Global pulp markets slow going into September, with customers in no hurry to buy

Diane Keaton

LOS ANGELES , September 11, 2011 (Forestweb) – This is shaping up as a slower-than-usual September for the pulp business around the world.

Buyers are generally well enough stocked to purchase no more than what they need to produce their products. In various cases, market-related paper production downtime is limiting need. And in addition, not a few customers are continuing to buy minimal quantities in anticipation of further pulp price decreases.

Hanging over this scenario is ongoing anxiety about global economic conditions—conditions that have a negative or potentially negative effect on the pulp and paper industry.

Having bottomed or nearly bottomed already, prices in China are fairly stable, but the declines are still underway in North America and Europe. So there continue to be ranges for list prices within regions, and gaps between list prices and spot prices, all adding to market instability.

Globally, not many pulp suppliers have made formal list price announcements for September, and buyers continue to report many cases of “temporary allowances” of US$10-US$20 per tonne off of list prices, before contractual discounts. Though the market isn’t necessarily rosy for suppliers right now, they still are getting relatively high prices.

This will not be a “normal” September in North America and Europe, said a market pulp consultant. Normally by early September, business is picking up in Europe after the holiday season, but that is not happening in either region, and paper mills are taking downtime and closing.

But also there will be pulp downtime in the coming months. A number of mills are taking scheduled maintenance downtime and, in Canada, there will be additional downtime in connection with Pulp and Paper Green Transformation Program projects.

In his just-published Market Pulp Monthly report, market pulp consultant Brian McClay said the Green Transformation-related shuts could account for as much as 50,000 tonnes of lost production. In August, he said, softwood pulp output was curtailed by some earlier-than –normal extended maintenance downtime in Canada, and about 70,000 tonnes of northern bleached softwood kraft (NBSK) pulp production were lost in Canada and Europe from unplanned equipment related shuts. Also Hurricane Irene caused two-to-four day shuts at several U.S. coastal mills when it struck in late August, he said.

Meanwhile, in China, new capacity has come on, McClay noted. Chenming Pulp and Paper’s 700,000 tonnes/year bleached hardwood kraft pulp (BHKP) mill started up in late August and late July saw the commissioning of a 300,000 tonnes/year high yield pulp mill at Asia Pulp and Paper Co.’s Dagan coated paper mill (he said this capacity is unlikely to run at close to full speed for some time). Several smaller high-yield (alkaline peroxide mechanical pulp, or APMP) market pulp mills are reportedly running slower due to electricity rationing, McClay wrote.

McClay said end-of-August World 20 producers’ softwood pulp stocks were likely unchanged from or lower than their end-July level, given the supply disruptions and more active China buying. But he said hardwood pulp stocks probably came close to repeating their July rise. (In July, overall pulp producers’ stocks rose five days, to 39 days, with softwood pulp stocks up four days to 32 days and hardwood pulp stocks seven days higher, to 48 days.)

He said that while there could be repeats of August’s pulp buying surge, any sustained revival in China’s pulp purchases might still only begin in the first quarter of 2012. He noted that paper and paperboard prices are headed lower in China and in the rest of Asia well into that time period, especially for coated freesheet.

McClay said the pulp demand outlook for most other major markets is similar. He expects market pulp demand in North America and Europe to continue its recent slump through the rest of 2011, as paper production curtailments through market-related downtime and permanent mill closures rise closer to levels last seen in late 2008. Most pulp buyers in these markets do not have the financial capacity to stock up on low-priced pulp and so purchase volumes will be kept to absolute minimum levels in anticipation of lower prices to come, he added.

McClay expects prices in North America and Europe to fall to 15% below their second quarter 2011 peaks.

North America picture. Not a few North American customers in recent months have said effective list prices are quite out of line with the net and spot prices, in some cases achieved by knocking $10-$20/tonne off of list prices before calculating contractual discounts. Discounts for BHKP are particularly high, with prices more than 25% off of effective list prices, sources note.

The NBSK and southern bleached softwood kraft (SBSK) list prices are down $20/tonne in September from August, with several major NBSK producers having announced that decrease, to $970/tonne; the new SBSK price is $930/tonne. This followed the $30/tonne drop for both grades for August.

FOEX Indexes Ltd. said that for the week ending Sept. 3, the NBSK price in the U.S. dropped by $3.99/tonne, to $988.76/tonne. “While the price decline has halted, at least for the time being, in China and some other Asian markets, pressure is still on in the European and North American markets,” FOEX wrote in its Sept. 6 comments.

BHKP producers did not announce price decreases for North America for September, with the exception of Alberta Pacific Forest Industries, which on Sept. 6 said the price of its aspen-grade northern bleached hardwood kraft (NBHK) pulp would be unchanged at $820/tonne. (RISI Inc’s. August list price of aspen and mixed hardwood NBHK was $815/tonne and its maple-grade NBHK price was $825/tonne, both down $30/tonne from July, and its BEKP price was $870/tonne, down $20/tonne.)

NBHK net prices in September have moved closer to August spot prices, with some customers now reporting net prices in the low $600s/tonne, amounting to decreases generally of $20-$25/tonne. (In August, spot NBHK prices moved to the mostly $600-$620/tonne range, with some dropping into the high $500s/tonne, which is still the case.) Depending on the previous month’s deal, some September net prices are into the mid-$600s/tonne.

A customer said the lowest September prices could mark the bottom, if one considers the cost of freight, as well. He said sellers are resisting going any lower, but at the same time they want to keep the business. “I can tell by my conversations with some of the agents and suppliers themselves that they are under the gun to get the price up and can’t,” he said. As for NBSK, he said suppliers have gradually been lowering their prices to within the range of what a particular named competitor has already been offering for several months. “There’s no question suppliers are acknowledging the weakness,” he said. Two years ago producers would have been surprised to think that prices would zoom into the $900s/tonne, but now “they’re really getting used to these $970 numbers,” he groused. But he said the slide is on “and China will have to come back fast” to halt it.

One of the buyers, for a company that produces commodity and specialty papers, said he is hoping for further price reductions. “We certainly need it,” he said. “We need continued relief.”

Another buyer, whose company produces specialty papers, commented that the lackluster economy is having its effect and that business is “very slow,” with several machines down, whereas they would normally be running full in September. “There’s no life,” he said. In addition, customers are reluctant to add more paper stock, partly because they see pulp prices dropping and they expect paper prices to follow, he said.

A North American pulp agent said, “It’s a brutal market” for papermakers,” and that this is causing much concern. “List prices aren’t coming down quick enough for buyers. They’re not keeping up with China,” where BEKP can be bought for $630/tonne “all day long,” he said.

He noted that tissue accounts for the lion’s share of BEKP purchases in the U.S.--he said 1.4 million tonnes/year out of total 1.6 million tonnes/year demand--and that BEKP producers haven’t announced reduced prices, while at the same time tissue buyers get very large discounts. “So others are held hostage,” he said.

Separately, the severe weather in the northeastern part of the United States has caused problems for the pulp and paper industry. A pulp buyer late last week described a mill that was just one foot away from rising river waters and said washed-out major highways have caused truckers to cancel runs to the Port of Baltimore to pick up pulp. This was after the buyer had turned to trucks following rain-related interruption of rail service. “We don’t build much inventory. We buy rail car to rail car,” said the buyer. “We are watching everything we put in the pulper.”

The major news in recent days included the Sept. 7 announcement by NewPage Corp. that it had declared bankruptcy, filing for Chapter 11 protection and securing up to $600 million in financing to continue its operations. The bankruptcy filing was not unexpected. NewPage announced on Aug. 22 the planned closure, in mid-September, of its mill in Port Hawkesbury, Nova Scotia, which produces mechanical papers. Reduced supply caused by the NewPage and other mill closures might help other troubled mechanical-grade papermakers, suggested a pulp agent source. But a market pulp consultant commented that the closing of the Port Hawkesbury mill could leave approximately 50,000 tonnes of NBSK market pulp looking for another home.

Meanwhile, in recent days, major North American uncoated mechanical papers producers, including Catalyst Paper Corp., AbitibiBowater Inc., Irving Paper Ltd., and Verso Corp. have announced $30/ton price hikes, effective Oct. 1.

Other major news, on Sept. 6 was the announcement of the planned acquisition by International Paper Co. of Temple-Inland Inc., for approximately $4.3 billion, including assumption of $600 million in debt, with the deal set to close in the first quarter of 2012.

In a Sept. 11 research note, paper and forest products industry analyst Mark Wilde of Deutsche Bank said that although the deal wasn’t a surprise, the speedy resolution was “startling.” He said Temple-Inland might have seen a mid-$30’s price earlier in the summer, but that the market correction, the signs of a slowing economy, the Bogalusa, Louisiana, paper mill accident and the Guaranty Bank suit “all worked against Temple.”

And Cate Street Capital, which plans to buy the closed Millinocket and East Millinocket paper mills in Maine, has said it plans to invest between $20 million-$25 million in the East Millinocket mill, including restarting PM No. 6, according to the Bangor Daily News on Sept. 2.

Europe angle. For Europe, pulp producers haven’t announced new list prices for September, but prices are expected to weaken further.

Some sources expect the September NBSK effective list price in Europe to be $950/tonne, which was the price paid by some major Italian buyers in August. As previously reported, the effective August NBSK list price for Northern Europe fell to $980/tonne from the effective July prices of mostly $1,010/tonne in the north. But in Italy, some July pricing had already fallen to $980/tonne.

BEKP prices fell in August, with producers announcing $30/tonne list price reductions, to $820/tonne, but some major Italian buyers paid as little as $770-$780/tonne, sources said.

For Europe, currency issues around the strength of the euro could have a large effect in September, commented a market pulp consultant. With a weakened euro, buyers will want a price break, he noted. The euro dropped to US$1.365 on Sept. 9, which Barron’s reported was the lowest point it had been against the U.S. dollar in six months.

For the week ending Sept. 3, FOEX showed an $11.16/tonne drop in the NBSK index, to $974.90/tonne. The U.S. dollar strengthened against the euro by 1.0% that week, so with the relatively stronger euro, the price in euros dropped by just 77 cents/tonne, to €683.90/tonne.

FOEX noted in its Sept. 6 comments that inventories in the supply chain have risen to levels well above average. Though supply has been reduced by the Aug. 12 fire that shut the Södra Cell in Mönsterås, Sweden, 750,000 tonnes/year pulp mill, along with some maintenance shuts, there are still price pressures, FOEX said. But it commented that shipment volumes are expected to recover in September after the summer slowdown.

FOEX said the BHKP price dropped by $11.40/tonne, to $805.52/tonne, and in euros it fell by €2.15/tonne, to €565.08/tonne.

China market. Chinese customers appear not to be in a hurry to buy pulp in September, following their flurry of purchases in July and early August that took advantage of reduced prices. This pulp will arrive in October and November. Also some holidays in China are curbing business activity.

As previously reported, commodity NBSK producers have kept their September list price in China at the August price of $830/tonne, which was down $30/tonne, and sources said considerable August business was done at $810/tonne.

There have been reports in recent days that some discounts were dropped, resulting in higher net prices and thus discouraging some buying.

A North American pulp agent doing business in China said he had not heard about dropped discounts. But he said Chinese customers had firmed up considerable business for six weeks before September in order to replace inventory, thus causing the market to level off. “There’s not that urgency,” he said.

Some NBSK customers have already placed orders, while others are not buying, said a Chinese agent who said some discounting had been dropped. “There’s plenty of pulp in China. There’s a lot of pulp in port warehouses,” he said. Customers “don’t need to buy, especially if they think the price is not right.” On the other hand, it doesn’t appear that Canadian suppliers have a lot of pressure, because they sold considerable tonnage in August and their inventories should be in good shape, he said.

The agent said the hardwood pulp market is more active because it has a “better price” that customers are willing to accept. He noted that there are various prices, with some net pricing said to be as low as $630-$640/tonne. (On Sept. 6, Al-Pac said its China price of aspen-grade NBHK would remain at $660/tonne in September.)

As previously reported, although Brazilian producers have not officially changed their $730/tonne list price, set in July, a major producer is said to have had an effective list price in August of $680/tonne, which put its net price in about the $650-$660/tonne range.

The agent said he doesn’t expect big changes in the China softwood and hardwood pulp markets in October and November, but that it is difficult to know which direction it will head later. “December and January will be very crucial,” he said. “It could go either way.”

The agent noted that there has been paper downtime lately, which others have been saying as well. “The paper business is not good. There is more downtime” and there are delays starting up new machines, said a market pulp consultant, “They can’t handle the paper they have now” and in some cases papermakers are resorting to selling it overseas at a loss.

Also a policy change this month in China, requiring larger reserves for commodity trading, has made it harder for smaller pulp traders and end-users to obtain credit and has made doing business more difficult, the consultant said.

He, too, expects the September/October/November to be fairly stable and quiet. “If they need the pulp, they will come in and buy cheap,” he said. “I don’t see a strong directional change.” He said both softwood and hardwood pulp prices will trade in a range.

For the week ending Sept. 3, FOEX said the index for NBSK moved up modestly for the third straight week, this time by $1.86/tonne, to $822.10/tonne. In its Sept. 6 comments, FOEX noted that the softwood pulp market remains stronger than that of hardwood pulp in spite of the near-record price differential between BSKP and BHKP. It said the use of NBSK as an extender of dissolving pulp earlier this year helped, it said that even now, with NBSK use in the textile sector phased out, BSKP supply/demand balance remains firmer. It said maintenance downtime taken in August, together with other production losses, helped.

FOEX said the BHKP index continued to retreat, this time falling by 51 cents/tonne, to $680.12/tonne. It noted that July shipments of market pulp to China were relatively weak, even though they were up considerably from the even-weaker July 2010. FOEX commented that intake from the ports, as reported by the Chinese import statistics, was even weaker than the shipments reported by the producer side. If the bleached chemi-thermomechanical pulp (BCTMP) price increase efforts are successful, this will narrow the gap with BHKP, FOEX noted.

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