Revised: Pulp producers expect further price hikes in February as customers scramble for tonnes amid very tight supply around world

Jan 15, 2010 — Forestweb
By Diane Keaton

LOS ANGELES , January 15, 2010 (Forestweb) —

Forestweb Editor's Note: This report has been expanded from the originally posted version.

The pulp market has tightened noticeably in January and major producers are saying that they will push for further price increases in February.

In fact, one of them, northern bleached softwood kraft (NBSK) producer Canfor Pulp LP in Canada, today made just such an announcement—up US$30 per tonne for North America and Asia. European producers are expected to lead NBSK announcements for Europe. And the market is expecting global announcements for bleached hardwood kraft pulp (BHKP), as well.

This would follow what has proven to be quick implementation in various key markets of the mostly $20-$30/tonne Jan. 1 price hike plans.

Sales executives for several major pulp producers used the word “desperate” to describe some customers’ pleas for tonnes. They said these customers had earlier cut back on demand in anticipation of a turn in the market that has not yet come, and their inventories have dropped too low for comfort.

Sources this week and last said the January market conditions are stronger than in December-November. Some noted that there were signs around early to mid-December that the market might be softening a bit. But that sentiment vanished in the New Year.

As has been previously reported, pulp producers’ supplies were at rock bottom on a global basis at the end of November and European customers’ inventories continue to be very low. Producers said U.S. and Chinese customers have limited inventories, too. A number of producers this week said they don’t have any spot tonnage to sell. “We can’t make or ship enough softwood or hardwood right now,” said a sales executive for a North American NBSK and northern bleached hardwood kraft (NBHK) pulp producer.

Sources generally expect tight conditions to continue at least through the first quarter and likely through the second quarter, thus again pushing out the long-anticipated downturn.
Sources also point out that strengthened currencies versus the U.S. dollar are likely to keep prices up. Lately the Canadian dollar has been at US$0.97 and the euro at US$1.43 and nearing US$1.44.

“It’s unbelievable. It’s tight as a drum,” said a sales executive for non-North American bleached softwood kraft pulp (BSKP) producer. He said all of his January business was done by the end of the year, with customers in Asia placing orders within a day of being told what’s available. “Nobody’s waiting around.” Whereas several months ago, customers, particularly in China, were trying to negotiate the price, that is no longer the case “and still we sold out immediately,” he said.

Like others, he said his company has been “bombarded” for months with calls from would-be buyers in traditional spot markets, but if it had spot tonnes, they would go to strategic markets. Meanwhile, he said, his company is holding its breath over supply issues. “We are down to zero inventory as we are loading ships,” he said, and it’s fine if customers don’t want the tonnes.

As for February price increases, he said, “All the fundamentals say the price should go up.” Also, he said, his company is currently negotiating discounts in one of the Asian markets it serves.

A sales executive for a Canadian NBSK producer said Canfor Pulp’s announcement “should not be a surprise” because supply numbers are so low and the market is “exceptionally tight.”

Sales executives for bleached eucalyptus kraft (BEK) producers report no letup in their tight supplies and strong demand. “The market is very, very tight,” said one. “Everyone is desperate for more pulp.”

Another said it’s better for softwood pulp producers to lead a February announcement, and for hardwood pulp producers to then follow. “If we want to be safe, we will wait for softwood to go first,” he said, before news of Canfor Pulp’s announcement had reached him. “As long as softwood goes, we can go.”

Not every producer was talking up February price hikes this week. A sales executive for a major NBSK producer said his company would evaluate its plans once the December pulp producer statistics are released.

Producers and other pulp players continue to describe hardwood pulp as in tighter supply than softwood pulp, but since both sectors are tight, it is a matter of degree. As an agent doing business in China put it, “Everyone is holding less than normal inventories. Hardwood is very, very low and softwood (producers have) higher inventories, but still below normal. There is no spot business because there is none available.”

Though current conditions point to longer-than-previously expected solid pulp demand, Canadian market pulp consultant Brian McClay sounded cautions in his just-released newsletter, Market Pulp Monthly. Paper markets around the world are weakening, with prices for most paper grades under increasing downward pressure, including in China, he wrote.

“Margin pressure on China’s imported-pulp dependent paper mills will continue to increase over the next couple of months as it will for European and North American papermakers, particularly those producing publication grades for which markets are weakest,” McClay wrote. “A growing number of these mills will succumb to the pressure over the next few quarters, reducing demand for pulp.”

Supply issues. Various Scandinavian pulp mills have had to slow running rates because of issues surrounding the extremely cold weather, and this is in addition to mechanical problems at some mills.

McClay said pulp output in Northern Europe continues to be limited by increasingly tight softwood chip supplies in several countries, partly due to heavy snows, hampering wood transport, and by the virtual absence of birch pulpwood in Finland for either market or integrated production.

McClay said there have also been recent boiler and extreme cold weather-related production problems at several Canadian NBSK mills. Producer sources have told Forestweb that, in addition to causing production problems at Canadian mills, the cold weather has affected transport.

Production in the U.S. South, particularly on the hardwood side, has been especially affected by extremes in wet and cold weather.

Reports suggest the U.S. supply reductions could total at least tens of thousands of tonnes per month, McClay wrote this week. Along with the absence of the Alternative Fuel Mixture (“black liquor”) tax credit, which ended on Jan. 1, producers have all but eliminated the market availability of roughly 20,000 tonnes per month of roll pulp, much of which was destined for China last year, he said.

McClay said there are about 37 bleached kraft pulp mills across the U.S. South, with a capacity of close to 18 million tonnes/year (55% softwood/45% hardwood), of which about 40% is market/dried pulp, including more than 4 million tonnes/year of fluff pulp.

Forestweb sources have been saying for some time that expected additional hardwood pulp market pulp capacity in Southeast Asia and China is and/or will be curbed by a lack of available and/or affordable wood, some of which has to be imported to mills.

McClay said that for Indonesia, among other things, a worse-than-normal and continuing rainy season has significantly limited the increased delivery of available pulpwood.

U.S. buying. As previously reported, buyers and sellers said the January pulp price hikes have easily gone through.

They are up mostly $20/tonne for BSKP and up mostly $30/tonne for BHKP. The January announced prices are $850/tonne for NBSK, mostly $800/tonne for southern bleached softwood kraft (SBSK), $740-$750/tonne for aspen-grade NBHK, $750/tonne for maple-grade NBHK, $730/tonne for southern bleached hardwood kraft (SBHK), and $760/tonne for BEK.

The $30/tonne Canfor Pulp announcement for Feb. 1 would bring its NBSK price in the U.S. to $880/tonne.

FOEX Indexes Ltd. said that for the week ending Jan. 9, the price of NBSK in the U.S. increased by an even $10.00 tonne, to an even $840/tonne, up half of the announced $20/tonne Jan. 1 list price announcement.

“Hardwood and softwood are very, very tight…softwood for me is as tight as hardwood,” said a U.S. pulp buyer who has been looking for more tonnes this month to feed increased production. Despite the end of the black liquor tax credit, affected mills are still producing pulp, “and we need it,” he commented.

He started looking for February tonnes early in January instead of waiting until the second half of the month, but “To a person no one’s giving me what I’m asking for.” He said all producers report that existing customers are asking for more and that would-be new customers are contacting them—and that he is one of those customers. He is willing to switch to grades he doesn’t typically use, but as to whether he will get such volumes, he said, “We hope.”

As for February, he said he wouldn’t be surprised to see prices rise. “Our budget’s certainly not going to look like we thought,” he said. “We thought the market would slip by now.” He expects the market to remain tight in the first quarter, and maintenance outages will keep it tight beyond that.

Commenting on the Canfor Pulp announcement for Feb. 1, another U.S. buyer said, “(T)hey aren’t wasting any time,” but the market is “actually tighter now than in December.”

In a Jan. 14 research note, Deutsche Bank paper and forest products industry analyst Mark Wilde said uncoated freesheet price increase announcements over the next few weeks “are extremely probable,” and that they likely will be in the $60/ton range on a variety of grades. He noted encouraging year-over-year volume comparisons and improved shipment figures. Aside from the very weak year-earlier figures, he said his firm’s discussions with merchants, importers and others “suggest a healthier tone to the business.”

A sales executive for a North American pulp producer said he has been seeing a pickup on the coated paper side, a sharp contrast to what he described as the “dire straits” of several major U.S. producers last summer.

A specialty producer in the U.S. said business is good and his machines are running as well as last year. But he said the ever-increasing pulp prices are causing a lot of revisions in his costs and paper pricing. At the rate pulp prices are rising, he said, the pulp market will “crash and burn” by the middle of the year.

Europe demand. Though January price negotiations are not yet completed across the board in Europe, there is no doubt that prices are increasing this month, presumably to announced amounts. Both BSKP and BHKP announcements were for $30/tonne hikes, bringing the list prices to $830/tonne for NBSK and $730/tonne for BEK.

FOEX said that for the week ending Jan. 9, the price of NBSK in Europe jumped by $14.61/tonne, to $813.24/tonne. The BHKP price also jumped, by $17.20/tonne, to $717.20/tonne.

In the words of an NBSK producer doing business in Europe, “When we talk to customers, there is no discussion about price. They just want their volumes.”

Also there is no doubt that there will be price increase announcements for February.

“The market is extremely tight. There’s no discussion whatsoever that (January) price increases will go through,” said a sales executive for a major European producer that expects increases in February of probably $20-$30/tonne. Even during the year-end holiday break, people he “hadn’t spoken to for years” were phoning him for pulp, he said, adding that he expects a strong market through the first quarter.

A BEK producer said, “Europe is definitely tighter (in January) than December and November…customers are desperate to get volume.” They are looking for any kind of pulp they can find, and even regular buyers are trying to secure February tonnes in advance, he said. European buyers got behind because they didn’t expect the market to continue to be so strong and they also didn’t grasp how much business was diverted last year to Asia, he said, adding that the market in Europe is unlikely to change soon because it will take time for buyers to build up stocks from current extremely low levels.

A Southern European agent this week said he had no doubts the price announced would easily be implemented in Italy.

As reported Jan. 13, Europulp released statistics showing that woodpulp port stocks had increased month-over-month in December by 110,971 tonnes, or 17.0%.

But, noting that the total of 762,431 tonnes was still near historic lows and that December Europulp stocks traditionally increase from November, several pulp suppliers selling into Europe said they were not concerned because producer and consumer stocks alike are so depleted. “They’re too low anyway,” said one such source about the December Europulp increase. “I don’t care.”

Pulp seller sources said their customers’ existing paper mills are running full. Customers’ business is “a little bit better than most of last year—15% to 20%, not 25% below (2008),” said a European supplier. “It’s not where it was two to three years ago, but it’s picking up.” Some that had considerable downtime are up and running now and there isn’t talk of downtime, he said.

A BEK supplier noted that the higher pulp prices are squeezing customers’ margins. “Their machines are running full and they have good orders. The only problem is margins,” he said.

Another BEK supplier described the coated papers market as having recovered a bit, but said the uncoated market is still struggling. With currency fluctuations, he said there is still room to raise pulp prices because the price in euros “is not that high.” The demand in Europe is very high, he said. “No one has pulp.”

China increases. The China market remains very strong and the announced January $20-$30/tonne price hikes (depending on the producer) were easily implemented, seller sources have been saying.

The January prices are $720/tonne for commodity NBSK and $730/tonne for reinforcing NBSK. Chilean bleached radiata pine is $670/tonne and Russian BSKP is $660/tonne (at the port). Brazilian BEK is $690/tonne (list), while Celulosa Arauco y Constitución SA’s BEK price is $670/tonne (net).

For the week ending Jan. 9, the BHKP price in China shown by FOEX was $683.75/tonne, soaring by $21.66/tonne.

With an announced Feb. 1 $30/tonne increase, Canfor Pulp’s new list prices in China will be $750/tonne for commodity NBSK and $760/tonne for reinforcing NBSK.

“Basically the market price is the market price and if (customers) don’t want the tonnes, fine,” said an NBSK producer in British Columbia. “People are still looking for spot tonnes from around the world. We’ve been getting those calls for months and they haven’t stopped.” He said the China market has been “extremely tight” for six months.

“Everything sold out immediately, earlier than normal…and there was no resistance to this price increase,” said a Chinese pulp agent. This was in contrast to December and November, when some customers resisted the price hike and took only half of their allocation or contracted volumes, he said, adding that this was agreeable to producers, who needed the tonnage to meet demand in other markets.

He said the local price of NBSK has recently increased by about US$30-$40/tonne Before the New Year, the price was RMB5,400/tonne and now it is as much as RMB5,700/tonne to RMB5,800/tonne, he said.

Sources continue to say that BHKP is in tighter supply in China than BSKP. (But as for SBSK, the agent said that, since October, there hasn’t been much available for the China market.)

Separately, adding to reported comments in recent weeks about bleached chemi-thermomechanical pulp (BCTMP) markets in Asia, a BCTMP supplier this week said his company was not trying to raise prices. For certain grades using BCTMP, this is a seasonally slower time, and also a price correction has been underway to establish a more typical price differential between BCTMP and BHKP, he said. (Starting last summer when demand was very strong, the price of BCTMP rose above that of BHKP, which is a reversal of the norm.) The adjustment underway will bring back demand for BCTMP, he said.

The Chinese agent said January import statistics would likely be down because they will reflect decreased orders taken in October. This means customers will continue to have low inventories in the near future, he said, adding that they need to build inventory before the seven-day Chinese Lunar New Year celebrations in mid-February.

He said most traders have a month’s worth of inventory, amounting to 70%-80% softwood pulp and the rest hardwood pulp. While large-scale papermakers have one or two months’ worth of inventory, some medium-sized mills have less than a month in stock, he said.

Thus, he said, producers will likely be able to implement higher prices in February. “Pulp will be strong through the first quarter and at least into mid-year because everyone needs pulp,” he said.

Credit Suisse’s Latin American Pulp & Paper Team reported in a Jan. 11 research note that Chinese pulp imports totalled 1 million tonnes in December, according to China Customs. Credit Suisse said this amounted to an increase of about 45% year-over-year and 4% month over month, and that for all of 2009, China imported close to 13.7 million tonnes of pulp, with bleached pulp accounting for 92% of the total.

As Forestweb reported on Jan. 5, in November, China’s pulp imports amounted to 954,186 tonnes, and that total imports from January through November rose to 12,585,881 tonnes, up 43.3% from the year-ago period. Adding in the 1 million tonnes in December, the rough total would be 13,585,881 tonnes, or up 43.6% for the year.

Aside from the strong pulp demand, the China market could be thwarted by problems on the paper side.

Due to cash flow problems, some paper mills have been struggling to repay loans due at the end of the year and haven’t been able to get new credit, said the Chinese agent. One coated paper mill, he said, is so short on cash that it has less than a week’s worth of pulp on hand. “They cannot even buy from the local market,” he said. “They have to pay cash to trade.”

Bigger companies don’t have the credit problem and are said to be pressing traders for large quantities of both softwood and hardwood pulp, he added.

Meanwhile, the Chinese government in recent days announced a new financial policy, apparently as a move to prevent inflation, that will have the effect of tightening liquidity, he noted.

As for the ongoing question of where Chinese papermakers are putting the paper they have made from the many tonnes of pulp they imported last year, some pulp players continue to say that more than the usual amounts are being used internally. And a sales executive for a BSKP producer said that at customers’ facilities and at ports in China, there is “no anecdotal evidence” of a build-up of paper stocks.

Still, said another pulp seller, if Chinese paper prices don’t move up, it would be a “big risk” to try to raise pulp prices, because papermakers “will fight back and put big pressure on pulp.”

In his recent newsletter, market pulp consultant Brian McClay was also circumspect, noting that although China pulp buying has not yet slowed dramatically, it has shifted lower since October.

“Anecdotal reports now indicate China’s paper merchants, printers and distributors have recently started a destocking process at this seasonally weakest time of the year just as the domestic market is becoming increasingly oversupplied with printing and writing paper…and tissue to a lesser extent,” McClay wrote, noting that 2.3 million tonnes of new freesheet capacity is coming on stream in the first half of 2010.

“More small and medium-sized paper producers have started taking market-related downtime and more temporary closures will take place over the Lunar New Year break in February,” McClay wrote.

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