of Utipulp countries and also the first time they have fallen below 700,000 tonnes. Year-over-year consumption continues to be down, but in recent months the difference has lessened.

In November, China imported 954,186 tonnes, which was the first month since February that imports did not surpass 1 million tonnes, and they were considerably lower than the 1.2 million tonnes and the 1.3 million tonnes that marked some months in the second and third quarters of 2009. However, the November figure was nevertheless higher than for every month of 2008, while total January-through-November 2009 imports of 12,585,881 tonnes were 43.3% higher than for the same months of 2008.

Sales executives for major producers have been quick to emphasize that they are still oversold, as they have been for months.

“The correction (in China) has started and gone unnoticed because demand picked up in other markets,” said a sales executive for a Canadian NBSK producer. He said papermakers in the U.S. and Western Europe have been making up for “over-destocking” in the first half of 2009 and that they bought steadily in the second half of the year.

Noting that the combined U.S. and European markets are three times the size of China, he said that even though Chinese demand dropped somewhat, it was “irrelevant.” Market conditions are “extremely tight, as black and white as I’ve ever seen it,” he said.

He added that his company is two to three months behind on shipments to China and that the severe winter weather is an ongoing challenge for its operations. “I hope that in March we will be caught up. (But) I don’t think that will happen,” he said. In order for global softwood pulp producers to keep customers supplied around the world, “We literally need the Chinese to back off or for a few pulp mills to start up,” he said.

Separately but also reflecting evolving markets, the shipping industry has had a sharp increase in demand, and pulp sources report continued freight price increases. “The (North American) container lines are all very busy and all on allocation,” said a pulp agent, noting that a year or so ago, “so many vessels were setting in dry dock—especially break bulk.”

U.S. South. A number of sources said inclement weather in the U.S. South continues to curb pulp production in the region.

Extremely wet weather conditions since late last summer have made it difficult to harvest hardwood trees from soggy bottomland. “We are experiencing an acute shortage of hardwood…and we have told our customers,” said a sales executive for one of the producers with mills in the region, adding that others in his company’s area are having the same problems.

As well, recent unusually cold weather for the U.S. South, including snow, has caused mechanical problems in some mills.

Another sales executive in the region said December and January production at his company’s mills is down about 15% because of the mechanical issues, “so it looks like it is going to be tight, certainly through the first quarter.” He said the mills have not lost production due to the woodchip shortage, but that the situation is hand-to-mouth.

Meantime, his company has no extra pulp—this has been the case for months, aside from the weather-related issues--and has been turning away requests from customers, he said.

Though the recent cold spell has allowed for better access to the woods, he said it is unlikely that wood supplies can be built back right away. “It will probably be tight through the winter,” he said, adding this has also driven up wood costs.

A Canadian NBSK producer said his company received calls starting in mid-December from four major North American customers looking for large quantities who reported that certain producers in the U.S. South were unable to supply their needs.

A North American-based pulp agent said various mills in the U.S. South, citing the wet weather, have not been able to provide him with hardwood pulp. He added that demand for southern softwood pulp is very high and that supply remains very tight, with producers unable to provide his allocation for three or four weeks.

One producer, Parsons & Whittemore Inc. (P&W), said it is running at a reduced rate on hardwood because of a shortage of fiber and is instead running more softwood. The company isn’t releasing the amount of the reduction.

The company noted that it was already tight on supply but that the wood issues have aggravated the situation. “There is no inventory to speak of,” said a P&W executive, adding that the company has been unable to supply the “many inquiries for additional tonnage” it has been receiving.

Furthermore, P&W has two-week maintenance shuts coming up in each of its two mills in Claiborne, Alabama, with the hardwood mill going down in the last week of February and the softwood mill in early May.

For 2010, P&W has budgeted 350,000 tonnes of hardwood pulp and about 600,000 tonnes of softwood pulp.

In 2009, it produced about 450,000 tonnes of hardwood pulp, but it has been reducing hardwood production over time It announced Sept. 30 that as of the second quarter of 2011, its mix will also include fluff pulp following a conversion project in its softwood pulp mill.

Black liquor. It’s too early to know the impact of the Jan. 1 cessation of the alternative fuels (“black liquor”) tax credit, but pulp players said that as long as the market stays strong, they don’t predict a drastic impact on the market.

They do expect U.S. producers to cut back on the production of roll pulp, which sources have said some were producing quite a bit of in 2009 to take advantage of the tax credit.

Market sources noted that, aside from the tax credit, the strong U.S. currency has been a big boost to U.S. mills. “What changed is the exchange rate,” said a Canadian producer. “Every dollar of the increases has gone to the bottom line” and the strong market has made mills cash-positive, black liquor credit or no.

Meanwhile, despite the end of the tax credit, U.S. supply is “tight as a drum,” said a North American pulp agent.

According to a Jan. 5 local news report, Domtar Corp.’s Woodland northern bleached hardwood kraft (NBHK) pulp mill in Baileyville, Maine, is continuing to run full and to have strong demand for its product. The mill had shut in March but reopened in June, with the company citing a stronger global demand for pulp, the black liquor credit, favorable currency exchange rates, and improving prices.

U.S. steady. With supply so tight, the announced $20-$30/tonne Jan. 1 price increases in the U.S. are expected to go through fully and have already been implemented among various customers, sources said in recent days.

Buyer and seller sources alike report no pushback. “There’s no issue,” said a sales executive for a major North American producer. “We have closed business.”

The announced increases include $20/tonne for NBSK, to $850/tonne. For southern bleached softwood kraft (SBSK), one major producer announced a $30/tonne increase to $810/tonne while two other major producers announced up $20/tonne to $800/tonne.

Announcements for North American-produced NBHK were up $20-$30/tonne (depending on the producer), to $740-$750/tonne for aspen-grade NBHK and $750/tonne for maple-grade NBHK. The southern bleached hardwood kraft (SBHK) increase is $30/tonne to $730/tonne. Brazilian bleached eucalyptus kraft (BEK) pulp producers announced a $30/tonne hike for the U.S., to $760/tonne.

Softwood and hardwood pulp supply in the U.S. is so tight that in the first days of the New Year, agents were calling pulp buyers to buy any excess fiber they might be willing to sell, according to one such buyer. “That’s concerning to me,” the buyer said, adding that the pulp price run-up has been a challenge for paper producers’ bottom lines. “We don’t want to think about further (price) increases this quarter.”

The FOEX Indexes Inc. price for NBSK in the U.S. has continued to move upward by a few cents in recent weeks. For the week ending Jan. 2, it reached the Nov. 1 list price of $830/tonne, up $0.43/tonne week-over-week. In the previous two weeks, the price increased by $0.04/tonne and $0.48/tonne, respectively.

Market conditions for North American-produced hardwood pulp are strong, said an executive for a company that produces NBHK for the market. He said the company is getting calls from would-be buyers overseas offering “phenomenal prices—more than domestic mill nets.” But he said his company is keeping domestic customers as its priority. He said January pricing has “absolutely” gone through. “Everything is sold out, everyone is taking their full allocation,” he said, adding that there is no spot tonnage available.

Though NBHK is generally in tight supply, a North American pulp agent named a mill that “offers (spot) tonnes and we buy.”

Customers have little leverage against higher prices. “Buyers don’t want to see a price increase, but how can they argue it when inventories are this low? said a major U.S. buyer. The only way to stop it is if demand backs off…but I don’t see that in the short term.” He said there appears to be some momentum for another price hike in February of about $20-$30/tonne. With conditions as they are, he said, “I don’t know why not.”

Another U.S. buyer said his suppliers have not intimated that there could be another price hike push in February. But he said his January prices have clearly increased by $20/tonne for softwood and $30/tonne for hardwood pulp. He said his NBHK suppliers describe supply as “very, very tight right now.”

One of the producer sales executives said there has been no internal discussion in his company about February increases—at least at this point.

But he said another price hike in this quarter wouldn’t surprise him, given the low producer inventories, the end of the black liquor tax credit advantage for U.S. producers and the Canadian producers’ currency disadvantage (at US$0.97, the Canadian dollar is nearing parity with the U.S. dollar). The market might ease by the second quarter if China were to slow down, he added.

Meanwhile, he noted, papermakers are hoping to increase their prices.

The fourth quarter is traditionally a strong demand time for printing and writing papermakers, and a pulp buyer for a major U.S. fine papers producer said his company’s orders have slowed down this month. “We’re still running full, but we don’t have as much of a backlog as in the fourth quarter,” he said, and the company’s paper sales people are wondering whether this is the normal slowdown after the fourth quarter ‘or should we react now?’

On the other hand, he noted that the global economic recovery that seems to be underway will help improve paper demand, “and without a drop in paper demand, I don’t know what would drive a drop in pulp prices.”

Europe tight. Producers doing business in Europe generally said they expect the January price increases to go through in Europe. European customers typically don’t close business until later in the month, and in early January, people were still trickling back from holiday breaks.

Producers announced $30/tonne Jan. 1 increases for both bleached softwood kraft pulp (BSKP) and bleached hardwood kraft pulp (BHKP). This brought list prices to $830/tonne for NBSK, $790/tonne for SBSK, $730/tonne for BEK and birch pulp, and $710/tonne for SBHK.

In the past three weeks, the FOEX price for NBSK in Europe has been $798/tonne and a few cents. For the week ending Jan. 2, it was $798.63/tonne, down $0.14/tonne. The previous week, it was $798.77/tonne, down $0.02/tonne, and the week before that it was up $1.91/tonne, to $798.79/tonne.

As of the week ending Jan. 2, the FOEX price for BHKP in Europe stood at the Nov. 1 list price of $700/tonne, for the fifth straight week.

Supply of BEK is tight and softwood is in balance and “I think we will see prices go through,” said a sales executive for a major European producer, adding that they have already been implemented in China.

A sales executive for a North American producer selling into Europe said it is “pretty well given” that there is no opposition to the $30/tonne BHKP price increase plan, while there are “some rumblings” about BSKP and that agents indicate the proposed January $30/tonne BSKP hike could be implemented in stages.

He noted that customers are seeing their real prices increase due to the strengthening U.S. dollar, even as their paper prices remain stagnant. (The euro is currently at US$1.44.)

Buyers in Europe are looking for “every tonne of (hardwood) pulp that can get their hands on,” said an executive for a major fine papers producer, adding, “Apparently there is no end in sight” to the tight conditions.

As for February price increases, a European pulp sales executive said such would be possible, “at least for hardwood, if not for softwood.” Market conditions “are much better than what we expected two months ago and are actually tight,” he said.

He said softwood supply appears to be “a bit tighter” than in recent months. He noted Södra Cell AB’s unexpected three-week extension last month to the two-week maintenance outage at its Värö, Sweden, mill, and he named a major integrated Nordic producer that he said is still short on pulp.

He said fine paper mills in Europe are running well. “Many customers report they are running full” and they are forecasting full operations in the coming month,” he said. But he said demand is down for mechanical paper, thus reducing operating rates.

Separately, in the Middle East, pulp prices also continue to rise, mostly by $20/tonne for softwood pulp and $30/tonne or more for hardwood pulp, said a North American agent doing business in the region. This puts North American-produced hardwood pulp prices at about $680-$700/tonne, he said. He said Middle Eastern buyers have had to accommodate to whatever fiber is available in this tight market, but that since “95%” of it is used for tissue, the customers have some flexibility.

China buying. A number of sales executives for major producers said January softwood and hardwood pulp price increases have easily been implemented in China.

For China, NBSK producers announced $20/tonne increases, to $720/tonne (list) for commodity NBSK and $730/tonne (list) for reinforcing NBSK. Also Chilean producer Celulosa Arauco y Constitución SA and Russian producer Ilim Group separately announced $20/tonne BSKP hikes, respectively to $670/tonne (net) and $660/tonne (at the port).

Brazilian BEK producers announced $30/tonne increases for China, to $690/tonne (list), while Arauco went up $20/tonne, to $670/tonne (net).

The FOEX price of BHKP in China continues to move upward. For the week ending Jan. 2, it was up $4.57/tonne, to $662.09/tonne. In the previous two weeks, it rose by $1.76/tonne and $0.13/tonne, respectively.

“Nobody’s banging on our doors, nobody is refusing the price increases, they’re just going along (steadily),” said a sales executive for a Canadian pulp producer. “These price increases for January are going through with no problem whatsoever.”

Even though China has been destocking some in recent months and even if demand were to decline in January, he said, it would be two or three months before an impact would be felt. He said a pickup in Chinese demand might well occur as other pulp capacity comes on stream, “so who knows? It’s a really fickle market and it’s hard to pick a date.”

A sales executive for a Canadian NBSK producer is not seeing any demand back off in January—in fact, the opposite. He said his company had sold its full normal allocation at its new price level as of Jan. 7, whereas in December, it took all month. “I think Chinese buyers now realize the market is unbelievably tight,” he said. “It’s first come, first served. We’re turning away a lot of orders (globally).”

There was at least one Jan. 1 price announcement for bleached chemi-thermomechanical pulp (BCTMP), or high-yield pulp, by Tembec Inc., to $690/tonne for 80-bright maple grade, up $30/tonne, and a source said the increase has gone through.

A sales executive for another Canadian BCTMP producer, calling the BCTMP market “too confused,” said his company did not make a price hike announcement but that it is nevertheless going to try to raise prices.

Chinese demand for imported BCTMP currently “is not very strong,” he said. He said there appears to be more domestically produced pulp available to major users in China and he noted that a number of competitors from around the globe are selling BCTMP into China. In addition, the restart this month of Tembec’s high-yield pulp mill in Chetwynd, British Columbia, “is creating a lot of uncertainty in the market,” he said.

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