Pulp markets easing through August, but with signs of a modest pickup in China amid ongoing downward pressure in other major buying regions; economic volatility a concern

Diane Keaton

Diane Keaton

Aug 14, 2011 – Forestweb

LOS ANGELES , August 14, 2011 () – In the past week, the buzz among pulp and paper players was about the pickup in local prices in China, and, on the broader scale, about the gyrating financial markets.

Major markets are generally seasonally slow and it is too early to know if the China pickup—it is modest so far—will be solid enough to affect pricing in other regions, where demand and pricing remain weakened, with additional spot tonnage still being offered, and where prices might drop some more in September.

Nevertheless, the local price increases in China could be signaling changes to come. “I hate to say it as a buyer…but in late April-early May we saw similar swings in China on the downside, and this feels similar…only now it’s on the upside,” said a North American pulp customer.

At the same time, he said he doesn’t want prices to drop to a point that would force his Canadian suppliers to close mills. Noting currency factors, he commented, “It doesn’t take much of a drop in price to put Canadians under water.”

Sources have been nervously watching the volatile developments in U.S. and European financial markets of recent weeks, saying they could cause pulp and paper producers to cut back on capital expenditures and paper buyers to reduce advertising. A North American industry source worried, though, that might be an overreaction in the economy. “I don’t think we’re near a 2008 meltdown,” he said, citing improved jobs statistics and good corporate profits, adding that people are at a loss about what to expect.

Pulp markets this month are relatively quiet, reflecting holiday schedules in the Northern Hemisphere as well as Ramadan, which this year is from Aug. 1 to Aug. 30.

Markets in August 2011 are reflecting typical summer doldrums, whereas in the summer of 2010 they were still reacting to the loss of tonnage from the Feb. 27, 2010, earthquake in Chile, and in the summer of 2009 they were still caught up in the financial crisis, commented a sales executive for a major NBSK producer. “There are a lot of smoke and mirrors in this business. I don’t think the market will collapse,” he said. “I am quietly bullish that we are not going to hit the wall.”

On Aug. 8, paper and forest products research analyst Chip Dillon of Vertical Research Partners said that while one weekly increase (in China) so far this year isn’t enough to declare this a 2010-type trend, there are several “second-derivative” indicators, including plans to raise semi-mechanical pulp prices in August, and “One certainly cannot conclude that the pulp –pricing upcycle that began in 2009 has ended. In other words, one may conclude that 2011 may have (a) similar pattern as 2010,” when prices reached bottom and then started to recover in August, Dillon wrote.

Dillon described U.S. northern bleached softwood kraft (NBSK) list prices as having corrected by 6% between July 2010 and January 2011, followed by robust increases totaling 8% through June 2011, which have since fallen by 5%, “and we expect another small decline in September before prices begin to recover in the fall,” he wrote. “We believe several weeks of progressively higher resale prices in China would validate our current thinking,” he wrote.

Dillon reiterated his expectation that 2012 should represent the peak average-price year this cycle for market pulp, based on substantial capacity additions that are expected in 2013. “On the other hand, should the global economy quickly enter a substantial downturn in coming weeks and months, we believe much of the capacity now slated for 2013 will be postponed, making the next peak a bit later than we currently expect,” he wrote.

In his Market Pulp Monthly report, published on Aug. 11, market pulp consultant Brian McClay said he expects chemical paper-grade pulp prices to decline 12%-15% from their second quarter peaks before the year end, assuming that foreign exchange rates remain close to current levels. He cited producers’ pulp stocks that he expects to move significantly higher by the end of August, paper markets poised for a much weaker-than-normal second half, and only modest additional pulp mill maintenance downtime planned for the next few months.

(Sales executives for several producers in North America and Europe in the past week commented to Forestweb that their supplies would tighten with their upcoming fall maintenance outages.)

North America market. Supplier and buyer sources said the announced August NBSK price in North America of $990/tonne, down $30/tonne from July, is in place. The new August list price of southern bleached softwood kraft (SBSK) is or will be down $30/tonne, as well, to $950/tonne, sources said.

There are ongoing comments that integrated papermakers have been selling additional quantities of market pulp, but not all buyers are reporting that this is widespread. Some buyers report they have not received offers from this or that major papermaker while others cite the opposite. One financially troubled papermaker has been doing so for some time and several sources have cited a report that output at a mill owned by a major papermaker is coming and going from the pulp market.

Sales executives for North American NBSK producers said customers are paying the announced price. One said buyers are also reporting spot offers and he said there are “definitely” higher discount levels and that the softening Chinese market has affected demand in North America. Customers’ order books are slow, they are feeling the uncertainty of global financial conditions, and they are buying no more pulp than what they need this month, on the assumption that prices will be lower next month, he said. He also noted the pressures of exchange rates and overall cost inputs.

“The correction has been a long time coming,” he said. “We’ve been anticipating it (a correction) for over a year and now it’s here. None of us are too surprised; we’ve seen it before.” He said the length of the correction would depend on global economies.

Another described North American demand as “good” in recent months, but he acknowledged that domestic prices have dropped in response to the China slowdown, which has caused more tonnage to be available elsewhere. He said although his customers have been receiving offers this summer, they know spot volumes will vanish when offshore markets improve, so they want to maintain relationships with their long-term suppliers.

A few, but not all, NBSK buyers are reporting “temporary discounts” off of list prices, from certain producers. And some of the spot offers are in the $760-$780/tonne range. A buyer said he has received many offers, similar to a month or so ago. Another said his regular suppliers are offering a bit more discounting on regular tonnage and that he has heard supplier talk that the list price could drop by another $20-$30/tonne next month. However, one of the North American sales executives said he expects domestic September prices to hold.

Some sources report the availability of excess NBSK in North America that otherwise would have gone to China, including what is said to be sizeable volume from some Canadian mills now owned by Asia Pulp & Paper Co. (APP). In addition, an agent doing business in China named an APP mill in Canada that he said offered pulp in China in June at $820/tonne, when the list price was $860/tonne. He said Chinese buyers lately have been offering the mill large quantities at very low pricing, but that the mill is “waiting for good timing, probably over $800.”

For the week ending Aug. 6, FOEX Indexes Ltd. said the NBSK price in the U.S. “reacted quickly to the announced lower prices,” falling by $28.22/tonne, to $993.99/tonne. It noted the recently released June shipments figures for softwood pulp were “particularly weak” to the North American market and noted some furnish changes from softwood to hardwood had also taken place, given the large price differential between the grades, and that spot prices were further down.

The unchanged list price of bleached eucalyptus kraft pulp (BEKP) in North America this month of $900/tonne is an irritant to buyers, especially because producers dropped their price in Europe by $30/tonne, to $820/tonne. North American buyers have been saying for some months that there have been $10-$20/tonne “temporary allowances” off of official BEKP prices, which they say puts the current effective list price at $890/tonne or $880/tonne, before regular discounts (RISI Inc. showed the July price was at $890/tonne).

Given market conditions and the price drops of North American-produced bleached hardwood kraft pulp (BHKP) this month, some buyers expect the August effective list price of BEKP to drop to $870/tonne.

“I can’t conceive that we are going to have such a big difference between the two regions,” said a major North American buyer. But in contrast to North America, Europe also has regional suppliers of BEKP, along with South Americans, so the suppliers to North America are in more of a position to stick to their July pricing, he noted. He said he has been looking for BEKP deals, but has found none for less than his contractual price less discounts. “There’s not a glut of very cheap spot tonnage out there,” he said.

Not all BEKP producers may have spot tonnage for sale, but some is being offered with discounting in the high-teen percentages off of $890/tonne, putting the price in the low $700s/tonne. But that isn’t very tempting, considering that North American-produced BHKP can be had for the low $600s/tonne, commented another buyer of substantial BEKP tonnage. (Some buyers for several months have been taking minimum quantities of BEKP and substituting with North American-produced BHKP, where possible.) As for list prices, he said he had already concluded some of his business “at least” down $20/tonne.

(BHKP is less expensive than market deinked pulp, or MDIP, which one buyer said rose by $40/tonne this month for the sorted office paper (SOP)-based product he purchases; MDIP producers are suffering from high wastepaper costs.)

As reported in recent weeks, there was some weakness in July domestic sales of North American BHKP, but the weakness in August is more pronounced and widespread. Prices have slipped by $20-$30/tonne this month, with buyers mostly putting current net prices in the mid-$600s/tonne (one last week, for example, said $635-$650/tonne) and spot prices in the low $600s/tonne, depending on the deal. There is an assumption among various sources that the August price will end up $30/tonne off of July pricing.

Sources noted a few mills in particular that are offering low-priced tonnage. Also, said a buyer, a large BHKP producer is said to be offering deals, even though it has an upcoming outage, and he said another is “dumping” tonnage overseas in order to maintain its inventory.

RISI showed the July price of aspen and mixed northern bleached hardwood kraft (NBHK) at $845/tonne and maple-grade NBHK and southern bleached hardwood kraft (SBHK) at $855/tonne, unchanged from June, which has caused consternation among some buyers who thought the price should have reflected the weakening market. Even for those who base their contracts on RISI figures, some business has been settled at the RISI July price less $10-$20/tonne, before regular discounts (various sources said 20% is a typical discount for BHKP these days). Otherwise contractual customers would be at a “total disadvantage” and would be discouraged from signing contracts when hardwood pulp is readily available, said a source for a North American BHKP producer. “In this market we can expect spot (pricing) to be lower than contract, but it can’t be phenomenally lower,” he said. “Everything is out of whack.”

He added that pulp sales had been slow in the second quarter as coated and uncoated papermaker customers limited their production because of their costs versus the price of paper, and that demand has been slower in the last couple of months compared to last year at this time. But he said customers appear to have stepped up their pace of production of late.

A sales executive for a North American BHKP producer said customers reporting receiving many BHKP offers, with spot prices off $30, $40, $50/tonne, depending on the source of the information. He said a spot price in the low $600s/tonne, along would freight of $60-$70/tonne, could be unsustainable for producers.

Looking at the paper side, a buyer for a specialty papermaker said that, instead of announcing the June NBSK price of $1,040/tonne (up $20/tonne), producers should have let paper prices increase because pulp price increases can’t be sustained without paper price hikes. “Paper is not that robust” and with the current uncertain economic picture, “everyone waits. No one wants to do anything,” he said. Business “is definitely slower now than a few months ago,” and not for seasonal reasons, he said, expressing concern that some of his company’s industrial customers might pull back on their orders in response to the economy.

Another buyer said customers are buying less uncoated freesheet as they cope with higher base costs and he said the economic developments have “got people scared.” He said sellers have been quiet lately, and if pulp producers’ stocks increased in July, buyers will react accordingly.

An executive for a commodity papermaker had a more positive report, saying said his company’s business in North America is “extremely good,” which tells him that people are planning to advertise. He said it hasn’t picked up indications that the economic situation is going to lead to cancellations of orders.

A sales executive for a Canadian NBSK producer, describing the North American market as “pretty stable,” said tissue customers are faring better than printing and writing papermakers, some of which are struggling to generate significant returns in the face of rising costs, competition, and difficulty raising their prices.

Europe expectations. Business is fairly slow in Europe, with various pulp and paper players on holiday, and business typically doesn’t close until the end of the month anyway.

Supplier and buyer sources generally expect the effective August NBSK price to settle at $980/tonne. As previously reported, July effective list prices of NBSK in Europe were mostly in a range of $980-$1010/tonne, rather than clearly at one level.

Citing the expected $980/tonne August figure, a sales executive for a major producer in Europe said there is “no way” the price can settle above the $990/tonne price in North America. But he said his company has no intention of announcing a $980/tonne price, “nor are we going to lead it down.”

Meanwhile, he said, customer order books are low and there are pushes for paper price increases. (As to reports of low-priced pulp offers, he said some is simply because the tonnage is off-quality.)

He said that some larger multinational customers who are trying to push the list price in Europe to $950/tonne have been met with a firm refusal for August, although he conceded that the price “may go to that” at some point. If the euro goes to US$1.39 or US$1.40--currently it is at US$1.42--pulp pricing could drop, he said, but producers’ costs are such that the price can’t be pushed down much, he said.

Sources have noted that Swedish exporters have been severely affected by the appreciating Swedish currency in recent months. Major producer Södra Cell AB of Sweden has not announced any change from the $1,025/tonne NBSK list price that it has had in place since late June. But a buyer said his company has been minimizing its purchases of $1,025/tonne NBSK, filling the gap instead with NBSK from suppliers with lower prices.

Looking at BEKP, with its August list price of $820/tonne, down $30/tonne, Brian McClay said in his Market Pulp Monthly report of Aug. 11 that July prices ranged from $820-$850/tonne, with many big contract buyers reportedly settling around the $830/tonne level.

McClay said commodity papermakers in Europe are taking modestly more than normal summer downtime, particularly for coated freesheet, while specialty paper markets seem to be holding up much better.

For the week ending Aug. 6, FOEX said the NBSK price in Europe dropped by $10.70/tonne, to $993.16/tonne. In euros, the price fell by €2.34/tonne, to €701.63/tonne, reflecting the 0.7% strengthening against the euro from the previous week. FOEX noted that the NBSK price deterioration in July has continued into August.

For BHKP, FOEX said the price fell by $11.58/tonne, to $829.23/tonne and by €3.81/tonne, to €585.82/tonne. FOEX said rising port inventories could be related to the low intake of pulp in China in June.

China moves. As reported a week ago, local prices in China have moved up a bit, Celulosa Arauco y Constitución SA (Arauco) sold its August volumes of bleached radiata kraft pulp (BRKP) at its latest price (reduced from July), and NBSK buyers in China were reportedly stepping up their demand. Sources have made other such comments in recent days, as well, leading some to think that BSKP pricing in China may have reached its bottom or that it is close to it.

List prices are $830/tonne for commodity NBSK in China and $820/tonne for BRKP.

(A North American-based pulp agent said spot BSKP prices are from the mid-$700s/tonne to $800/tonne in Asia and in the $700s/tonne in the Middle East.)

In his Aug.11 Market Pulp Monthly report, Brian McClay said buying activity in China “has increased modestly in recent days, mainly by regional traders for softwood and major papermakers for hardwood.” He said larger volumes were trading at around $770-$780/tonne for NBSK and at $620-$630/tonne for BRKP, “levels at which more papermakers can operate with positive margins.” He said this has pushed spot prices and traders’ resale prices up modestly from their lowest levels.

McClay said there have been only limited August commodity NBSK contract sales concluded in China to date at the announced $830/tonne level, but that most BRKP business has been settled in the $820-$800/tonne range. On the BHKP side, McClay said there has been “little if any” business done in China since June at the announced list prices, so several BHKP suppliers have reportedly lowered their offer prices for contract/regular customers into the $650-$670/tonne range.

“Given that there is no current or near-term prospective shortage of pulp in China and that papermakers’ margins will be increasingly squeezed even with today’s spot pulp prices, it seems likely that any big-volume revival in China’s pulp purchases is still months, away, especially now that the global macro-economic outlook has darkened considerably,” McClay wrote.

In his Aug. 8, research note, industry analyst Chip Dillon wrote that the increase in local resale spot prices for NBSK in China is the first since early March, and he described the increase as RMB100/tonne, to about RMB6,175/tonne, or about US$13/tonne.

On Aug. 10, a Chinese pulp agent told Forestweb that local Chilean BRKP pricing in China had risen the equivalent of about US$15/tonne and that NBSK pricing had gone up by about $10-$15/tonne. He said the lowest BSKP pricing occurred in about early July, at around RMB5,800-RMB5,900/tonne, with the latter being the predominant price. Now, he said, Chilean BRKP is at RMB6,000/tonne and NBSK is at RMB6,100-RMB6,150/tonne.

He said many NBSK suppliers have moved pulp at $790/tonne or below, with the lowest being $770/tonne from one particular Canadian supplier. He said NBSK volumes are moving more slowly than those of BRKP. BRKP normally is priced similar to that of Russian BSKP, and now that the latter has been sold in China at very low prices, the pressure is off BRKP, he said. Not only does he not expect a further reduction in Russian pricing, but also he is hearing that Russian pulp pricing might increase in September, in order to bring it back to levels within range of its competitors.

(Ilim Group in Russia had dropped its BSKP effective list prices to $740/tonne CIF at the port and $710/tonne at the Russia-China border, amounting to a $180/tonne decrease from its peak pricing, or about twice the reductions of NBSK and BRKP producers.)

The Chinese agent said BSKP inventories appear to have fallen substantially during the summer, leading each trader to try to liquidate its stocks as quickly as possible. Also this has been a typically slower summer for paper mills, and though a pickup is expected in September, it will be to a lesser extent than last year, when rayon-related demand was a factor, he added.

He said there could be another “minor adjustment” of, say, $10-$20/tonne, in the local market because of a lack of a rayon-related boost this year and also because, in the last two to three weeks, suppliers have moved higher-than-regular volumes to China, all of which will arrive in China in a month. He expects prices to bottom out at about RMB5,900-RMB6,000/tonne (about US$780-$790/tonne), and he said there would be “no freefall.”

A sales executive for a North American NBSK supplier said he thinks pricing in China has already bottomed. The tight credit situation in China, which has restricted at least some of the purchasing in recent months, appears to be loosening, he said. “Customers are coming back with offers and buying again,” he said, describing this as both credit- and inventory-related. He added that softening market conditions in recent months have led to a waiting game on both sides for China business, with negotiations not necessarily ending at the physical end of the month.

As for BHKP, the Chinese agent said that, starting from July, “a lot more American hardwood was available to China. He said North American-produced aspen NBHK has been selling at a higher price—he said $660/tonne--than that of Brazilian and Chilean BEKP, for which he said large quantities have been sold for as low as $640-$650/tonne; he noted that three months ago, BEKP was $50-$60/tonne higher than aspen.

BEKP producers may have been providing their customers with limited quantities at list or effective list prices, while also selling them larger volumes at the low spot prices, in order to hold on to some semblance of their list prices, he said.

As previously reported, the official BEKP list price in Asia is still $730/tonne, although the effective July price was around $710/tonne, with some $10/tonne or so higher and some perhaps $10/tonne lower than that. (As for Brazil’s Fibria Celulose SA’s keeping its official list price at $730/tonne in China while dropping it in Europe, a non-Asia BEKP buyer commented that Fibria isn’t a major supplier to China in the first place, and “I’m not sure it really matters what the list price is in Asia.”)

The Chinese agent described the current local price of aspen as in the RMB5,000-RMB5,100/tonne range and BEKP in the RMB4,900-RMB5,000 tonne range.

He said aspen customers have continued to buy during the summer and he expects the September price to remain unchanged.

For the week ending Aug. 6, FOEX said the NBSK price in China was down $13.98/tonne, to $824.40/tonne. “The fall of demand as (an) extender for dissolving pulp, tighter credit availability, power supply problems and the seasonal slowdown in paper demand in and outside China have all affected the demand pull,” FOEX wrote.

FOEX said the BHKP price continued to retreat in China, this time by $14.95/tonne, to $689.45/tonne. FOEX said one reason for the resistance is the price differential that has developed between the quotes of the large importing companies and the locally sold/resold pulp volumes. “Unless the intake activity has been considerably higher in July than in June, some of the good June shipping volumes from producers’ end have ended up increasing the Chinese port stocks,” FOEX wrote, adding that spot prices have continue to fall but at a receding rate.

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