Global pulp market continues slow, low prices taking toll on pulp mills but further price pressure continues in anticipation of reduced demand during Northern summer

Diane Keaton

Diane Keaton

Jun 17, 2012 – Industry Intelligence

LOS ANGELES , June 17, 2012 () – Pulp markets in major global markets continue to lag, with demand lackluster going into the usually slow Northern summer months.

The China slowdown that began in April has been increasingly affecting contract and spot prices in other markets.

There is persistent commentary from sources saying that net prices have dropped so low that some mills are losing money.

But at the same time, sources are generally expecting markets to come back in September.

“It’s a normal seasonal slowdown,” said a pulp sales agent, opining that structurally, there’s nothing different about current market conditions except that China has built up inventory. But he acknowledged that there is concern “about what’s outside of China, which has no place to push its exports,” especially to Europe, with its economic woes.

A sales executive for a bleached eucalyptus kraft pulp (BEKP) producer said that although prices might fall during the Northern summer, he doesn’t see a collapse, barring a major macroeconomic driver. But, he said, “I don’t see a premium of eucalyptus over softwood remaining. It’s just not natural.”

As for currency factors, Bloomberg reported on June 16 that the euro strengthened against the dollar for a second week as investors pulled back on record bets against the currency before the Greek election that took place this weekend. Bloomberg said the euro rose 1% to US$1.2638 last week in New York trading, after gaining 0.7% in the previous week.

Reuters reported today that political parties supporting Greece's international bailout will begin forging a government on Monday after the election victory over radical leftists “staved off the prospect of the debt-laden country leaving the euro and brought relief to global markets.”

Mill downtime. On June 15, Fibrek Inc. announced that, starting on June 23, it plans to take a 12-day market shut at its 375,000 tonnes/year northern bleached softwood kraft (NBSK) mill in Saint-Félicien, Québec. The downtime, aimed at helping to control inventory, will affect about 12,000 tonnes of output, the Montreal-based company said.

In the current price cycle, this is the first formal announcement by a North American pulp producer of market-related downtime. Resolute Forest Products, which is in the process of acquiring Fibrek, has announced market downtime at various mills over the months, as its management holds to its commitment to match production to demand. Also on June 15, Resolute announced that it is indefinitely idling its Mersey newsprint mill in Brooklyn, Nova Scotia.

A sales executive for one of the Canadian NBSK producers said Canadian producers “are at the bottom now, given the currency level,” and that on a net-net basis, the bottom “has got to be around $640-$650 sold to China.” He noted that the last time the Canadian dollar was a par, a few mills (in Terrace Bay, Ontario, and Tofte, Norway) had to shut when the price dropped to $700-$710/tonne. “I can’t imagine how people are making money,” he said. “That’s the magic question.” With the euro having fallen faster than the Canadian dollar, the bottom for Scandinavian producers would be around $620-$630/tonne, he said.

A sales executive for another North American pulp producer said, “There should be more announcements (for market downtime) and probably there will be. I can assure you that people are losing money.”

Outage effects. Meanwhile, Canfor Pulp LP is repairing tubes in a recovery boiler that failed on one of the two lines of its 590,000 tonnes/year NBSK Northwood Pulp Mill in Prince George, British Columbia, causing the line to be shut down. On June 1, when Canfor Pulp reported the incident, it said it expected the curtailment to last at least three weeks, resulting in a loss of about 25,000 tonnes of production. A knowledgeable source said in recent days that the figure might end up being a bit more than that.

With the unexpected Northwood mill outage, Canfor Pulp’s inventories are now on the low side as it works to cover its customers’ needs as well as the fiber needs of the 135,000 tonnes/year kraft paper machine at its Prince George Pulp and Paper mill during an upcoming planned extended pulp mill shut.

Also the company had a scheduled second quarter maintenance outage at its 320,000 tonnes/year Intercontinental Pulp Mill, which was expected to lose 11,000 tonnes of production.

The Prince George Pulp Mill (120,000 tonnes/year of unbleached and 15,000 tonnes/year of semi-bleached) will be down for both maintenance and for a Green Transformation Program project to partially rebuild the recovery boiler. The shut, which will last for four or five weeks during parts of the second and third quarters, will result in a loss of about 24,000 tonnes, the source said.

Analyst forecast. In a June 12 research note, Vertical Research Partners paper and forest products industry analyst Chip Dillon described the NBSK price in Europe as already having fallen to $825/tonne, down $75/tonne since March, and down $210/tonne from the June 2011 peak of $1,035/tonne. “With some producers (mainly in Canada) losing cash, we see only an additional $30/tonne decline in Europe (to a $795/tonne trough by August-September),” Dillon wrote. He noted that the ongoing uncertainty of European economies is expected to drive European prices to fall a bit farther in coming months, but that the current spread with U.S. prices will narrow as U.S. prices fall farther.

In response, he said his group is lowering its full-year forecasts for average NBSK full-year prices delivered to Europe by $50/tonne for 2012, to $825/tonne; by $65/tonne for 2013, to $915/tonne, and by $25/tonne for 2014, to $1,025/tonne. The group is maintaining its 2015 forecast, based on an expected capacity wave, at $885/tonne.

Dillon’s NBSK forecast for North America is $873/tonne for 2012, $935/tonne for 2013, and $1,035/tonne for 2014. He said he expects the price in North America to fall by $50/tonne by the fall, bottoming at $850/tonne. (As reported previously, on June 6, RBC Capital Markets lowered its NBSK list price forecast for 2012 by $10/tonne, to $890/tonne, and for 2013 by $40/tonne, to $925/tonne.)

North America outlook. For June, NBSK producers have been holding to their $900/tonne list price in North America, unchanged from April, though some customers have been pressuring for a decrease.

The high-percentage contractual discounts that have been negotiated in recent years have reduced mill nets, making it particularly painful for suppliers to reduce their list prices. A few years ago, North American NBSK customers’ discounts were mostly in the mid-teen percentages, having crept up from the low double digits, but in recent months there have been ongoing reports of some discounts in the low 20-percentiles.

Recalling not so many years ago when the average, he said, was 12%, a small-scale North American buyer commented, “Now when you don’t get 20%, there’s something wrong.” He said he expects BSKP prices to drop by $40-$50/tonne, including at least $20/tonne in July, and the rest in August. He thinks one of the major NBSK producers will “come out with a low number like $20 and make sure they control it.”

Some larger-scale NBSK customers have been complaining about the widening spread between the $900/tonne list price in North America and the price in Europe, which in the North fell last month mostly to $840/tonne and is slipping more this month. A North American customer said that in his discussions with suppliers, “so far nobody’s cracked this month,” but that he is still optimistic that he will get a correction for June, or if not, “at least in July--at least $30.” He noted that softwood pulp supply in North America is tighter than in Europe “and especially China” and he named a major domestic supplier that he said is “pretty tight on inventory and not motivated to make an adjustment on price.”

A major buyer said that although NBSK producers are trying to hold on to their $900/tonne price, he is telling suppliers he won’t accept it and instead he has been buying spot tonnage, as well. For major customers, spot pricing is in the low $600s/tonne, down $30-$40/tonne from May, and there is enough spot tonnage “coming from all over Canada” to cover his needs, he said. He, too, is fighting the price gap between North America and Europe--he said Europe’s range is $820-$825/tonne—while at the same time, “Asia prices are crumbling.” He said the price in the third quarter could drop to around $800/tonne.

Paper markets are so weak that capacity will be shut, and therefore demand for pulp will weaken, he said. Pulp mills will run full during the third quarter until September, and there will be “a whole lot of supply and even less demand,” he said.

A sales executive for a Canadian NBSK producer said that despite some pressure on the $900/tonne price, there is not a lot of spot tonnage available, given various production issues at some mills. And he said buyers being wooed by Scandinavian producers should be mindful of the importance of having contracts with their domestic suppliers so they can count on them when needed.

(One of the buyers said he isn’t seeing a lot of Scandinavian inventory now, but that there seem to be efforts to “put some programs in place” for the future. “It all points to the weakness in Europe,” including the slide in paper demand, he commented.)

Another sales executive for a Canadian NBSK supplier noted that the market in North America has been dropping more slowly than elsewhere, and that this potentially could keep the $900/tonne price in place until July. But he also said there will possibly be a $20-$30/tonne drop this month, followed by another larger decrease in July. When prices first start to fall, the pace is pretty slow, but then it speeds up, he commented.

On the hardwood pulp side, the announced May BEKP list price was $860/tonne, up $40/tonne, and sources generally said the price rose by $30-$40/tonne but that there were also $20/tonne increases. The prices reached in May are about the same for June deals, sources said.

A sales executive for a BEKP supplier said that for June his company is solidly at its announced price of $860/tonne, except for contracts pegged to the previous month’s RISI Inc. price, which was $850/tonne. “From what I can gather, there’s not a lot of eucalyptus around. There’s a little more hardwood, but it’s in pretty good shape,” in contrast to the “sloppy” softwood pulp side, he said. He said his company’s supply is tight and he noted that in Brazil, maintenance downtime is coming up.

Another BEKP seller said some June business is at $840/tonne, having moved up by $20/tonne in May and holding in June, while other is at $860/tonne, up $20/tonne in May and another $20/tonne in June. He said he wasn’t hearing $860/tonne in May and that some of the $850/tonne business in May was essentially $850/tonne less $10/tonne, equaling $840/tonne, he said. “Eucalyptus is still quite tight,” he said. “I don’t think there’s a lot of spot out there” but a spot price would be around $670/tonne, calculated as a 20% discount off of $840/tonne, he said. He disputed talk that some spot pricing is in the low $600s/tonne. But he said the “big talk” is about the market flattening out or coming down in the next 30, 60, or 90 days, he said.

The list prices of North American-produced hardwood pulp rose by $30/tonne in May, as announced, and are holding in June, sources said. The prices are mostly $790/tonne for aspen and mixed grades of northern bleached hardwood kraft (NBHK), $800/tonne for maple-grade NBHK, and $785/tonne for southern bleached hardwood kraft (SBHK).

North American hardwood pulp buyers this month have mostly been reporting changes of unchanged to increases of $10-$20/tonne over those of May for spot or regular non-contractual tonnage, depending on how much their prices changed in May over April. Overall for the two months, their prices generally increased by $30/tonne. June prices are in the high $500s/tonne to the low $600s/tonne.

A spot BHKP buyer who paid $15-$20/tonne higher in May said he thought June would see no further increase, but that all of his suppliers nevertheless held to their goal of getting the rest of their $30/tonne hike. “They thought the market was strong enough, so they got it,” he said. But he said his suppliers are running fairly well and that there will be a good supply of pulp available in the next few months, reflecting a typical weaker summer market, which he expects to continue through September. He said this would depend on whether monthly data show enough increases in producer inventories to establish a trend.

An exception to the story of upward movement was from an executive for a BHKP supplier, who said domestic spot prices had decreased in June by $10-$20/tonne, to about $600/tonne, and that volumes are down. “We’re definitely seeing some pressure for spot pricing for hardwood,” he said. “I think the market is showing signs of weakness here, but not as much as in China and Europe.” He said his company has turned some to export orders “and not at very attractive prices.” He added that doesn’t expect domestic contract prices to move to this month but that they are likely to move in July by, say, $20-$30/tonne. “I think it’s going to be not a great summer,” he said.

For the week ending June 9, FOEX Indexes Ltd. said the NBSK price in the U.S. continued to stand at $900/tonne. In its June 12 comments, FOEX said the U.S. market is fairly well balanced, despite the oversupply problems in some other markets. FOEX said the U.S. situation was aided by maintenance and mechanical downtime in some mills, as well as the brief (May 23-June 1) Canadian Pacific Railway Ltd. strike.

FOEX noted that downside pressures have increased, due to the weakened global balance and also due to the recent strengthening of the U.S. dollar.

Separately, although there has been some unexpected loss tonnage in North America on the pulp side, sources note that this is offset to some extent by the unexpected shut of Verso Inc.’s paper mill in Sartell, Minnesota, which suffered an explosion and fire on May 28. The company said on June 7 that it would take several months to finish necessary repairs at the mill, that it had not yet confirmed the operability of the mill’s single paper machine, and that the company would decide on the mill’s future once a damage assessment is completed.

According to Verle Sutton in a May 29 edition of The Reel Time Report, this machine formerly had an official capacity of 200,000 tons/year, but, with basis weights moving down over the years, capacity has probably been reduced to about 190,000 tons/year, most of which is coated groundwood, with perhaps 60,000 tons/year or so of SCA being produced.

Europe business. The NBSK price in Europe is under pressure in June, having already decreased by $10/tonne or more in May. As previously reported, the May price in Northern Europe mainly settled at $840/tonne, mostly down $10/tonne, and in Italy at about $800/tonne, mostly down $30/tonne.

The June price in Northern Europe could end up at about $820-$830/tonne, acknowledged a sales executive for a Canadian NBSK producer. “It all depends on inventory, currency, and current demand,” he said. A price of $800/tonne, discounted by 20%, would equal $640/tonne, and tacking on a freight price of $50/tonne would bring the price down to $590/tonne, at which point “you’re starting to bump up against the bottom,” he said, adding, “It’s starting to hit people already.” Meanwhile, pulp demand in Europe is quiet going into the summer, reflecting the weak printing and writing side, as well, he noted.

But another such producer said he thinks the price spread with Europe will continue, commenting that a spread of $50-$70/tonne is not unheard of.

Looking at BEKP, one of the sellers said his company ended May with a “weighted” price of $790/tonne, including business at the full $800/tonne list price as well as “some below $790.” But he commented that as paper mills take normal summer downtime, BEKP pricing is likely to erode by about $20-$30/tonne.

Another said that in May in Northern Europe, the market rose by $20/tonne of the announced $40/tonne, to $780/tonne, but that buyers are “fighting tooth and nail” for a $20/tonne reduction for June. He said this could indeed come to pass, and that the price could fall an additional $20/tonne during the summer, before the market revives in the fall. He commented that not only have papermakers reduced their demand and in some cases shut capacity, but that the market is also affected by normal seasonal factors, including increasing port stocks and vacation-related paper machine shuts.

For the week ending June 9, FOEX said the NBSK price in Europe dropped by $1.93/tonne, to $835.91/tonne, which followed an $11.55/tonne slide in the previous week. In euros, the price fell by €9.51/tonne, to €670.44/tonne, with that week’s 1.2% strengthening of the euro against the U.S. pulling the benchmark lower.

The BHKP price in Europe rose by $1.60/tonne, to $786.13/tonne. In euros, it dropped by €6.17/tonne, to €630.52/tonne.

FOEX wrote in its June 12 commentary that the narrowing of the price gap between softwood and hardwood will gradually even out the supply/demand balance between BSKP and BHKP by supporting softwood demand and switching supply to hardwood at the mills that produce both grades. But it said that for the time being, BSKP market remains softer than BHKP.

The declines in coated paper production and the greater availability of BSKP sold on the market, through closures of integrated paper capacity, are the main drivers, FOEX noted.

In BHKP, the supply/demand balance remains relatively firm, at least for the time being, FOEX wrote, saying that the key support comes from the large growth in global tissue production that is compensating for the losses of market BHKP demand in the graphic paper sector in the industrialized countries. The weakening, again, of uncoated woodfree order books, the approaching summer paper mill shuts, and the arrival of several shiploads of pulp to Europe from Latin America in late May are easing the ratio in practice in June, FOEX wrote, noting that the next wave of pulp mill maintenance downtime won’t occur until the early fall.

China mood. A Chinese pulp buyer said the domestic pulp and paper markets generally remain very sluggish, mainly, he said, because there are still high inventories of both pulp and paper, especially of paper warehoused at mill sites. He also cited a mid-week report saying that some tissue paper mills in Southern China have so much end-product in stock that their operating rate has been reduced to one-third of normal.

He said imported NBSK is being offered in June at a net price range of as low as $620-$630/tonne, but that very few buyers are interested in placing large orders. And he said efforts to push up the price of imported BEKP and other hardwood pulp have failed, and that it is being offered at a net price of about $610/tonne, with reports of further discounts for big orders.

In the local market, Canadian NBSK is being offered at the equivalent of about $630/tonne (RMB4,650-RMB4,700/tonne, he said. The high-grade BEKP offering price has risen by RMB50/tonne, with a cash price of RMB4,500-RMB4580/tonne, but almost no business has been concluded, he said.

“It seems everybody believes the pulp price will be going down further because of the general economic situation,” he added.

Sources have said that Canadian NBSK producers dropped their June list prices by $50/tonne, to $660-$670/tonne for standard NBSK and $680/tonne for reinforcing-grade NBSK. A sales executive for a Canadian NBSK producer said his company has closed 75%-80% of its contract volume in China for June. “I don’t believe there is that much inventory because we’re getting our orders,” he added. However, he said his company’s sales in China during May were virtually zero and that that was essentially the case for competitors, as well.

As for non-NBSK softwood pulp, he said that by the time “normal discounts and special rebates” are given off of the announced net price of $650/tonne, the price “is closer to net-net $600 rather than $625.”

In his June 12 research note, Vertical Research Partners’ Chip Dillon said China’s resale NBSK prices have fallen by $75/tonne since late March, and are at their lowest since 2009. “Evidence is building that prices in China have already hit bottom,” he wrote.

For the week ending June 9, FOEX said the NBSK price in China decreased again, this time by $1.25/tonne, closing marginally below BHKP at $664.41/tonne. And BHKP retreated by $5.07/tonne, to $665.68/tonne.

“Once started, the downward slide is difficult to stop and also this time the earlier started price retreat in BSKP grades continued but slowed down,” FOEX wrote in its June 12 commentary.

FOEX said the local supply of hardwood pulp increased in May with Yunnan Yun-Jing Forest & Pulp mill Co., Ltd. (Yunnan Yun-Jing) adding BHKP capacity and with Chenzhou Yunong Paper starting up a hardwood bleached chemi-thermomechanical pulp (BCTMP) mill. The continued weakening of the dissolving pulp price in China may encourage some of the swing capacity between dissolving and hardwood paper pulp to go back to BHKP, FOEX wrote.

With BSKP prices below BHKP, with the approaching summer downtime in the paper sector, and with slow purchasing activity of pulp in May, BSKP is experiencing downside pressures on both supply/demand balance and on prices, FOEX wrote. But the BHKP market is supported by the non-wood pulp closures and especially by the double-digit growth continuing in tissue sector, FOEX said, noting that in China, there are severe restrictions on the use of recovered paper for toilet paper and facial tissue, thus boosting market BHKP demand in these products.

FOEX noted that, given some time, the reversed price ratio to BHKP will start to support to softwood pulp demand over hardwood in grades where furnish changes are relatively easy to realize.

The technical problems at several BSKP mills, including Canfor Pulp LP’s Northwood mill in Prince George, British Columbia, and the approaching lengthier-than-normal maintenance downtime at Ilim Group’s Ust-Ilimsk mill in Russia will remove market BSKP supply, much of which has been targeted to China, FOEX observed.

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