Short-term global pulp supply restrictions pushing up prices in March and possibly into part of second quarter, but underlying demand not seen as strong

Diane Keaton

Diane Keaton

Mar 11, 2012 – Industry Intelligence

LOS ANGELES , March 11, 2012 () – Pulp producers are generally seeing increased list and spot prices in March and prices could rise a bit more in the second quarter, sources said.

Some mill shuts and operational problems in recent months have curbed supply, and upcoming scheduled spring Northern Hemisphere maintenance shuts will also further restrict it.

After that, with production back to full swing and going into the seasonally slower Northern summer for a paper side that is less than robust for various sectors, pulp pricing momentum is likely to be flat, sources say.

Sources continue to fret about global economic conditions, with Europe still struggling and slowed growth in China.

In China, northern bleached softwood kraft (NBSK) pulp list prices have moved up in March. It is not yet clear whether or how much NBSK list prices will increase in Europe this month. There was no effort to increase NBSK list pricing in North America.

In his just-published Market Pulp Monthly, consultant Brian McClay said that while the global supply/demand balance for softwood pulp is not as solid as for hardwood pulp, market conditions have improved somewhat for fluff pulp because of the reduction of available supply from some market-related downtime in January and by equipment-related output reductions at four U.S. mills in February. McClay said fluff pulp prices “rose considerably” in spot markets through February—by as much as $40/tonne in China.”

A few, but not all, fluff pulp producers announced global price increases of $30/tonne, to list prices of $960/$965/tonne. However, some said this number is considerably above what they describe as February effective list price of $910/tonne.

Bleached eucalyptus kraft pulp (BEKP) prices are moving up around the world this month. Producers announced $30/tonne increases for North America and Europe, to $820/tonne and $760/tonne, respectively, and a $35/tonne hike for Asia and/or China, to $640/tonne. Sources continue to say, in the words of a major buyer, that “the supply/demand dynamics are much better on hardwood” pulp than on softwood pulp.

A seller of Brazilian BEKP, noting the hardwood pulp production losses of recent months, commented that such losses aren’t felt in the market until a couple of months after the fact. “It’s a concern but not a reality (until) the vessel doesn’t show up,” he commented. Meanwhile, he said, “There’s a lot of pressure from currency to try to move prices up.”

And a buyer for a major tissue producer noted that currency issues are a stress for Brazilian BEKP producers. “I keep watching currency,” he said. “Currency will play an important factor.”

The Brazilian real ended regular trading on March 9 at BRL1.7820 to the U.S. dollar, marking the sixth straight session of depreciation against it, as investors continued to fret over possible government action to stem investment inflows, Dow Jones Newswires reported on that date. Currently it is at BRL1.79140. Also on March 9, the U.S. dollar rose against the euro and hit a 10-month high against the Japanese yen after a better-than-expected U.S. jobs report, The Associated Press (AP) reported on March 10. Currently the euro is at $1.31220.

Separately, in his March 7 Wood Resources Quarterly report published on Industry Intelligence, Hakan Ekstrom wrote that in 2011, wood costs for pulp mills and sawmills in Brazil reached their highest levels in more than 20 years, though eucalyptus and pine log prices fell toward the end of the year in U.S. dollar terms, mainly because of the strengthening U.S. dollar.

“Prices for Eucalyptus pulpwood traded in the open market are high not only from a historical perspective, but also as compared to many other regions around the world,” Ekstrom wrote. “Only pulp mills in Europe and Australia had higher hardwood fiber costs than Brazil in late 2011, while North America, Chile, Russia and Indonesia all had lower hardwood log prices than the world’s largest market pulp exporter.” Wood fiber cost is “by far the most important cost component for Brazilian pulp mills, more so than for most other pulp mills in the world,” Ekstrom wrote.

McClay comments. In his monthly report, Brian McClay said maintenance and other supply cuts should lead softwood pulp prices to start to edge higher late in the second quarter, while hardwood pulp prices consolidate the increases that are being implemented through March.

He said pricing momentum for all pulp grades should be relatively flat through what is likely to be a better-than-expected Northern Hemisphere summer for surviving papermakers in most markets. The pulp pricing momentum “will likely start to benefit from paper pipeline restocking if, as is likely, more paper capacity is closed permanently between now and then and as paper demand starts to improve on a cyclical basis,” he wrote.

He said pulp prices for all grades should start to push higher again around September and through most of 2013 before undergoing “a significant downward correction” around the last quarter due to a sharp increase in new BEKP capacity.

North America moves. Buyers in North America report increased spot prices in March, but they say the reason is that suppliers are preparing for their spring maintenance outages, rather than because of increased demand. Sources generally aren’t expecting to see market momentum once suppliers come out of their outages.

The NBSK price in North America is solidly at $870/tonne, with producers making no change from February, sources said. Now the talk is whether producers will try to raise prices in April.

Some large-scale buyers in recent days downplayed that notion. One said his suppliers report they still have plenty of inventory; however, there will be some tightening due to the upcoming outages.

He said suppliers might try to ride the coattails of hardwood pulp price increases, but he said it would be more of a challenge to raise prices in North America than in China and Europe, where prices dropped faster and farther in the first place and are now therefore recovering more quickly.

If the $20/tonne NBSK March increase for Europe doesn’t go through fully, this could prevent an April increase effort in North America, he said. Another such buyer source said his company is still getting spot offers, “so there’s no reason for NBSK to go up.”

But a sales executive for an NBSK producer said an April increase for North America is a possibility, given mill shuts plus the price increase underway in Asia. Even if the March price in Europe doesn’t go through, the spread with Asia is an issue and Asia “is more of a driver than Europe” regarding pricing, he countered. The freight cost from North America to Asia is “much lower” than the cost of shipping domestically, he added.

As for March pricing for southern bleached softwood kraft (SBSK), Resolute Forest Products announced a $20/tonne hike, to $850/tonne, and International Paper Co. announced a global $20/tonne SBSK increase. A buyer said last week that compared to February, he is paying $10/tonne more for spot SBSK, to the $615-$620/tonne range, with plenty of availability. Spot SBSK pricing varies; for January/February another buyer reported $630-$650/tonne.

As for the announced BEKP price for North America of $820/tonne, up $30/tonne, a BEKP seller said his company has gotten the $30/tonne hike and in some cases, more. “Some that were below $790 (in February) are now at $820,” he said.

He said the market in North America has firmed up. “There is a bit less available (and) demand has picked up a bit” due to a few tissue customers’ internal needs, although there is no dramatic change in the market, he said.

He said some customers are still trying to leverage their North American-produced hardwood pulp prices against those of BEKP. He dismissed customer complaints about the higher BEKP price in North America compared to that of Europe, saying it accounts for delivery terms, fuel charges, and comparative rebates.

For February, RISI Inc. said the BEKP price increased by $30/tonne, to $770/tonne. (It left prices unchanged for North American-produced hardwood pulp, at $700/tonne except for maple-grade, at $710/tonne.)

A BEKP buyer who paid the $770/tonne February RISI price said he expects “at least a true $20 increase” in March but that he doesn’t expect the price to jump by $50/tonne, to $820/tonne. Spot tonnage can still be had in the mid-$700s/tonne, he reasoned.

Several major northern bleached hardwood pulp (NBHK) producers, Alberta-Pacific Forest Industries (Al-Pac), Sappi Fine Paper North America, and Resolute, formally announced $30/tonne March 1 increases for North America. For aspen-grade NBHK, Al-Pac is at $735/tonne and Resolute is at $730/tonne; for aspen and mixed NBHK, Sappi is at $730/tonne, and for maple-grade NBHK, Sappi is at $740/tonne. Resolute also announced a $30/tonne increase, to $730/tonne, for southern bleached hardwood kraft (SBHK), and IP announced an increase of $30/tonne for major markets, with the exception of $35/tonne for Asia.

A sales executive for a North American BHKP producer said his company’s NBHK spot price has gone up in March by an average of nearly $20/tonne, to $555-$560/tonne, and that this followed $10-$15/tonne spot price increases in February. “When the spot price starts moving before the announced price, that’s a sign,” he commented. He expects the announced March $30/tonne increase to go through and said there has been “very little” resistance from customers. The earlier BEKP price increase push seemed to help reduce “the shock value,” he said.

With North American-produced BHKP in fairly tight supply in preparation for maintenance shuts, there might be another price hike next month, depending on the strength of the paper business, he said. But going into the summer, the price will not “by any stretch” have increased by $50-$100/tonne, he said.

An NBHK buyer in New England said that despite the $30/tonne announcements, his net pricing in March hasn’t moved up, although he expects it to do so next month. He said the hardwood market is tightening but that he is having no problem with availability. One of his suppliers is moving more tonnage to China now than before, but told him it wants “to try to commit some for the North American market,” he said.

Another NBHK buyer said his spot prices have risen by $20/tonne this month, to the $530-$540/tonne range, and he, too, said availability is not an issue.

Regarding deinked pulp (DIP), one buyer said his net price is unchanged while another said his went up $20/short ton, tied as it is to sorted office paper (SOP) pricing, which has seen a price increase. Buyers report DIP prices hundreds of dollars apart from each other, depending on various factors, such as whether the product is wetlap and how far it must be transported.

FOEX Indexes Ltd. said that for the week ending March 3, the NBSK price in the U.S. remained unchanged at $870.00/tonne. FOEX has shown this level since the week ending Feb. 4, with the exception of the week ending Feb. 11, when it fell by 6 cents/tonne.

FOEX wrote in its March 6 comments that the January 2012 year-over-year 1.9% decrease in market pulp shipments to the North American market (per statistics from the Pulp and Paper Products Council, or PPPC) was a “surprisingly good result” compared to the decreases in graphic paper and in tissue paper production (the American Forest & Paper Assn., or AF&PA, said the respective drops were 3.3% and 0.8%).

FOEX said part of the recent shipment volume has gone to fill up consumers’ pulp stocks, which rose by nearly 100,000 tonnes in two months (December + January).

As for the recently announced uncoated freesheet paper price increases for April, they are “wishful thinking,” given the lackluster market, said an executive for major commodity paper producer, adding that the coated paper market is also slow. The second quarter is usually slow, he commented. “We’re always nervous this time of year because it’s a seasonal business and what if demand doesn’t pick up?” he said, but added that there is currently “nothing out of the historical norm” underway.

Europe changes. Most NBSK producers are targeting $850/tonne, up $20/tonne, as their March price in Northern Europe. A number of producers had announced this price for January, but the price remained at $830/tonne through February. Now the push for $850/tonne has resumed this month.

But buyers aren’t necessarily agreeing to it. A major buyer flatly said, “It will not go through.” He and another such buyer said the $20/tonne increase might go in partly or be stepped in over two months.

One of the buyers said his February BEKP price was “far below $730,” and that that the announced $760/tonne price for March is likely to fall short by $10-$20/tonne, adding, “What transpires in Europe transpires in the U.S., as well.” The second buyer said that while his company is pushing back on the NBSK price, “there is no sense of a pushback on hardwood” and that the $30/tonne increase is expected to succeed.

As previously reported, in February the NBSK price in Italy was about $810-$820/tonne, therefore still below the $830/tonne price in Northern Europe, while the BEKP price in Italy caught up with that of Northern Europe.

In his recent Market Pulp Monthly report, consultant Brian McClay said European hardwood pulp buyers have had little choice but to pay higher prices so far this year because they were caught short after minimizing pulp stocks at the end of 2011, at which time they were expecting a weak start to the New Year. But order inflows for freesheet paper were stronger than expected through February on restocking by merchants, distributors and end-users, McClay said, adding that this is now probably largely over.

Meanwhile, underlying paper consumption in Europe is reportedly weak, and freesheet producers have recently started to seek higher prices this month that should face stiff resistance, including cancelled orders, McClay wrote.

“As such and considering their increasing cost pressures, especially if the EUR/USD weakens further, market-related paper downtime, including some permanent closures, will increase through Q2 and pulp consumption should slow,” McClay wrote.

For the week ending March 3, FOEX said the NBSK price in Europe was $830.27/tonne, up 17 cents/tonne. In euros, the price increased by €9.26/tonne, to €628.18/tonne. FOEX noted that the euro weakened by 1.5% against the U.S. dollar from the previous week.

FOEX said the BHKP index increased by $6.84/tonne, to $729.14/tonne, and that in euros, it rose by €13.12/tonne, to €551.67/tonne.

Middle East prices. An agent in the Middle East region said that depending on the producer, various Scandinavian suppliers are pricing spot NBSK from $645/tonne to $670/tonne or more in March, up from $625-$650/tonne in February.

For BEKP, the agent said he is asking for a minimum of $645-$650/tonne, up from his recent $630/tonne price.

He said he expects at least another $15-$20/tonne in increases for all grades by the beginning of April and continuing until May. But the momentum could slow, especially for softwood pulp, and there could be price erosion by June, he said.

China changes. Sources said the announced March price increases for China are being implemented.

These include $20/tonne increases to $700/tonne (list) for standard NBSK, $710/tonne (list) for reinforcing NBSK, and $680/tonne (net) for bleached radiata kraft pulp (BRKP).

Major BEKP producers and some North American BHKP producers have announced March 1 $35/tonne price increases for Asia, bringing the BEKP list price in China to $820/tonne. Al-Pac’s announced China price, also up $35/tonne, is $620/tonne.

The March 1 increases from Ilim Group in Russia include $10/tonne for NBSK, to $680/tonne (net) CFR port; $30/tonne for BHKP, to $610/tonne (net) CFR port; and $20/tonne for UKP, to $405/tonne (net) CFR port.

Some hardwood bleached chemi-thermomechanical pulp (BCTMP) producers have announced $35/tonne price increases for Asia and some softwood BCTMP producers have gone up $20/tonne for Asia, bringing the list price in China of 75-bright softwood BCTMP to $570/tonne.

FOEX said that for the week ending March 3, the NBSK price in China increased by $7.08/tonne, closing at $690.57/tonne. It said the BHKP price continued to move up, this time by $14.56/tonne, closing at $620.60/tonne. FOEX added that in the paper sector, mills have reduced their stocks but that paper merchants have increased theirs.

A Chinese buyer said that at current pulp price levels, there is still a balance for both buyers and sellers. But he was skeptical about whether pulp prices could increase in the second quarter, saying this would depend on March volumes, the economic situation and the reaction of end-users.

“NBSK is still under pressure” and if sellers try to go above the current level, customers would not likely continue taking their regular volume, he said. The large quantities that Chinese customers bought late last year and into January have been arriving since January and continue to arrive, he said, and some of the ordered pulp has yet to be produced. “Now the main port is full. There is lots of pulp there,” he said.

He described February orders as “normal,” noting that hardwood pulp suppliers restricted sales to their contractual requirements because they were seeking a price increase for March. He described hardwood pulp as still supply-driven—“that’s why we support the price increase in March”--and softwood pulp as in balance. But if producers further increase their softwood and hardwood prices in the second quarter, “the summer will be quiet,” he said, noting that additional supply will be coming on in the second half of the year.

As for local prices, he said they are little changed of late. He said first-quality NBSK is at RMB5,200-RMB5,300/tonne, compared to RMB5,100-RMB5,300/tonne a month earlier, with the price change depending on the region and on the user’s need for pulp. “The NBSK price is not so strong, even in the local market,” he said. He said BEKP is mostly at RMB4,600/tonne now, compared to RMB4,500/tonne a month earlier.

He said Chinese customers ordered those large quantities of imported pulp several months ago in order to stock up for the new printing and writing paper and tissue capacity coming on this year. There were more than 1 million tonnes/year of new tissue capacity last year and there will be more than 2 million tonnes/year this year, he noted. Given current economic issues, there is more new tissue and printing and writing paper capacity than the market can absorb right away, which will result in low operating rates, he said, adding that economic issues are also expected to result in weakened exports of items in boxes.

In his latest Market Pulp Monthly, consultant Brian McClay said that while prices for March softwood pulp business so far in China have increased by $20/tonne, most of the business has been done by traders “who have a vested interest in improving market sentiment so that their prices to local buyers can be driven higher.”

Since local market RMB prices remain below international prices, and seem unlikely to move much higher in the near-term, given the surge in softwood pulp imports in recent months and with more pulp on the way, traders’ purchases of softwood pulp over the next couple of months should be limited to contract volumes only at best, McClay wrote.

Looking at the hardwood pulp situation in China, McClay said anecdotal reports indicate that rising prices have already encouraged more domestic pulp capacity to restart or to speed up production, which was curtailed starting in September.

Dissolving pulp. A sales executive for a dissolving pulp (DP) producer said the price of commodity DP is still around $1,200/tonne, but that the price “has come off a little bit.”

He added that India’s recent ban on cotton exports might lead to better “prospects” for viscose. India’s commerce ministry announced the export ban on March 5. It was imposed after India exported nearly 9.4 million 170-kilogram bales of cotton, out of the 12 million bales that had been registered for export, exceeding the government’s 8.4 million bale exportable surplus, Bloomberg News reported March 6. Already the ban is said to be causing a surge in cotton prices.

In a March 6 research note, paper and forest products industry analyst Paul Quinn of RBC Capital Markets said that commodity DP prices are currently ~$1,200/tonne, which he described as up 9% since December but down 6% over the last three weeks. “We believe pricing momentum stalls at ~$1,250/mt as prices are then high enough to attract swing capacity into the market,” Quinn wrote.

Dundee Capital Markets paper and forest products industry analyst Richard Kelertas said in a March 7 research note that DP prices have rebounded over the last couple of months and are now at $1,250/tonne, which he described as ~20% higher than a couple of months ago.

Quinn, Kelertas, and industry analyst Sean Steuart of TD Securities made their comments about DP pricing following the March 5 release by Fortress Paper Ltd. of its fourth quarter results.

Fortress said its Thurso, Quebec, mill, which was converted to DP last year, started DP production in early December and that it has since ramped up its output to approximately 72% of its planned capacity (of 200,000 tonnes/year), targeting full capacity by the end of the second quarter of 2012. “A slower-than-expected ramp-up curve to full DP operating rates at Thurso also implies a longer time frame to reach target unit operating costs,” Steuart wrote.

In a March 7 research note, Quinn said Fortress is now targeting placing around 50% of its production into the high-alpha specialty market within three to five years.

Observing that this market has very high barriers to entry from a technical, cost, and customer perspective, Quinn wrote, “We note that Buckeye and Rayonier will only have just finished transitioning the combined 232k mt of additional specialty DP by then, and Tembec might have 30k mt to add too. Sateri will also be bringing on ~85k mt in Brazil in 2014/15. Additionally, precedent conversions into specialty suggest commodity mills require Capex of ~$1,000/mt, implying $400MM+ might be needed. This figure may be less for Fortress given its recent conversion from papergrade to commodity DP.

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