Ongoing slowdown in kraft pulp markets reflected in further reduced prices in August around world

Diane Keaton

LOS ANGELES , August 7, 2011 (Forestweb) – Global Kraft pulp prices are continuing to fall, with August marking both official and unofficial decreases.

Sources report that effective list prices are down for grades and in regions in which there have not been official list price reductions.

As previously reported, some major producers in mid-July announced they were dropping their August northern bleached softwood kraft (NBSK) prices in North America and China by $30/tonne, to $990/tonne and $830/tonne (commodity grade), respectively.

Early last week, bleached eucalyptus kraft pulp (BEKP) producer Fibria Celulose SA of Brazil added to the announced price reductions for August, but it did so only for Europe, going down $30/tonne to a list price of $820/tonne. Fibria’s list prices for Asia and North America remain at $730/tonne and $900/tonne, respectively. At least two other key Brazilian BEKP producers are quietly following Fibria’s lead in Europe, sources said. Fibria is the world’s largest producer of BEKP, at 5.35 million tonnes per year,

A sales executive for a BEKP producer said it was “very strange” that Fibria didn’t reduce its prices in other major markets, given what he described as “the downward movement in Europe and especially Asia.” He added, “It is very clear for us.” He said perhaps the official status quo was kept for psychological reasons, but that the reality is that August pricing for regular business in Europe and Asia is down “at least $10-$20” from official spot prices.

Brazilian BEKP producers had dropped their July list prices by $30/tonne in North America and Europe, to $900/tonne and $850/tonne respectively, and their Asia price by $50/tonne, to $730/tonne. The aforementioned BEKP source noted that customers reduced July volumes in order to pressure prices, but also, he said, there was weak demand from European and Asian printing and writing papermakers. He expects customers around the world to also limit August volumes, as well, but is hoping that paper markets will catch up by September and provide some price stabilization.

That more optimistic view belies the unrelenting troubling economic news around the world that has led to increasingly pessimistic views among sources about how the pulp and paper industry may fare. And as the Brazilian source noted, “Another very important issue is the currency rate,” which, he said, “is completely impacting our results very much.” He said the Brazilian real valuation had risen by double-digit percentages compared to his company’s budget and also compared to other currency rates in the past five to six months.

As reported on June 21, the World 20 chemical market pulp producer inventories gained one day month-over-month, to 34 days (standard calculation), with bleached softwood pulp (BSP) stocks up two days, to 28 days, but bleached hardwood kraft (BHK) stocks unchanged at 42 days. Shipments, totaling 3.634 million tonnes, increased by 3.0% from a year ago and by 4.9% from May.

FOEX Indexes Ltd. said in Aug. 2 notes that the shipments of were “deceptively” better than expected. “Yet, the weakening of the market continues with very weak intake of pulp into China and with the declines in paper consumption reducing the fibre needs in the western world,” as pressure on prices continues, FOEX wrote. “Strong June shipments have partly ended up, or will end up, in the port inventories.”

North America changes. The August NBSK list price for North America is $990/tonne, down $30/tonne, following announcements by such major producers as Canfor Pulp, Mercer International Inc., and Domtar Corp.

There have been reports of “temporary allowances” of as much as $20/tonne off of the new $990/tonne price, before regular discounts, but some buyers said they aren’t seeing them in their business dealings. An NBSK producer that is heavily into spot sales is said to have a $980/tonne list price, with discounting above 20% for nearby business. There have been reports for the last month or two that spot NBSK tonnes are available from various producers.

For the week ending July 30, FOEX said the NBSK price in the U.S. fell by 98 cents, to $1,022.21/tonne. This followed a drop of 62 cents the previous week and of $7.96/tonne the week before that. FOEX noted that June shipments to the North America market fell by 4.5% in the first half of 2011, although for June, there were gains of 6% year-over-year and 12% “against the weak May 2011.”

On the BHKP side in North America, effective July list prices remained unchanged, at $855/tonne for maple-grade northern bleached hardwood kraft (NBHK) and $845/tonne for mixed and aspen grades of NBHK, with southern bleached hardwood kraft (SBHK) still at $855/tonne. Not all buyers think the July effective list prices should have remained static. And some buyers said they are pushing producers to drop their August list prices, citing August spot price decreases of $20-$30/tonne. Producers “are not ready to go down,” but are nevertheless likely to do so, one of the buyers commented.

(Over the years, various U.S. buyers have said they don’t pay much attention to NBHK and SBHK list prices in the first place, with much of the pricing being done on a case-by-case basis.)

Though the July BEKP list price in North America was $900/tonne, buyer and other sources said that, due to $10-$20/tonne “temporary allowances,” the list prices in various cases were essentially $890/tonne or $880/tonne, before regular discounts. In recent days a sales executive for a Brazilian producer said he expects the list price in August to drop to “at least $890-880.”

Some U.S. buyers of NBHK said spot prices are now in the $610-$630/tonne range, down $20-$30/tonne, depending in the deal. One named several suppliers that are resorting to shipping farther afield, including to Europe, in order to move tonnes. Another said that, at 42 days, global inventories are eight days higher than normal and that “spot is more available month over month.”

But another buyer said his net prices for regular business are in about the $630-$670/tonne range down $30/tonne. I’m not seeing $610-$620s for normal (first quality) bales,” he said. Also he said he isn’t getting spot offers but, noting that stocks are at 42 days, he said there is “plenty of pulp around” and that he pushed for his price reductions. “I think they’re trying to hang on to their prices,” he said of his suppliers.

Sources have been commenting for some months about rising wastepaper costs and decreasing availability. In recent days a pulp buyer noted that there is less volume of sorted office paper (SOP 37) available because of the lack of demand for new paper, thus affecting prices of market deinked pulp and tissue made by integrated producers. This is “just another frustration that buyers are struggling to deal with these days that few understand and appreciate,” he said.

Paper issues. In paper-side news late last week, Manistique Papers Inc. in Manistique, Michigan, announced on Aug. 5 that it will file for bankruptcy, cease production, and seek a buyer for the facility, reported The Daily Press in Escanaba, Michigan, on that day.

And on Aug. 4, Kruger Inc. said it plans to take a market-related outage at its 250,000 tonnes/year Wyagamack coated groundwood (CWG) paper mill in Trois-Rivières, Québec, from Sept. 2 through Sept. 8.

A U.S. buyer source told Forestweb the still-lackluster coated paper business is leaving integrated producers with more spare pulp to sell.

A market pulp consultant described the commodity paper business in the U.S. as “not healthy” and suffering from a secular reduction in demand.

And in an Aug. 1 research note regarding uncoated freesheet (UFS) paper prices, Deutsche Bank paper and forest products industry analyst Mark Wilde said a key variable looking ahead would be the extent of pulp price declines. “If pulp falls sharply, it could ripple over into UFS prices,” he wrote.

Wilde said repro bond estimated prices rose by $5-$15/ton to $1,075-$1,130/ton in July, down 1.6% year-over-year. So far, he said, producers have implemented $30-$50/tonne out of their $60/ton June 1 price hike. “While demand remains weak, higher prices are aided by supply cuts, lower inventories & favorable trade flows,” Wilde wrote. “In offset papers, estimated prices are up only $25 of a $40/ton April 1 price hike.”

Europe resistance. The European market hasn’t yet seen August NBSK price announcements. Sources said that by late July, when most pulp business settled in Europe, there was a range of effective list prices, more or less at $1,010/tonne in the north and $980/tonne in the south. So “there was no real list” price, said a market consultant. Most August business also will not settle until the end of the month.

Producers had sought a June price in Europe of $1,040/tonne, up $30/tonne from $1,010/tonne. But $1,025/tonne was as high as it got, and a fair amount of June business—especially in the south--remained at $1,010/tonne. In July, prices faltered.

For the week ending July 30, FOEX said the NBSK price in Europe sank by $12.97/tonne, to $1,003.86/tonne. In the previous week, the price dropped by 83 cents/tonne and by 28 cents in the week before that. (A market pulp consultant said the prices in these previous weeks, when “no one is doing business” and previous data is relied on, have led to concerns about “false readings.” But he said the latest PIX of $1,003 was “not far off.”)

With the weakened euro—the U.S. dollar strengthened over the euro by 0.9% week-over-week—FOEX showed the PIX for the last week in July falling by €2.60/tonne, to €703.97/tonne. In the previous week, reflecting the 1.7% strengthening of the euro, the PIX dropped by €12.44/tonne, while increasing the week before that by €12.32/tonne as the U.S. dollar strengthened by 1.7%.

On the BHKP side, the PIX fell by $8.65/tonne, to $840.81/tonne. The index fell by 83 cents the previous week and by $15.34/tonne in the week before that. In euros, the BHKP price was €589.63, down 64 cents. The previous week, it fell by €10.81/tonne and the week before that by 40 cents/tonne.

An industry consultant said that in July, major BEKP buyers paid $830/tonne for heavy volumes and that there was also some business at $840/tonne versus the $850/tonne list price. Currently in Europe, he said, “No one is there,” being either on holiday or “hiding.”

A sales executive for a BEKP producer said that in July, his company did half of its regular business in Europe at the $850/tonne list price, while the other half was generally negotiated on a case-by-case basis, mostly down $10/tonne, to $840/tonne, but some down $20/tonne, to $830/tonne. Some regular customers pushed for $820/tonne in July, but were refused, he said, noting that this would have been competing with spot prices of $800/tonne in the European market. Now that the August list price has been dropped to $820/tonne, his company is receiving some pressure to go to $810-$800/tonne, but he said it hasn’t agreed to this so far.

He said he heard that spot prices in Italy were down to $780-$790/tonne in July but that most of his regular business in Italy nevertheless closed at the $850/tonne list price, with a few customers being granted some additional discounts. Whether the market is weak or strong, he added, his company is “not there to compete with spot levels.”

European consumers continue to have low stocks, continuing the pattern of historically low levels, with buyers continuing to get by on less inventory than in past years. European woodpulp consumers’ stocks fell in June over May by 2,654 tonnes, or 0.4%, to 684,479 tonnes, marking the third straight month of drops and the second straight month in which they had 20 days of supply, according to data released by Utipulp on July 19.

China challenges. Various BSKP sources last week said they had not yet closed any August business in China, although a bleached radiata kraft pulp producer said it had done so.

The August list price for China for commodity-grade NBSK is $830/tonne, down $30/tonne from July, with several major producers at that level. Canfor Pulp LP announced an $840/tonne price for China, also down $30/tonne, for reinforcement-grade NBSK.

And at week’s end, a sales executive for a Canadian NBSK producer said Chinese customers have been making inquiries and he expects to close business soon. In contrast to July, he said customers this month want to close orders quickly and ship quickly, which tells him they are very low on inventory. “The conversations are more on ‘How fast can you ship?’ so we are getting very firm on prices,” he said, adding, “It has definitely been a very positive week.” He added that customers in Asia “are very concerned” about supply in 2012, thus giving them an incentive to complete current orders.

Separately, he downplayed reports that some July business at $860/tonne has not been finalized and that letters of credit (LCs) are slow to come in. He said there are still some credit issues with smaller buyers in Asia, who are turning to other institutions to get credit, but that there is “no haggling” over prices of July orders.

On July 20, Celulosa Arauco y Constitución SA (Arauco) announced a $30/tonne reduction in its August price of BRKP, to $820/tonne, and a $50/tonne reduction for unbleached kraft pulp, to $720/tonne. (To date, Arauco has not made an announcement for August prices for BEKP.)

On Aug. 1, a source said Arauco had fixed all of its BRKP volume in China at the announced price, with just a few exceptions for customers that had accepted high July prices. He said it was much easier to finalize business in August than in July and that the company had more demand than it could supply. “We think and have enough evidence to believe the market in China already is turning around,” he said. “It reached the bottom and now it may start to recover.”

A market pulp consultant said that in recent days, there has been “a bit of a flurry because spot prices have bumped up” and that it “give hope at least some purchasing” (of Chilean softwood) is going on.” The softwood pulp purchasers are mostly traders, he added.

He said softwood pulp pricing could bottom at $800/tonnne and that he “wouldn’t be surprised” if it goes to $770/tonne next month, but that producers aren’t “desperate enough” to do business to hurry such a change.

A few days after Arauco made its BRKP announcement for August, customers wanted good volumes along with further reduced pricing along the lines of Russian offers, but a source said Arauco was rejecting the notion because its stocks are low and there was no need to make further concessions at that stage.

(As reported, on July 19, Ilim Group in Russia reportedly was offering Chinese customers as much as $80-$100/tonne off bleached softwood kraft pulp (BSKP) prices for August. At an $80/tonne decrease, this would bring Ilim’s BSKP prices to $740/tonne CIF at the port and $710/tonne at the Russia-China border, said the source. The latest Ilim prices would be about $180/tonne off of their peak, or twice what NBSK and BRKP producers have conceded.)

Early last week a softwood pulp supplier said, “There is still a bit of horse play going on (so) I think we are just watching and waiting.” He commented that it was a slow process to establish just what the price was for July business, too. In July, he said, “We did about half our usual volume in China—we were not chasing business at any price so were happy to have lower sales given the lower price.” At the same time, Chinese customers resisted buying as much as his company resisted selling – “them because they believe August will go down further and us because we cannot see justification at current prices, exchange rates and costs.”

As of mid-July, the softwood pulp source said there were “desperate sellers,” naming three Canadian NBSK producers said to be selling spot tonnage in the high $700s/tonne. (The lowest softwood pulp price in the Middle East was $760/tonne, a market pulp consultant said.) But the source said that in other markets in Asia, customers continued to buy relatively normal volumes. “China still plays the traders game of manipulating purchasing and inventory to try and control price,” he said. “Lots of Asia is like the mature markets these days where working capital rules. They just buy what they need each month and pay the going price for that month. They benefit from the Chinese forcing the price down but they still buy usual volumes. So the most vulnerable sellers are those who have a disproportionate reliance on China for their sales.”

On the hardwood pulp side the official BEKP list price in Asia remains at $730/tonne, but sources said the July price was in the $700-$720/tonne range, depending on the deal.

Some sources said spot BEKP prices in China and the Middle East in July have been in the $620-$650/tonne range and that Indonesian hardwood pulp was selling in the Middle East in the $500s/tonne. A Brazilian BEK sales source said he was seeing $640-$650/tonne. A sales source for another South American producer said his company is hearing many net prices in the China in the $650-$670/tonne range. He said his company hasn’t set its August price yet since there has not yet been an announcement, so customers are reserving volumes pending that information.

One of the sources said customers in Asia are buying only “a little bit more than half of their budget.” He said his company “had to be flexible” in order to close deals in July, thus reducing prices for regular customers “by $10-$15 or even $20.”

Given that spot and net prices are as low as they are, he said he is concerned that another producer might announce a big drop in the August list price.

For the week ending July 30, FOEX said the NBSK price in China continued to fall, this time by $10.46/tonne, to $838.38/tonne. This followed decreases of $8.73/tonne in the previous week and of $29.80/tonne in the week before that. Though June imports of BSKP were low in June, the differential to other months was not as marked as that of BHKP, FOEX commented.

“Taking into account the recent reduction of rather nearly total stoppage of using NBSK as an extender of dissolving pulp, the intake was actually relatively good, both in June as well as through Q2,” FOEX wrote on Aug. 2.

(Of note, in Mercer International Inc.’s Aug. 2 earnings statement, the company said it has decided to defer converting two of its northern bleached softwood kraft (NBSK) mills to swing mills capable of producing dissolving pulp. It cited “significant new dissolving capacity coming online, certain ongoing technical and equipment developments and other available opportunities, including for enhanced power generation.”)

For BHKP, FOEX said the price dropped by $12.92/tonne, to $704.40/tonne, following decreases of $1.11/tonne and $18.10/tonne in the respective previous two weeks.

FOEX noted that June BHKP import statistics fell by 30% or more against any other month so far this year and that Brazilian volumes were hit the hardest. (June’s 309,761 tonnes marked the first time this year below 400,000 tonnes and the figure was down by 26.3% from May and by 9.8% from June 2010.)

BCTMP increases. As reported in recent days, two bleached chemi-thermomechanical pulp (BCTMP) producers have announced Aug. 1 $30/tonne price hikes, one for China and one for Asia.

West Fraser Timber Co. led with its announcement for softwood BCTMP and hardwood BCTMP increases in China, which was received by customers on Aug. 1. Tembec Inc. followed on Aug. 5. Neither company named its new prices. A BCTMP supplier commented in recent days that prices in Asia are “all over the map,” reflecting freight differences and other factors.

BCTMP price have been strengthening in recent months even as kraft pulp prices continue to drop. BCTMP prices had sunk to the low $500s/tonne in China some months ago, considerable below the prices of kraft pulp, thus providing some incentive for buyers in Asia to increase demand.

Also industry sources have been reporting that the lost output of Tembec’s Matane, Quebec, mill, which was struck on May 10, has helped tighten up global high-yield pulp (BCTMP) supply. Tembec said in its July 26 earnings report that the strike resulted in 30,100 tonnes of lost production during the three-month period ending June 25.

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