FOEX Pulp & Paper Indices - Feb. 7, 2012

Kendall Sinclair

Kendall Sinclair

Feb 7, 2012 – FOEX

HELSINKI , February 7, 2012 (press release) – US NBSK – Market pulp shipments in December to the North American market were stronger than the paper market with a clear increase from November and with a minor 1% hike also against December 2011. It is likely that part of this volume increased the consumer inventories even if those inventories were reported clearly lower than what they were at the end of 2010. The prices for contract business continued to be under downward pressure, however, as spot volumes continued to be offered in BSKP at prices well below the contract price levels. Our PIX US NBSK index fell by 1.86 USD, or by 0.2%, and closed at precisely 870.00 USD/ton, announced by most of the NBSKP producers.

US Newsprint – Newsprint Association of America showed US newsprint consumption down by more than 20% in December. PPPC numbers for North America were weak as well, although not as bad as the Association data. White Birch Stadacona mill remains closed as a satisfactory labour agreement could not be reached. Restructuring process continues at Catalyst. While supply reductions have not fully matched the retreat in the North American consumption, contract prices have remained stable. The PIX US Newsprint 30lb index remained thus unchanged at 623.28 USD/ton and the 27.7lb index likewise flat at 664.03 USD/ton.

Pellet Continental - Some fairly significant revisions became enacted from January 1, 2012 in Germany’s Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz, or EEG). The target for the share of renewables in the German electricity supply was raised to 50% by the year 2030 and as high as 80% by 2050. This revision also means a change in the FIT (Feed-in-Tariffs). Tariffs have been increased for the power plants with a capacity of less than 5 Megawatts but for those over 5 Megawatts but below 20 Megawatts, the tariff has been lowered. Very big plants are not eligible. This revision is, obviously, linked to the decision to phase out the German nuclear power production by the year 2021. These measures to promote renewable energy production will not be enough to fill the hole left by nuclear exit. Non-renewable energy sources and energy imports will go back up again.

Until the last days of January, this winter had been relatively mild in Europe. The severe cold spell seen from end January through the beginning of February did not have much time to impact the prices of pellets for the medium-size users, over and above the normal seasonal pattern. The capacity utilization rates of the pellet plants in and around Continental Europe ran below their maximum capacity still in January. Compared to the risen heating oil and gas prices, pellet prices remained fairly stable in January with only minor upward and downward changes reported to us. Our continental pellet benchmark value over January 2012 showed thus only moderate changes. Our PIX Pellet Continental Europe price index moved to 216.21 EUR/ton, up by 35 cents, or by 0.16%, from the December 2011 value published in the beginning of January 2012.

General economy: US –Recovery momentum is getting stronger and news of the economy over January have been predominantly positive. Encouraged by the prospects, more people have started to look for jobs again. Still, the unemployment rate came down to 8.3% as nearly 260 000 new jobs were added in the private sector. Manufacturing index (by the Institute for Supply Management) rose to 54.1%. US factory production ran at the fastest pace since early summer 2011. For new orders and for order back-logs, January numbers were the highest since April 2011. Also export orders moved up. Even the housing sector is showing some signs of improvement. GDP-growth forecasts have been revised upwards. E.g. the Fed expects now +2.5%. The impact of the probable European recession on the US makes many private analysts a bit more cautious.

Europe – The talks between the political leaders continue in order to find further economic coordination in the crisis-hit European Union, including the Greece-centered problems of the Euro-zone. Greece is not the only problem. EU’s total government debt rose to over 82%. Eurostat estimates that unemployment across the Euro-zone rose by the end of 2011 to 10.4%, a record high since the euro was launched in 1999. Range between the Euro-zone member countries was very wide: Austria 4% - Spain 23%. Ratio of new orders to inventories improved, suggesting positive potential. Germany reported the best numbers and may have returned to positive growth. Still, Euro-zone manufacturing activity appears to have declined as the upturn in Germany was not enough to offset the contraction within the smaller economies. Consumer price inflation in the Euro-zone remained at 2.7 % in January, down from last year's peak levels but still well above the ECB target range. GDP forecasts have already been revised to a marginally negative number, averaging -0.3%.

Japan – economic signals are still mixed, partly due to reconstruction growth continuing on one hand, but with relatively weak household spending and political problems dragging the growth down, on the other hand. January economic data suggests that the rapid weakening seen in Q4 2011 is over. But, it does not raise hopes for any clear recovery but rather indicates a slow, flat growth through 2012. Manufacturing PMI (by Markit) rose in January moderately to 50.7 points, within the positive territory but only by a small margin. Factory output rose after three consecutive months of decline. Input prices eased lower. More new business was brought in but despite of this and of the rise in manufacturing output, employment numbers weakened. Inventories eased which is a negative driver, short-term, but provides hopes for growth later on with re-stocking. The 2012 annual GDP-growth is projected at 1.8-1.9% with more downside than upside risk. Consumer prices are expected to decline by about 0.3%, the same as in 2011.

China – Economic growth fell to a 2 1/2-year low at 8.9% in Q4 2011. China’s Manufacturing PMI (by HSBC) remained slightly negative at 48.8, suggesting a "moderate further deterioration”. The weakened export potential and the late 2011 tightening of the fiscal and monetary policies to combat the over-heating and run-away inflation continue to lower the growth prospects in early 2012. Manufacturing sector was boosted by a strong holiday season demand for domestic products, but export demand, new business orders, purchasing and other leading indicators remained weak and even weakened further. While growth is tapering off, even the reduced momentum still means a GDP-growth most probably at around 8.5% for 2012 as a whole. To make sure that the growth rate does not fall too much, further stimulation through fiscal easing can be expected. And, the Chinese government has ways and means to re-stimulate the economy, e.g. by reducing the reserve requirement ratio of the banks or by lowering key Central Bank interest rate.

Paper industry – As the economic outlook would suggest, paper industry outlook is weakening further for Europe but showing some signs of recovery, or at least signs of a less rapid decline, in the US. US paper and paperboard production data, published by AF&PA revealed that the total production was down in December by 3.1% and for the full year by 1.8%, compared to 2010. Total paper showed a 3.9% annual decline whilst total paperboard was down by just 0.1%. Tissue paper was up in December by 1.2% but for the year ended down by 0.3%. Total paper and paperboard operating rate was 90.8%, marginally lower than the 91.1% seen in 2010. Paper and paperboard inventories came up for newsprint and for other printing and writing papers in December against November and were up also in containerboards. Comparison against December 2010 shows inventories up slightly in printing and writing but clearly down for containerboards. Imports of paper and paperboard were down by 4% over the year and exports were up 6.4%. In January, uncoated free sheet and packaging grades appear to have held seasonally satisfactory order books. In Europe, the printing and writing paper data shows December losses bigger than the average monthly loss was earlier in the year. European estimated consumption for the total of wood-containing publication papers was as much as 12.5% lower than in December 2010. Woodfrees did better in December than the wood-containing grades. Total woodfree demand of the region was estimated down by 5% for the month and by 6.4% for the full year. January 2012 price negotiations have been very difficult and are in many cases still dragging on. Prices appear to be under downward pressure but the uptick in recovered paper and hardwood market pulp prices give support to opposite views. Order books go typically down in January. Declines have been clear in wood-containing grades and in coated woodfrees but in uncoated woodfrees, the order book situation has rather improved.

NBSK pulp Europe – No decline in December in BSKP producer stocks was a sign of weakness when BHKP stocks went clearly down. UTIPULP’s consumption numbers were down in softwood pulp by more than 13% against both November 2011 and December 2010. The closures of printing and writing paper capacity, mostly in coated grades, does not automatically mean reduced market pulp demand in 2012 but the odds are high, especially after seen a 20% drop in the estimated LWC demand in December. The price gap between softwood and hardwood pulp is narrowing but remains much larger than the long-term average. Consequently, softwood pulp has still downside pressures even if the hardwood pulp price already started moving back up. EUR strengthened by 0.1% against USD from the previous week. In spite of the USD-weakening, our PIX NBSK index retreated further, this time by 4.60 USD, or by 0.55%, and closed at 826.46 USD/ton. Converted into Euro, the index fell by 4.22 euro, or by 0.67%, to 628.01 EUR/ton.

BHK pulp Europe – Hardwood pulp market has tightened over the past few weeks. The record high shipments in December, news over the clear drop in producer stocks and several supply losses all contributed. The downtime taken at Tofte, switch of Mörrum’s birch line to dissolving pulp, major demand pull in China and delays in shipments by several BHKP producers were enough to tighten also the European balance even if the December consumption and demand for pulp were weak in this market. EUR strengthened by 0.1% against the USD. The PIX BHKP index-value in EUR moved up by 10.55 Euro, or by 2.07%, and closed at 520.13 EUR/ton. The PIX BHKP index value in USD rose by 14.65 dollars, or by 2.2%, and closed at 684.49 USD/ton.

BHK pulp China – Pulp shipments to the Chinese market from Indonesia have been affected by heavy monsoon rains. Major volumes of pulp were bought from the Latin American and other eucalyptus pulp producers. The shipments of BEKP, globally, approached 120% of the monthly capacity in December. Prior to the Chinese New Year holidays, BEKP prices were announced first at 580 USD/ton and then by some producers at 605 USD/ton. While the prices in practice have not reached those latter levels, at least not yet, a clear upturn momentum was on the way when the Lunar Year started. The next few days will show what the level of activity is when the New Year Holiday ends. The PIX China BHKP continued to move up, this time by 11.01 USD, or by 1.90%, and closed at 591.05 USD/ton. Yuan strengthened by 0.1% against USD. The conversion of the USD value into Yuan resulted in an increase of 67.37 RMB, or by 1.84%, to 3729.63 RMB/ton.

NBSK pulp China –BSKP shipments were relatively clearly weaker than those of BHKP but even so reached a respectable 94-95% of capacity in December. Chinese demand was good also in this grade with e.g. the intake of Canadian pulp, according to Chinese import statistics, exceeding 200 000 tons for the second time in 2011. Intake of Swedish and German BSKP more than doubled in 2011 against 2010. Canada and Finland showed an increase of over 60%. Overall, nearly 1.8 million tons more BSKP was delivered to China in 2011, compared to 2010. With some softness prevailing on the global BSKP market, prices in China, while moving up, advanced less than the BHKP-prices and the price differential continued thus to shrink. Our PIX China NBSK index value increased by 4.19 USD, or by 0.63%, and closed at 674.25 USD/ton. Yuan strengthened by 0.1% against USD. The conversion of the USD value into Yuan meant an increase of 24.01 RMB, or of 0.57%, to 4254.64 RMB/ton.

Newsprint – Good export tonnage at the end of the year 2011 could not fully compensate for the losses of volume in the regional market even if part of the regional consumption drop was taken out of the sales to Europe from outside sources. The negotiations over 2012 prices were apparently not settled within January and some of talks still continue this week. The first results seen appear to be either unchanged or slightly down from the prices applied in December/early January on the last tonnage against the 2011 contracts. The Euro weakened against the weighted basket of non-EMU currencies by about 0.5%, which meant an upward thrust on the benchmark. The PIX Newsprint index value rose by 45 cents, or by 0.09%, to 514.63 EUR/ton.

LWC – The drop in the European estimated demand in December was, at least for that single month, relatively as big as the capacity decline in December 2011- January 2012. However, if the annual drop of 5% in demand seen over 2011 was repeated in 2012 and exports continued at/near the 2011 level, then the supply/demand balance would clearly improve. Order books in January were not very good. Results from the year-turn price negotiations are still not widely known and some of the talks appear to continue. Some sources indicate unchanged prices, some other suggest that small decreases have been the outcome. The currency effect of an approximately 0.5% weakening of the EUR against the weighted basket of non-EMU currencies had, theoretically, a positive impact on our benchmark. In spite of that, the PIX LWC index slid down by 31 cents, or by 0.04%, to 703.51 EUR/ton.

Coated woodfree – December was a relatively good shipment month both in the US as well as in the European markets. Still, prices remain under downside pressure, partly due to over-supply and partly to the fall of the fibre prices until the turn seen in BHKP a couple of weeks ago. Prices in the US market came down by 10-15 USD in January. In Europe, the outcome of the price talks is still not clear as the change in the mood of the pulp market slowed down the negotiations. The 0.5% weakening of the Euro against the weighted basket of non-EMU currencies gave an upward push to the benchmark. Despite the small assistance from the exchange rates, the PIX Coated woodfree index lost a modest 17 cents, or 0.02%, ending at 710.73 EUR/ton.

Uncoated woodfree – This is the only major grade where the order intake in January has not been disappointing. Lengthening lead times support the producers’ efforts to keep the prices unchanged for the time being. On the other hand, the supply/demand balance for uncoated woodfree during 2011 still suggested that there was over-capacity also in this grade. Imports from outside the CEPI-countries into Western Europe declined by over 100 000 tons in 2011 compared to 2010. As exports from CEPI-countries to destinations outside Europe grew by 8% over the year 2011, the 6% drop in the estimated European demand was not felt as strongly as it could have. The approximately 0.5% weakening of the Euro against the weighted basket of non-EMU currencies provided an upward push on the benchmark. But, the PIX A4 B-copy index still retreated marginally, i.e. by 6 cents, or by 0.01%, and closed at 861.26 EUR/ton.

Containerboard Europe – In the US, box shipments were moderately positive in December with a small 1.8% decline in shipments and with one less working day, the average daily shipments were actually up. Linerboard production was up marginally, or by 0.6%, in December, but a fair amount of that went to fatten the inventories which were up considerably at the box plants and moved marginally higher also at the producing mills. In Europe, weaknesses in the economic outlook impact the order books for linerboards negatively. With higher shipments to the export markets and slower consumption volumes, the availability of raw materials has tightened and prices are moving back up. A small French testliner producer went bankrupt, citing lack of raw materials as the cause. Restructuring continues in the packaging sector as UPM has sold its sack- and kraft paper production to Billerud and SCA has sold their packaging business, except for two kraftliner mills in Sweden to DS Smith, subject to the approval by the competition authorities. Last week, the currency movements had a mixed and relatively small impact on the packaging benchmarks. Euro strengthened by 0.1% against the USD but weakened by about 0.5% against the weighted basket of the non-EMU currencies. All our packaging benchmarks continued to head south, even though the OCC prices moved up. The PIX Kraftliner index lost 3.03 euro, or 0.59%, and closed at 514.88 EUR/ton. The PIX White-top Kraftliner index retreated by 3.27 euro, or by 0.43%, and closed at 762.26 EUR/ton. Our PIX Testliner 2 index lost 5.00 euro, or 1.2%, and settled at 410.04 EUR/ton. PIX Testliner 3 index fell by 2.31 EUR, or by 0.6%, and landed at 382.83 EUR/ton. Our PIX RB Fluting index declined by 3.89 euro, or by 1.03%, to 372.35 EUR/ton.

Recovered paper Europe – Recovered paper demand in China and in some other export markets continued quite lively until the Lunar New Year. No major change is expected with the return after holidays. The increasing volumes for exports, the sinking availability of recovered paper in Europe and the rising export prices show increasingly also in the regional recovered paper prices, most clearly in the largest export grade, OCC. The PIX OCC 1.04 dd benchmark moved up by 3.05 euro, or by 2.72%, and closed at 115.07 EUR/ton. The price gaps to containerboard prices continued to narrow. Against Testliner 2, the gap tightened by 8.05 euro to 294.97 EUR/ton. 300 euro is widely considered as the “minimum gap”. Against Testliner 3, the differential narrowed by 5.36 EUR to 267.76 EUR/ton. Against RB Fluting, the gap shrank by 6.94 euro to 257.28 EUR/ton. Our PIX ONP/OMG 1.11 dd index decline ended and the benchmark recovered by 8 cents, or by 0.06%, landing at 124.11 EUR/ton. As the PIX Newsprint benchmark moved up more, the differential to PIX ONP/OMG 1.11 widened by 37 cents to 390.52 EUR/ton.

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