Paper, Packaging & Forest Products
The Continuous Digester – what we learned last week

December 21, 2015

RBC Dominion Securities Inc.
Paul C. Quinn (Analyst) (604) 257-7048; paul.c.quinn@rbccm.com

Wood products
Lumber – Random Lengths (RL) reported that W. SPF prices increased 0.4% w/w to $270/mfbm and SYP rose 1.5% to $407. We note that the SYP to W.SPF price spread remains at historically wide levels, with the current difference at $137/mfbm and the YTD average at $98/mfbm. These levels are significantly higher than the 5, 10 and 15-year price spread averages of $51, $52 and $47. RL observed a stronger pulse throughout the week, with some mills having orders pushed until January. The US Federal Reserve's interest rate hike was viewed as a positive for general economic activity and, therefore, lumber prices (noting that there was a meaningful increase in lumber futures last week).

OSB – North Central OSB prices fell 3.0% w/w to $226/msf, South East pricing declined by 2.8% to $212, while Western Canada pricing rose 5.5% to $193. RL highlighted that most of the week's activity took place Western Canada. Which was likely influenced by a weaker loonie that propped up OSB prices delivered into Canada. We are not surprised by the recent weakness in OSB prices noting the very strong (40% to 60%) rise in prices during the 4-month period following the recent low at the end of July. We remain very confident in our expectation of materially higher OSB prices in 2016, based off our supply-demand model that has NA industry operating rates moving from 85% in 2015 to 92% in 2016 (and 95% in 2017).

Paper, packaging & pulp
Containerboard –​ RISI's Pulp and Paper Week (PPW) reported that KapStone announced downtime at its 1.15MM tpy Longview mill, due to seasonally softer market conditions. The downtime will commence on December 21 for a seven day period (plus two days for certain grades). This curtailment is expected to impact production by ~25K tons. PPW noted that KS has been facing particularly strong pressure on the extensible kraft paper products due to the strong US dollar impacts on export markets.

Pulp – RISI’s PPI Asia reported that heavy smog in Beijing has caused some paper, containerboard and tissue mills to take downtime. PPI commented that there are many small tissue mills located in Baoding city ("Tissue Town"), with a total capacity of 1.2MM tpy, some of which have already stopped production. We highlight that earlier this year, similar downtime concerned pulp producers regarding demand sustainability from China.

Paper – PPW reported that UFS producers are eagerly awaiting the February 2016 decision on US UFS import final duties. PPW noted that some suspect that Domtar's Ashdown, AR paper machine shut planned for mid-year 2016, combined with fewer imports could leave buyers short on supply. Other producers disagree and we expect flat pricing in 2016, consistent with their thesis.

Newsprint –​ PPW reported that this week Kruger and Catalyst joined their newsprint peers in February pricing initiatives. Both producers informed customers that they intend to implement a second $20/tonne increase on Feb 1. All five North American producers have now announced $20/tonne price hikes for Jan. 1 and Feb. 1. We believe that one on these two price hikes will be successfully implemented.

All values in USD unless otherwise noted.

Priced as of prior trading day's market close, EST (unless otherwise stated).
RBC Dominion Securities Inc.
Paul C. Quinn (Analyst) (604) 257-7048; paul.c.quinn@rbccm.com

Paul Quinn is an analyst at RBC Capital Markets (Royal Bank of Canada) and can be reached at paul.c.quinn@rbccm.com