FOEX Pulp & Paper Indices - Dec. 11, 2012

Sandy Yang

HELSINKI , December 11, 2012 (press release) – General Economy: US – Both the global and the US economic growth picked up pace in November, according to the latest purchasing manager index results. This was a positive surprise in the US as the negative impact of the super-storm Sandy in the North-East was apparently fully compensated by good growth in other areas. The improvement in manufacturing output and increases in new domestic and export orders boosted also job growth. The US economy added almost 150 000 new jobs in November. The unemployment rate fell to 7.7%, which is the lowest number seen since December 2008. However, much of the gain was due to workers leaving the labour force and by retailers hiring seasonal workers. Reconstruction after Sandy-storm and improving housing activity should support employment in December-January. Without the spectre of the fiscal cliff, the recovery process would be cautiously promising.

Europe – European stock markets recovered and Euro strengthened after the ECB and IMF reached an agreement on conditions to grant Greece the next part of the financial support. Otherwise, the economic growth and growth prospects of the Euro-zone remain poor. Manufacturing sector has been in the contraction zone now for 16 months in a row. The rate of the downturn has started to moderate but the situation is still quite grim. Regional demand is weak, exports fragile, capacity utilization rates low and job losses continue. Now even Germany is expected to fall into a recession, at least briefly. In December and early 2013, export performance is hoped to start improving with global economic activity. 2013 GDP- growth is now projected at 0.0% by the Consensus Economics and the most pessimistic analysts predict a nearly 1% decline.

Japanese economy registered a further drop in manufacturing in November. A new recently launched stimulus package is hoped to prevent Japan from falling to a new recession but the depth of the decline registered in Q3, further fall in the exports to Europe and the continuing negative economic impact linked to the political dispute with China are not promising. One positive sign was the increase of new orders in the service sector in November. With that, the service sector as a whole also returned to growth with the service sector PMI recording a positive value at 51.4. A fall in the output prices suggests that some of the positive movement has been “bought” with additional discounting. In any case, this service sector rebound also added some jobs in the sector and gave some hope within a rather grim economic environment that the technical recession could still be avoided if this minor upturn persists through December.

In China, the composite PMI (by HBSC/Markit) for November showed a modest improvement with the index value rising to 51.6 from 50.5 in October. Both manufacturing and service sectors were in recovery mode with activity rising in manufacturing and falling slightly in services. While things continue to look cautiously better, supported by the easing programs, the clouds have not disappeared. As an example, order backlogs shortened in manufacturing as well as in services. Jobs continued to be added in the services but slightly lower employment numbers were recorded in manufacturing. Inflation moved up, but at a slower pace than in October. With lower inflation, real GDP-growth may reach or even slightly exceed 8% during Q4.
Paper industry – October was the best month for printing and writing industry in more than a year, both in North America and in Western Europe. Still, in the US, October 2011 was 2.4% bigger than October 2012 for printing and writing paper total. In Europe, this year’s October demand was actually almost 2% higher than October 2011. Several potential reasons for this improvement can be listed. Some combination of the following is likely to be behind the breaking or slowing down of the long-lasting decline:

a) More shipping i.e. weekdays in October 2012 than in October 2011
b) End of a de-stocking phase
c) Re-stocking for speculative or other reasons
d) Compensation of a very weak September/delayed seasonal pick-up
e) Economic recovery picking up (US)
f) Reduced imports from outside US/Europe

Once the November statistics are out, more conclusions can be drawn as to how temporary this modest improvement is. It has not removed the need to get rid of remaining over-capacity and several further closures of graphic paper capacity have been announced recently on both sides of the Atlantic Ocean. Some additional price increase announcements have also been seen from January 1.

NBSK pulp Europe – Total stocks in the pulp line – or the known part of it – are quite low, down by about 1.4 million tons from a year ago when adding up the available data on producer, consumer and port stocks. In softwood pulp, the shipment-to-capacity ratio remained good at 93% in October and averaged 94% over the first 10 months, up by two percentage points from 2011. Purchasing activity appears to have been slow over the past week or two. Inventory fundamentals support the ongoing price increase efforts but the tight fibre cost/paper price ratios have made it difficult to get these increases fully through. Euro weakened by 0.6% against USD from the previous week. Our PIX NBSK index moved up by 1.51 dollars, or by 0.19%, and closed at 805.41 USD/ton. Converted into Euro, the index value rose – with the strengthening dollar – by 5.06 euro, or by 0.8%, and closed at 624.11 EUR/ton.

BHK pulp Europe – CPMC Board has made the widely anticipated decision to build a large new BEKP pulp line at their Riograndense (Guaiba) mill in Brazil. The announced capacity expansion is 1.3 million tons with early 2015 as a start-up target. In market BHKP, the fundamentals are not as strong as in BSKP. Shipment increase against 2011 was, according to PPPC, 1.7% over the first 10 months, and shipment-to-capacity ratio was 85% in October and averaged 89% over the first 10 months, up one percentage point from 2011. Price increases of 20-30 USD/ton, depending on the market and producer, have been announced from January 1. Euro weakened by 0.6% against USD from the previous week. The PIX BHKP index in Euro moved up by 3.93 euro, or by 0.66%, and closed at 599.51 EUR/ton. The PIX BHKP index value in USD inched up by 25 cents, or by 0.03%, to 773.67 USD/ton.

BHK pulp China – The announcement of APP to add about 40 more tissue machines into China will mean a lot more BHKP demand over the coming 1-3 years. On much shorter term, Chinese pulp market has appeared relatively quiet over the past few weeks. The low paper price level has raised a lot of resistance to the recent pulp price increase attempts as well as to the new increases which some producers have announced on the Chinese market from January one. On the other hand, the picking up of the economic growth rate may well help paper – and pulp – demand over early 2013, with a normal seasonal quietness expected, of course, over the Chinese New Year holiday season. Prices of recent sales in local currency have been slipping lower. The PIX China BHKP index retreated by 4.09 dollars, or by 0.63%, and closed at 642.89 USD/ton. Yuan strengthened by 0.05% against the USD. The conversion of the USD value into Yuan resulted in a decrease of 27.29 RMB, or of 0.68%, to 4003.20 RMB/ton.

NBSK pulp China – Chinese buyers, trading houses and producing companies, have continued to resist the 690 USD/ton level announced earlier by several NBSKP producers. The gap to the quotes in Yuan on the resale market has been too wide, combined with the weak paper prices and the availability of Russian pulp at well below 650 USD/ton. The delay in the start-up of the new line at Bratsk and the narrow price differential support the BSKP shipping volumes from PPPC-countries to China, though. Over the first 10 months BSKP deliveries to China were up by 19%, versus 11% in BHKP. Our PIX China NBSK index value slipped back this time, even if only very marginally. The retreat was just 7 cents, or by 0.01%, and the index closed at 658.90 USD/ton. Yuan strengthened by 0.05% against the USD. The conversion of the USD value into Yuan meant a decrease of 2.29 RMB, or of 0.06%, to 4102.90 RMB/ton.

Newsprint – The price negotiations over (early) 2013 contracts have started in a challenging environment. Hikes have been announced, typically of about 5%. Producers need to get the prices up to improve their poor profitability. Buyers cannot accept any increase due to their low profitability and due to the prospects of advertising facing another drop when the recession in Western Europe undoubtedly extends into 2013. Exports outside the region continue to be a bright spot but the estimated European demand fell also in October when other graphic paper grades showed improvement over October 2011. The 0.5% weakening of the EUR against the weighted non-EMU basket helped the benchmark higher. The PIX Newsprint index moved up by 45 cents, or by 0.1%, settling at 496.59 EUR/ton.

LWC – In North America, further closures of wood-containing grades have been announced and chances of capacity utilization rates moving up have improved. In Europe, LWC demand in October was virtually unchanged from 2011. Cumulatively, coated mechanicals continue to be the weakest grade after newsprint in year-to-year volume comparisons, partially explained by the reduced production capacity. Magazine advertising also suffers under the weak economic conditions. Some downtime has been taken in November and more of the same has been announced for December. The 0.5% weakening of the EUR against the weighted non- EMU basket supported an upward movement in prices. Our PIX LWC index advanced by 78 cents, or by 0.1%, and reached 690.88 EUR/ton.

Coated woodfree – Reduced supply from South Korea has limited CWF sales from Asia to North America and given room for more shipments from Europe as the US remains a net importer of coated papers. In October CWF exports from Europe were up by more than 20%, compared to October 2011. Closures and downtime in coated mechanicals, as well as the narrow price gap between CWC and CWF grades helps CWF volumes but risen fibre costs keep the profitability of the coated WF sector poor. The 0.5% weakening of the Euro helped to push the benchmark higher. The PIX Coated woodfree index jumped up a bit more than what it lost last week, i.e. by 2.45 euro, or by 0.35%, and closed at 698.31 EUR/ton.

Uncoated woodfree – Also in this grade, October was a bit better month than October 2011. Still, the situation remains challenging. The seasonal uptick was almost unnoticeable and over- capacity prevails. More UWF capacity closures have been announced, the latest by Arjo Wiggins at their Dalum Papir mill in Denmark, following an earlier machine closure of the same group in the UK. To the best of our knowledge, there have been no public announcements of new prices from January. The 0.5% weakening of the Euro last week gave some upward push on the benchmark. However, the PIX A4 B-copy index slid down by 88 cents, or by 0.1%, to 863.98 EUR/ton.

Containerboard Europe – In the US, inventories are low, capacity utilization high and export pressures outside the region thus only moderate. In Europe, even if imports from North America are not pressing the supply higher, uncertainties on the containerboard and box markets have increased over the recent weeks. The state of market fundamentals also varies quite a lot between grades and countries. In general, virgin fibre linerboards continue to do better than recovered paper based grades but also here some pockets of weakness have reappeared, more of them on the unbleached than in white-top grade. Between regional markets, northern European countries continue to do better than the southern half of the continent.

Currency movements brought this time with them upside pressures as the Euro weakened last week by 0.6% against the USD and by about 0.5% against the non-EMU currency basket. Still, the PIX Kraftliner index slipped down by 40 cents, or by 0.07%, to 584.35 EUR/ton. The PIX White-top Kraftliner index gained 2.15 euro, or 0.28%, and settled at 779.03 EUR/ton. The price development of testliners and fluting was negative, in spite of the lift from the exchange rate movements. The PIX Testliner 2 index moved lower by 98 cents, or by 0.23%, and closed at 426.57 EUR/ton. The PIX Testliner 3 index retreated by 49 cents, or by 0.12%, ending at 403.29 EUR/ton and the PIX RB Fluting index lost 1.29 euro, or 0.33%, and closed at 387.53 EUR/ton.

Recovered Paper Europe – As already remarked a week ago, the upward price momentum in recovered paper is wearing out, at least for the present. Further price declines have been reported in Asian markets and the reduced demand pull has started to impact the regional prices, too, both in the US and in Europe. The threat of a strike in the Eastern US ports may put the pieces of the puzzle in a new order. In the meantime, downside pressures on RP-prices persist as the downtime to be taken around Christmas holidays reduces the demand and the availability of both packaging and graphic grades in the regional markets in Europe and the US has improved with smaller volumes directed presently for exports.

Our PIX OCC 1.04 dd benchmark lost ground after a long, even if slow climb. The retreat was 1.15 euro, or 1.02%, and the index value settled at 111.13 EUR/ton. The price gaps to the related packaging indices showed mixed movements. The difference of PIX OCC 1.04 dd to PIX Testliner 2 increased by 17 cents to 315.44 EUR/ton, to Testliner 3 it widened by 66 cents to 292.16 EUR/ton but to RB Fluting the gap narrowed by 14 cents to 276.40 EUR/ton.

Even if the so far very fragile graphic paper business finally had one better month according to October statistics, the ONP/OMG demand has continued to be weak in early December. Our PIX ONP/OMG 1.11 dd benchmark slipped lower again. The index retreated by 53 cents, or by 0.41%, closing at 128.56 EUR/ton. The price gap to the PIX Newsprint benchmark widened further by 98 cents to 368.03 EUR/ton.

US NBSK – Good October shipments and the closure of Fort Frances mill compensated for the supply increase of from the restarted Terrace Bay mill. The further reduction of the producer stocks played a role in firming up the market as well. The prices in the limited amount of spot deals has been moving up. Buyers have continued to resist the price increase initiatives made for November, encouraged by the slower acceptance of the new prices on the other markets but the higher prices have gradually been implemented. At least three producers have announced unchanged prices for December shipments. The prices reported to us were now in a range of 850-870 USD with 870 USD again the most common individual quote. The PIX US NBSK pulp benchmark moved up with the index value gaining 1.03 dollars, or 0.12%, per ton and closing at 867.32 USD/ton.

US Newsprint – October statistics by PPPC for North America recorded a 1.7% demand hike for October. Shipments within North America were 2.0% bigger for the month, about 82 % of the total to USA and 18% to Canada. Total shipments were thus down by 0.3% in the 10- month cumulative comparison. Not much news on the pricing front, except that the announced increase in the West Coast market appears to be advancing rather slowly, as mentioned in some news reports, due to heavier concentration of sales to the regional markets as opposed to exporting newsprint to overseas destinations.

No changes were reported in the latest prices for this week’s benchmarks. The PIX US Newsprint 30 lb index remained at 620.49 USD/ton and the 27.7 lb at 661.09 USD/ton.

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