Paper & Forest Products
P&W paper stats: Demand and shipments continue decline

December 22, 2015

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

Impact:
Neutral. PPPC NA Printing & Writing Paper stats for November were released.

Shipments declined by 2% y/y – P&W shipments in November were down by 1.6% on a y/y basis (-8.3% m/m). Coated groundwood (CGW) shipments fell 20.7% y/y and uncoated groundwood (UGW) shipments declined 8.0%. Coated freesheet (CFS) shipments were 3.9% higher y/y and uncoated freesheet (UFS) shipments increased 7.4%.

P&W demand 3% lower y/y – Total P&W demand declined 2.5% y/y (-9.8% m/m). Demand for UGW fell 11.8% y/y and CGW demand decreased 18.3%. Demand for CFS was 6.3% higher y/y, and UFS rose 4.5% y/y (-1.1% 11Mo YTD).

Overall inventories down 1.4% m/m – NA inventories decreased 1.4% m/m (-19K tonnes) to 1,317K tonnes. We note that November inventories have increased six times in the last decade (average 8K tonne buildup). M/M (changes) were CGW (-2.9%), UGW (-1.7%), CFS (-5.0%) and UFS (+1.3%).

Operating rates lower y/y for 3/4 grades – The overall NA operating rate (shipments-divided-by-capacity) was up y/y at 91% (+200 bps). CFS increased 300 bps y/y to 89% and CGW fell y/y to 88% (-800 bps). UFS rose 600 bps to 91%, while UGW remained unchanged at 95%.

White paper prices – RISI's Paper Trader estimates that demand for UFS in Europe is set to contract 2.1% in 2015—a drop largely attributable to the slow economic recovery in the continent. UFS cutsize imports (71% of total UFS imports) fell 38.7% y/y in November (-27.1% YTD) to represent approximately 12% of the NA cutsize market (cutsize = ~40% of industry shipments). Despite the decrease in supply (from the preliminary ADD announced in August 20), RISI does not expect it will be enough to support a price hike for UFS in North America (and we tend to agree) due to falling demand, relatively low operating rates in North America, and increased supply from other sources. We also highlight that in October, Domtar announced that it was dropping customer Veritiv, which suggests that its inventories will rise in the short term. It could also lead to a price war with Vertiv offering discounts to retain its customer base. That said, in September, PPW reported that IP has had a "strong run" on cutsize paper and there was talk of a price increase by year-end. We also highlight that in October, Rolland Enterprises (No. 9 UFS producer) announced a 4–5% UFS price increase for all orders placed after November 3.

UFS op. rates expected to remain relatively stable – While NA UFS demand is declining 3–4%/yr, industry op. rates averaged 91% in both 2013 and 2014, supported by producers having taken out ~495K tpy of capacity in 2012 and 1,053K tpy (9.5% of NA capacity) shut over Q413–Q114. Domtar will remove 364K tpy of UFS capacity at its Ashdown, AR mill in Q216.
Neenah plans to remove 22K tpy at Appleton, WI in Q416. However, we note there have been anecdotal reports of additional capacity coming into the market, e.g., Norpac's new cut size substitute (70K tpy produced at Longview, WA) and Resolute's new white paper offset offering (35K tpy produced at Calhoun, TN). RISI expects US UFS op. rates to average 91% in 2015 and 92% in 2016. RISI assumes that US white paper demand declines 3.1% in 2015 and 3.7% in 2016.

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