Global pulp markets wending through January in stable manner; a few February price hike plans added for Asia in recent days

Diane Keaton

Diane Keaton

Jan 22, 2012 – Industry Intelligence

LOS ANGELES , January 22, 2012 () – Pulp markets continue to show stability, with spot prices mostly having been reached in December and supply-and-demand factors preventing much upward price movement in January. February is expected to be similar.

Meanwhile, the China market started to slow last week or earlier in anticipation of the Lunar New Year, which begins Jan. 23, so the global picture will be subdued until Chinese players return in February.

The February price announcements to date have been for Asia. The most recent kraft pulp announcement was from bleached eucalyptus kraft pulp (BEKP) producer Suzano Papel e Celulose SA of Brazil, which is going to a February list price of US$605 per tonne in Asia from a net price of $580/tonne in January.

Three bleached chemi-thermomechanical pulp (BCTMP) producers, West Fraser Timber Co., Winstone Pulp International Ltd., and Millar Western Forest Products Ltd., have announced $20/tonne February increases for Asia for the grades they produce (softwood and hardwood for West Fraser and Millar Western—their 75-bright softwood BCTMP price will be $550/tonne—and softwood BCTMP for Winstone).

These add to the earlier announcement for China from Chile’s Celulosa Arauco y Constitución SA (Arauco) of $10/tonne price increases for bleached radiata kraft pulp (BRKP), to $660/tonne and for unbleached kraft pulp (UKP), to $610/tonne.

Aside from February plans, some low-priced spot deals, at least, continue to be had in the Middle East spot market. Early last week a pulp buyer in the region said that on Jan. 16, a Saudi paper mill closed a northern bleached hardwood kraft (NBHK) spot deal for more than 5,000 tonnes; he named a producer in the U.S. Northeast as the supplier. And he said that on Jan. 15, a 5,000 tonne NBSK bid in Egypt closed at $620/tonne, with the low price aided by the euro exchange rate; he named a smaller-scale European producer as the winner of the bid.

A sales executive for a major North American producer said he expects prices to start firming up globally, with February prices likely to remain stable, then go up in March. This reflects a pickup in demand and less supply on hand, given the purchasing that occurred in December and early January, he said. For the first six months of the year, he expects the printing and writing sector to be stable globally, with tissue and towel and packaging sectors picking up. As for the global economic picture, the tone has improved since the last months of 2011, which will help demand even as producer downtime tightens supply, he said.

In a Jan. 16 research note, paper and forest products industry analyst Sean Steuart wrote, “We believe that global pulp markets are quickly approaching a cyclical trough. Pulp prices have been declining over the past seven months as demand growth has slowed and the inventory balance has shifted to producers from buyers. We believe that the market will bottom out by the end of Q1/12 once papermakers complete pulp supply destocking.”

In a separate research note on Jan. 16, Steuart said, “We believe that the global paper grade pulp market is approaching a cyclical inflection point.” Noting that prices for commodity pulp grades have been in steep decline since July 2011, he said, “We believe that buyer destocking of pulp supplies will finish in February and that a cyclical decline in mill inventories will start by early-Q2/12 (followed shortly thereafter by a pulp price recovery).”

Some backward-looking information about producers’ stocks will come on Jan. 24, when the Pulp and Paper Products Council (PPPC) releases the December World 20 chemical market pulp producer statistics. Over the previous 10 years, the stocks have risen by an average 224,800 tonnes, to 3.581 million tonnes in January (over the previous five years, they rose an average an increase of 318,200 tonnes). For February they average 3.576 million tonnes, down 10,800 tonnes (averaging an increase of 61,200 tonnes over the most recent five years) and for March they average 3.428 million tonnes, down 145,300 tonnes (down 201,600 tonnes on the five-year average).

Conference call. On Jan. 18, Deutsche Bank hosted a conference call with market pulp consultant Brian McClay. In a follow-up research note, Deutsche Bank said the “key takeaways” were that hardwood pulp prices appear near a bottom, but there is still some downside risk to softwood prices, especially in North America; that the fluff pulp market is weak and prices are falling, with the Asian “spot” price ~$600/tonne; and that the rebound in hardwood prices is apt to be muted as ~2.8MM/mtpy of new Latin American capacity starts up over the next 15 months.

Looking at the near-term, McClay said pulp demand would strengthen in the second quarter, with buyers going to “just in case” purchases from “just in time.” With maintenance downtime coming up, he noted that there would be less supply from March through June and that an anticipated weakening of the U.S. dollar against the euro and the Brazilian real could influence suppliers to take additional downtime. With contractual discounts off of pulp list prices having increased by perhaps 2% in 2012, “the nets are already lower and the currency effect provides motivation for more downtime in the spring,” McClay said.

McClay described discount percentages in North America and Europe as “probably in the high teens, probably double from five years ago” and he said discounts in China are probably in the 2%-6% range. Large-scale buyers are probably in the 20% of higher range, he said.

Looking at China, McClay said that market “kept things from falling apart completely in the fourth quarter.” He said shipments to China will be high in January, too, and that there is still a lot of pulp in China. The production of pulp in China from agricultural waste has slowed seasonally in the past month or two, which is allowing more wood pulp to be consumed in the first quarter, he added.

Going forward, if buyers want to push prices lower, “they could,” he said, and if papermakers and traders become convinced that pulp prices are going lower, they will destock. He noted that Chinese traders, which account for around of 70% of softwood pulp demand and perhaps 30% of hardwood pulp demand, have a vested interest in keeping prices at least where they are now and going higher.

Though there “is clearly no shortage of pulp in China,” McClay said, “I think at this time the assumption is that prices are going higher and they will maintain current volumes.”

Chinese papermakers bought considerable pulp in the last two months and are looking to increase their own prices above those of 2011, and stable-to-rising pulp prices would help them get higher paper prices, McClay said.

After the Lunar New Year, Chinese customers will buy enough to at least maintain stable prices through March, McClay said. He expects buying to accelerate in the second quarter and that the second quarter “will be good for paper and board in China.” Overall, though, he said prices in China would be down in 2012, before recovering in 2013.

North America market. Sources said there is less spot tonnage available in North America in January than in December, when producers were trying to reduce inventories before the end of the year. Sources are mixed about whether prices have fully bottomed and where they will head in February.

“I’m not hearing about fire sales,” said a sales executive for a North American pulp producer. “I think most producers are trying to hold their own and keep their positions. There’s not the liquidation mentality we had in December, or the gargantuan price drops of the fourth quarter.”

Announced list prices in North America for January include $870/tonne for NBSK and $830/tonne for southern bleached softwood kraft (SBSK), down $20/tonne for each. Not all major suppliers have formally announced these prices, but market sources said they are being competitive.

Sources generally are pricing hardwood pulp off of December list prices of $740/tonne for BEKP and $700/tonne for NBHK and southern bleached hardwood kraft (SBHK), although it isn’t entirely clear where the January prices will settle. When Resolute Forest Products Inc. announced January BSKP prices on Jan. 9, it said it was not adjusting its hardwood pulp or fluff pulp prices at the time. While Suzano’s Dec. 22 announcements for January included a $790/tonne list price for the U.S., sources noted this would be hard to achieve, given above the December price RISI Inc. subsequently showed of $740/tonne, down $30/tonne.

As for deinked pulp (DIP), a buyer said that although prices have fallen sharply, they “are still extremely high.” (Sources report prices in the $500s/tonne to the $700s/tonne, depending on the quality of DIP they buy, whether it is dried or wet-lap, and freight costs.)

Sources continue to say that January BHKP spot prices are essentially unchanged compared to December, with the exception of this or that sale up or down $5/tonne or up $10/tonne. Depending on the source, January spot pricing of NBHK is said to be mostly in the range of $500-$530/tonne, or $530-$540/tonne, or $540-$570/tonne, or the like. A buyer said SBHK is in the range of $530-$550/tonne, which he described as unchanged from December. A buyer named a mill in the U.S. Northeast that is offering $520/tonne into the Midwest; he said there is no market for the mill’s pulp in the Northeast or overseas and he said the company is willing to commit to a sizeable monthly quantity to the Midwest.

At such prices, some hardwood pulp sellers wouldn’t do spot business in December and others wouldn’t in January, said a buyer source. “My hardwood’s bottomed,” he said, adding that the January list price could drop in order to help close the gap with contractual prices. He doesn’t expect increases soon, given that demand doesn’t appear to be growing as paper mills shut.

An agent doing business in the U.S. said he is hearing a range or $610-$650/tonne for spot BEKP, about the same as December, but that the spot market has quieted, with little business being done outside of contracts and buyers not much pursuing BEKP spot tonnage.

There are still some NBHK deals below $500/tonne, but they are much fewer and farther between than in December, when, as sources said, suppliers were eager to unload tonnes before closing their books for the year.

As for whether sub-$500/tonne prices are sustainable for North American producers, the agent said probably not for Canadian producers short-term because of transportation costs and that U.S. producers would be hard-pressed unless freights are low enough, “but not in the long run.” Some producers are telling him that they would take downtime if conditions persist, he said, adding, “We really are at the bottom as far as spot prices go. They’ve got to go up.” He said he expects no change in the lists pricing in February.

Looking at spot NBSK, the agent said most pricing is in the $650-$680/tonne range. He said $650/tonne was common in December, but that big blocks, of, say, 5,000 tonnes, could be had for $620-$630/tonne as suppliers cleared their inventories. Overall the price has gone up in January, he said. (As previously reported, some buyer sources have said January pricing is at $650/tonne and one said some tonnage can be had for as low as $610/tonne.)

FOEX Indexes Ltd. said that for the week ending Jan. 14, the NBSK price in the U.S. fell by $10.96/tonne, to $876.90/tonne. In its Jan. 17 comments, FOEX said the decline in softwood paper grade pulp prices “has spread into the fluff pulp sector which, together with weaker fluff pulp demand growth may slow down the switch from paper pulp to fluff pulp at mills in conversion process.”

A buyer said spot SBSK is in the $630-$650/tonne range, down $20/tonne from $650-$670/tonne in December and in keeping with the announced $20/tonne list price decrease.

In a Jan. 18 research note, Deutsche Bank paper and forest products industry analyst Mark Wilde, said spot prices of NBSK were in the $600-$650/tonne range, down $25/tonne month-over-month, and that fluff pulp prices fell by ~$35/tonne month-over-month. Noting that North American softwood markets remain weak while hardwood markets appear to be close to a bottom, Wilde said that at current spot levels, prices appear to be at/below mill cash-cost levels.

Some buyers “are still optimistic prices will go down further and they will get good deals in February,” said the pulp agent. But, he added, “Paper demand hasn’t picked up at all,” be it coated and uncoated grades, food packaging or some other specialty grades. The running rates are mostly in the 75%-90% range, he said, adding that most tissue and towel machines are running at nearly 100% of capacity. A few small specialty machines that went down before Christmas still have not been restarted, he said.

“There’s not much optimism out there,” he said. He said sales volumes have moved down a bit in January, as is normal compared to November-December, but that pulp buyers do act when they can get a good deal. He expects improvement late in the first quarter or “worst case” in the beginning of the second quarter. “I hope demand picks up,” he said. “Even the paper guys are saying that,” given that paper prices fall in response to pulp price drops.

A pulp sales executive who sells into North America said the printing and writing sector hasn’t picked up as he had expected after such extensive year-end liquidation of pulp supplies. He said he hopes “to see optimism” in pulp markets late in the end of the first quarter or going into the second quarter and he said he expects spring maintenance outages to be longer than normal.

The tissue and towel business has its own issues, with the traditional brands facing increasing competition from private label products, he commented. He said the ongoing price spread between NBSK and hardwood pulp has again renewed efforts by papermakers to use more hardwood and less softwood pulp.

He said another issue in the current market is some North American buyers’ reluctance to honor contracts, and at a time when discount percentages are already in the high teens or low twenties. “When the contract becomes an option, it’s not a contract,” he said. While producers are held to certain contractual volumes, some buyers don’t feel obligated to take them or will ask suppliers to be more competitive when market conditions aren’t in their favor or they change furnishes, product mixes, and so on, he said. “I swear that’s getting to be more and more prevalent,” he said, “The door swings one way.”

Separately, sources have been watching Resolute Forest Products’s significant market downtime at various pulp and paper mills, the latest being the company’s decision to extend the ongoing pulp and paper downtime at its Fort Frances, Ontario, facility, until the end of January “or when market conditions improve.” The company has said it will produce to orders.

A North American pulp agent commented that it is “the right thing to do,” but he noted that there are associated shutdown costs even as other producers running flat out “are given a free ride, encouraging bad behavior in the future.”

As for integrated mills shutting paper machines and continuing to run pulp for the market, a phenomenon more prevalent in North America than in Europe, Brian McClay said during the Jan. 18 Deutsche Bank conference call that he is hearing less about this now. Closures of supercalendered (SC) and lightweight coated (LWC) paper machines have typically freed up softwood pulp, not hardwood pulp, for the market.

Europe picture. On Jan. 17, Utipulp reported that European woodpulp consumers’ stocks grew by 15,065 tonnes, or 2.3%, in December over November, to 662,337 tonnes. In December, consumption weakened year-over-year by 77,791 tonnes, or 8.6%, to 826,140 tonnes.

On Jan. 18, Europulp reported that in December, European woodpulp port stocks fell by 18,998 tonnes, or 1.4%, from those of November, to an estimated 1,379,703 tonnes. Year-over-year, the December stocks increased by 15.6%, or 186,417 tonnes.

As previously reported, sources have said the January NBSK price will settle at $830/tonne, unchanged from December, because some major European producers did not support others’ $850/tonne price hike plan.

However, for the week ending Jan. 14, FOEX showed an NBSK price in Europe above $830/tonne: $834.55/tonne, up $5.72/tonne. The euro weakened by just 0.04% against the U.S. dollar, so the price in euros moved up, by €4.73/tonne, to €653.47/tonne.

FOEX said in its Jan. 17 remarks that the reduction of spot sales and the weaker price-to-cost ratio is supporting sellers’ efforts to get price increases through.

“On the other hand, buyers’ resistance, USD strengthening, weak pulp demand in Europe, weakening of the fluff pulp market and mixed price announcements (blend between 830 and 850 USD/ton) make it more difficult to get the price increase initiatives through,” FOEX wrote. “The final outcome of the price negotiations is still not known.”

The BHKP price is still not close to the announced $730/tonne list price announced by several BEKP producers starting in December. For the week ending Jan. 14, FOEX said the BHKP price was $665.36/tonne, up $9.10/tonne, and that in euros, it was €520.99/tonne, up €7.32/tonne.

FOEX said that although the (global) December BHKP shipments figures are not yet known, the first indications suggest that they “have continued reasonably lively…despite the weaknesses of the woodfree paper sector, especially in Europe.” Downtime taken by BHKP mills in Asia and the continued good demand from the tissue sector, as well as the still very wide price gap between BSKP and BHKP support the hardwood market pulp delivery volumes, FOEX wrote. “Together with low consumer stocks – leading to “forced to buy” situations - they also support the price increase initiatives,” FOEX wrote.

China quieting. Overall, the China market has been solid in early January, before the expected slowdown leading up to the Lunar New Year.

A sales executive for a non-NBSK producer with dependence on the China market said his company “is pretty well sold” and that business “is pretty healthy,” though prices are still poor.

“January is much better, especially the last two weeks, for price and volume, first hardwood and then softwood,” said a Chinese pulp agent.

Suzano’s February plan for a price increase to $605/tonne is the first BEKP list price announcement in a number of months. As prices declined last year, BEKP producers didn’t set prices. Then Fibria Celulose SA announced a net price of $580/tonne for December, which carried into January.

The Chinese agent said $580/tonne should be the current “list” price for BEKP, considering that the net (and mostly spot) price in December was, he said, $530/tonne, and that he has been hearing January prices of $560/tonne but also of $545/tonne. He said that since there seems to be no specific net price at the moment, he didn’t want to name a prevailing price. But he agreed with other sources that the price increased overall by about $10/tonne in December and by about $20-$30/tonne in January.

The agent said the softwood pulp market lags that of hardwood pulp because inventories are higher compared to consumption, and he noted that Chinese papermakers normally consume more hardwood pulp than softwood pulp. (He didn’t venture an estimate about overall papermaker inventory levels, saying it is just not possible to know.)

He said some softwood pulp customers think the bottom has not yet been reached at the $650/tonne net price, so any effort to raise prices in February could be a challenge. He said a $10/tonne increase might be doable and he added that small increases would be a wise approach for both softwood and hardwood pulps producers.

But he cautioned that production exceeds demand. “The paper industry is not that good yet,” he said. “I think pulp prices have bottomed out, but I haven’t seen any improvement in demand.”

He said some customers think prices have bottomed and are buying large quantities, while others think prices can drop some more, so they haven’t bought a lot. Nevertheless, the purchase of large quantities has helped the market bottom, “so it’s not a true bottom,” he said, describing this as “nothing new” for Chinese customer behavior. “The market change is not caused by the paper market, but because the price reached bottom,” he said. “It’s OK--as long as the price is going up for pulp, it is good.” Producers like to see a stable pulp price since it is difficult to sell paper if the pulp price keeps changing, he added.

A North American agent selling into the region said the China NBSK market has firmed up in January, as compared to December when there were “the crazy $610-$620 deals” from mostly Scandinavian producers looking to sell year-end tonnage. “The level of urgency isn’t quite the same,” with marginal players such as Ontario’s Terrace Bay Pulp Inc. now out of the picture, he said. He said the January net price is mostly $650/tonne and that net-net prices overall have increased. He expects February pricing to be about the same, considering that it will take Chinese customers a while to catch up from holidays. And he said the March price could rise by $20/tonne.

He and others said the BEKP price is up a bit in January over December but that not a lot of business is being done because of the large volumes purchased late last year. He said the net price is $560/tonne or so, up from an “unsustainable” $520/tonne a couple of months ago. Sellers now appear to have a different attitude following the December “midnight madness,” he said, and are holding back on some exports and curtailing some production, which “takes the panic out of it.” Even the announced $580/tonne (net) price is “very border line,” he added.

As for several producers’ recently announced February $20/tonne BCTMP price hikes, one of them, softwood BCTMP producer Winstone Pulp International Ltd. said, “Support for the price increase is based on strong demand and low producer stocks in particular for Softwood and/or High Bulk HYP (high-yield) pulps.”

In his Jan. 18 Deutche Bank conference call, Brian McClay said that of six million tonnes/year of new domestic pulp capacity in China, much of which started in late 2010 and during 2011, most is “under-the-radar” high-yield pulp used for board. (A fast-growing board sector in China is high-yield-using ivory board.)

As for fluff pulp, McClay said spot prices are in the low $600s/tonne for China (effective list prices around the world are in the low $900s/tonne).

For the week ending Jan. 14, FOEX said the NBSK index in China increased by $1.41/tonne and closed at $666.33/tonne. It said the BHKP index moved up by $6.11/tonne and closed at $574.79.

In its Jan. 17 notes, FOEX said that Indonesia’s wood supply and logistics problems because of the monsoon rains, which have increased the downtime at local pulp mills, have increased the hardwood pulp import needs of Chinese buyers from other sources. “The sense that the bottom of prices was reached/near and the uncertainty over the fate of the non-wood pulp mills may have led to some speculative buying in December,” FOEX wrote.

Overcapacity of paper and board, announced extensions of downtime during the Lunar New Year season, and increasing domestic wood pulp production capacity are the key drivers working against the price increase initiatives, but the price increase efforts appear to continue to be at least partly successful, FOEX wrote.

As for BSKP pricing, FOEX noted that it has fallen more in China than in Europe or the U.S. and that the gap between BSKP and BHKP prices has recently been smaller, which has kept the pressures changing to BHKP from being as high as elsewhere. Meanwhile, buyers need to seek other sources to replace volumes lost by the shut of Terrace Bay Pulp and from the recent unexpected downtime in Chile while wildfires raged nearby.

“The earlier started and continuing rise of BHKP prices supports also softwood pulp price increase initiatives,” FOEX wrote.

Dissolving pulp. Sources continue to report improved-to-stable commodity dissolving pulp (DP) spot prices in recent weeks.

A sales executive for a DP producer said on Jan. 6 that the end-of-December viscose price was $1,110/tonne and holding. On Jan. 16 said the price during the second week of January was $1,085-$1,125/tonne. On Jan. 17, paper and forest products industry analyst Richard Kelertas of Dundee Capital Markets said current spot prices are in the $1,100-$1,200/tonne range.

In his Jan. 18 Deutsche Bank conference call, Brian McClay said the December price was close to $1,000-$1,050/tonne, and that there “has been a pickup in the last two weeks,” now closer to $1,100/tonne. He said viscose staple fiber (VSF) producers have reduced their prices and that companies that produce yarn are likely buying more than in the fourth quarter.

And a sales executive for a company that produces specialty DP said that, depending on the product line, the specialty prices have risen by anywhere from 3%-4% to close to 10% in January, providing good profit margins. Specialty DP prices are fixed for periods of six months or a year, he noted.

In his research note, Kelertas said more DP players believe it is becoming increasingly unprofitable to operate their older mills, with costs ranging from $900/tonne to $1,200/tonne. He noted the recent announcement that Buckeye Technololgies Inc. is taking offline 40,000-50,000 tonnes/year of cotton linter pulp, a DP grade that competes with rayon viscose.

“Viscose rayon fiber is moving up nicely in China after a tough 3-4 months” following the removal of some capacity from the market and prices are moving back up, Kelertas wrote. But he noted that several plants will be starting up in China over the next two to three years to meet the increasing demand for rayon in 2012.

Kelertas said Fortress Paper Ltd. “will also likely soon purchase another mill in Quebec to convert to dissolving viscose pulp for 2013-14 start-up.” Fortress will stand out as a low-cost DP producer, Kelertas said, benefiting now from drops in fiber costs at its facilities in Thurso, Quebec, and Landquart, Switzerland, and in the future with the completion of its Thurso cogen facility.

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