FOEX Pulp & Paper Indices - Sept. 13, 2011

HELSINKI , September 13, 2011 (press release) – US NBSK – Weakness of the economic growth reduces paper demand and weakens the demand pull for pulp as well. In addition, lower demand reduces the need for inventories. The potential impact of the NewPage bankruptcy on market pulp demand remains to be seen but reduction is possible. The fall of the price of pulp substitutes, availability of spot volumes and the recent strengthening of the dollar mean that the downward pressure on pulp prices persists as well. Market pulp shipments to the regional market have continued to fall and the purchasing activity remains muted in early September. Our PIX US NBSK index lost 17.33 USD/ton, or 1.75%, and closed at 971.43 USD/ton.

US Newsprint – The trend away from print to digital editions continues. Labour agreement conflict impacts a proposed major ownership change at White Birch Paper. ONP and ONP/OMG prices have been slipping down but less than the prices in some other grades. Export performance has been good but the recent dollar strengthening is making US exports less competitive. The PIX US Newsprint 30lb index moved up by 3 cents, or by 0.00%, to 623.06 USD/ton. The 27.7lb index headed back up by 4 cents, or by 0.01%, and closed at 663.81 USD/ton.

General economy: US – Obama administration is working on plans to reduce the stubbornly high unemployment numbers, even at an expense of even larger deficits which are considered a smaller evil than high unemployment, according to a number of prominent economists, including Mr. Krugman who wrote: "The deficits we're running right now — deficits we should be running, because deficit spending helps support a depressed economy — are no threat at all," One tool to do this is to introduce payroll tax cuts which will help to create jobs but, most likely, in a very limited way. Compared to the current level of growth, the program has been estimated to add about 0.2 percentage points to GDP in 2012 with a minor boost on spending. Many firms will continue to hold back employing people, due to the uncertain future path in the US economy. Without further quantitative easing, chances of a double-dip have risen to about 50%, according to many experts.

Europe – In the Euro-zone, contraction of the economic growth during Q4 looks likely, even if an agreement was reached on measures to take to prevent Greece from going bankrupt. Also in Europe, the wisdom of introducing austerity programs as a way to “save the Euro-zone” is being questioned. The slowdown in the global recovery threatens to undo Europe's austerity efforts but it is very difficult to save and stimulate at the same time. Risks of austerity programs are growing. According to Roubini: “In the short term, we need to do massive stimulus; otherwise, there's going to be another Great Depression,” “Things are getting worse, and we're running out of policy bullets.” World economies need to spend more money to make money. Economists have been reconsidering the merits of boosting growth to reduce debt. Decisive actions and building up the lost confidence are the key to Euro-zone survival in its present form. Euro is finally weakening towards a more justified level. This will support economic growth.

Japan –The country is going through an interesting phase during Q3-Q4. Manufacturers are turning more optimistic over the medium turn future. While the mood of the big manufacturing companies is getting more optimistic, the short-term outlook is getting dimmer. The downward revision of the manufacturing output over Q4 and over next year is at least partially due to the strength of the Yen and amplified by the steepening slowdown of the US and European economies. The economy of Japan already contracted more than expected in Q2, i.e. shrank at an annual rate of 2.1%, much more than recently estimated 1.3% drop. Japanese firms have reduced their capital spending by nearly one full percentage point. This leads to less growth than earlier foreseen also during Q3. E.g. the private sector investments in plants and machinery fell in Q2 from a year earlier.

China – There is a lot of talk but little evidence of the potentially approaching “hard landing” of China. In fact, the economic turmoil of the industrialized countries seems to have had surprisingly little impact on China, at least for now. Despite the cooling off of the export growth to the US and Europe, China's GDP-growth continues at 9%/annum. One key driver is the state-supported construction of more than 10 million houses, together with many other investments in the less-developed provinces. Also other parts of the domestic demand continue to do OK. Commodity imports continued to grow in August evidencing the confidence the Chinese firms have on the domestic economy. Inflation appears to be finally calming down and the Central Bank is likely not to pursue with further tightening. Industrial output moderated in August but only slightly. Investments continued to grow and were up 25% over the first eight months of 2011. In the long run, China’s growth model is unsustainable which could well mean hard landing – in 2014.

Paper Industry – In the US, printing and writing activity remains weak. Further slowdown in the economy will hurt the paper demand even more as it strengthens the structural decline by both reducing the advertising activity and moving it, as well as books and catalogues, into the digital sector. US Postal Service losses have prompted requests for further postal rate increases from January 2012; yet another downside driver on paper consumption. Seasonal pick-up appears muted. Paper companies’ financial standings are weak, as evidenced e.g. by the filing for creditor protection by New Page.

In Europe, the return from holidays has not helped the order books as much as the seasonal pick-up normally does. Order books remain thin. This applies especially the publication papers, but the order books are not thick in other grades either. The weakening of the Euro, if it continues, will improve competitiveness in export markets. Capacity closures will remove part of the over-capacity in the beginning of 2012. On the other hand, over-capacity increases still in China during the remainder of this year making the exports from Europe towards Asia and other overseas export markets more challenging. Printing and writing paper operating rates are fairly low in China and fell in July to 88% in North America and to only 83% in Europe.

NBSK pulp Europe – Pulp buyers activated in China in late August/early September. This will show when the August and September world delivery statistics come out. Unfortunately, that data will most probably show declining deliveries to some other regions, including Western Europe, where market pulp demand has remained weak also after the PPPC statistics showed a clear decline in July shipments, after a reasonably good first half. The combination of higher inventories, muted pulp demand and recent strengthening of the USD against Euro continues to put downward pressure on prices. Our PIX NBSK index fell by 7.15 dollars, or by 0.73%, and closed at 967.75 USD/ton. With clearly weakened Euro, the NBSK EUR index moved up by 16.51 euro, or by 2.41%, to 700.41 EUR/ton.

BHK pulp Europe – In BHKP, shipments to both Western and Eastern European markets were well above the 2010 levels over the first seven months of the year, in spite of the weakness in demand and low operating rates of the woodfree paper grades. The historically wide price differential between BSKP and BHKP has still increased the BHKP share in the furnish, wherever technically possible. The tightness of pulp substitute availability, especially over the early part of the year, has also added to market BHKP demand. At present, demand pull is, however, weak and global producer inventories well above long-term average. The 3.1% weakening of the EUR against the USD helped the benchmark higher in euro-terms. The PIX BHKP index-value in EUR rose by 13.36 euro, or by 2.36%, and closed at 578.44 EUR/ton. The PIX BHKP index value in USD lost 6.29 dollars, or 0.78%, and closed at 799.23 USD/ton.

BHK pulp China – After a weak period in pulp purchases in June-early August, the buying activity in China appears to have increased considerably during the 2nd half of August/early September. Time will tell how permanent this improvement will be. More than a million tons of printing and writing paper capacity started up in China in June-August and another million tons plus will be added before the turn of the year. While bringing all this capacity into the market means lower operating rates, the purchases of pulp for the start-up phase add to the physical needs, on a temporary basis, at least, and more permanently, if this new, import pulp consuming capacity replaces some of the non-wood pulp capacity which has been ordered to close down. The PIX China BHKP index continued to retreat slowly, falling this time by 1.00 dollars/ton, or by 0.15%, and closing at 679.12 USD/ton. Yuan weakened last week by 0.1%, against the USD. The conversion of the USD value into Yuan resulted in a drop of 2.24 RMB, or by 0.05%, to 4338.37 RMB/ton.

NBSK pulp China – When starting up new paper capacity, the share of softwood pulp is typically first increased in order to improve the run ability and reduce the risk of brakes. Therefore the new capacity, even if mainly in UWF, supports BSKP sales. On the other hand, the fall of paper prices makes it financially more challenging to use BSKP. Dissolving pulp demand has picked up, mainly for seasonal reasons, but not enough to return to the use of NBSKP as extender of dissolving pulp in textile end-use. Still, softwood pulp market in China is firmer than hardwood pulp market and earlier price decline has turned into a minor price recovery. The PIX China NBSK index continued to move up, rising this time by 4.28 USD, or by 0.52%, and closing at 826.38 USD/ton. Yuan weakened by 0.1% against the USD last week. The conversion of the USD value into Yuan meant an increase of 32.36 RMB, or 0.62%, to 5279.10 RMB/ton.

Newsprint – More and more publishers are cutting down the number of pages – or numbers of editions. Some weeklies are considering options where only the Sunday edition would remain a print version while just a digital version would be available on week-days. Others, while continuing with daily editions, are switching to smaller page sizes. All this speeds up the structural decline in demand while the economic slowdown adds to the negative drivers. The EUR weakened against the weighted basket of non-EMU currencies by about 0.5%, which had a positive effect on the benchmark. The PIX Newsprint index gained 2.13 EUR, or 0.42%, and closed at 509.07 EUR/ton.

LWC – UPM’s decision to close Myllykoski and Albrück production facilities will remove over 500 000 tons of LWC capacity from the market at the turn of the year. A further 200 000 tons reduction may be seen in mid-2012, if the Strasbourg PM ends up being closed as well. These closures should help to improve the supply/demand balance if exports outside Europe can be maintained. The recent weakening of the Euro supports the sales efforts on overseas markets. In January-July, capacity utilization averaged 87-88%. The currency effect of an approximately 0.5% weakening of the EUR against the weighted basket of non-EMU currencies helped to push the benchmark higher. Our PIX LWC index moved up by 3.25 EUR, or by 0.47%, and settled at 698.93 EUR/ton.

Coated woodfree – In January-July, the operating rate in CWF averaged in Europe about 85%, including the dismal 82% in July. The closure of Biberist (both CWF and UWF) will reduce the capacity here. There is no news at present as to the possible impact of the Chapter 11 filing of NewPage on the production capacity of the company in longer run. Producers in Europe may have more export avenues available if the value of the Euro continues to decline, as expected now by most analysts. Regional demand remains weak and the seasonal pick-up appears to be slow and shallow. The 0.5% weakening of the Euro against the weighted basket of non-EMU currencies gave the benchmark an upward push. The PIX Coated woodfree index rose by 1.91 EUR, or by 0.27%, to 711.86 EUR/ton.

Uncoated woodfree – In this grade, the capacity utilization rate in July was even lower than for coated woodfrees, i.e. 80%. Cumulatively, European UWF-machines ran at about 85% of their nominal capacity over the first seven months of the year. The closures at Biberist and Dörpen will reduce the capacity during the 2nd half of 2011, compared to the first half. Weakening of the euro against the USD may open up more export possibilities but it will also limit the impact of the purchased pulp dollar-price drop. Order books are thin approaching the seasonal peak period. The 0.5% weakening of the Euro against the weighted basket of non-EMU currencies supported the rise of the benchmark. The PIX A4 B-copy index gained 1.79 EUR, or 0.21%, and closed at 874.88 EUR/ton.

Containerboard Europe – A major acquisition was seen in the US when IP acquired Temple-Inland at 32 USD per share. This deal is still conditional, requiring the acceptance of the TIN shareholders and the anti-trust officials. If concluded as proposed, the share of IP of the North American containerboard capacity will rise by more than 10 percentage points to about 37%. There have been no announcements as to the possible changes in capacity. New capacity will be added by Cascades but that will be starting up only in early 2013. A significant drop in the recovered paper costs in late August/early September will improve the economics of the RP-based grades, at least temporarily.

In Europe, the weakness of the economic activity impacts the containerboard demand which has continued to slow down over the past weeks and months. After a clear increase still in Q1, shipment volumes have fallen to, or below, 2010 level over the summer. Also in Europe, the prices of recovered paper have been slipping lower with sluggish demand but the drop has been less significant than in the US market. Combined with the weakness of the linerboard and fluting demand, the prices have become under downside pressure.

The currency development had a basically positive impact on the benchmark prices, at least from the producers’ point-of-view. The Euro weakened by 3.1% against the USD and by 0.5% against the weighted basket of the non-EMU currencies. These changes had, theoretically, a clearly positive impact on the Euro-prices. But, in practice, most of our benchmark prices in packaging grades headed back downwards after a small rise last week. Our PIX Kraftliner index fell by 2.79 euro, or by 0.48%, and closed at 574.82 EUR/ton. The PIX White-top Kraftliner index value gained 3.03 euro, or 0.39%, and settled at 788.08 EUR/ton. Our PIX Testliner 2 index value retreated by 2.54 euro, or by 0.50%, and closed at 501.72 EUR/ton. PIX Testliner 3 index slumped by 6.40 euro, or by 1.33%, and closed at 475.12 EUR/ton. The PIX RB Fluting index value fell even more, i.e. by 7.43 euro, or by 1.58%, to 463.72 EUR/ton.

Recovered paper Europe – The prices of recovered paper have remained well above the long-term average in real terms through this year, in spite of the strength of the Euro. The simultaneous weakness of the demand for recovered paper in the North American and European markets, coupled with the return of the collectors from holidays and with again a slower intake by the Chinese/other Asian buyers have increased the downside pressure on recovered paper prices in most of the grades. The fall of the pulp price puts extra pressure on the pulp substitute grades and the indirect impact is felt through the portfolio of different RP-qualities, including the brown grades. Data over last week’s RP business in Europe shows that our OCC 1.04 index lost 1.65 euro, or 1.09%, and settled at 149.81 EUR/ton. With a bigger drop in liner prices, the price differentials to containerboards narrowed: against Testliner 2 the gap shrank by 89 cents to 351.91 EUR/ton; against Testliner 3 the differential narrowed by 4.75 euro to 325.31 EUR/ton and against RB Fluting by 5.78 euro to 313.91 EUR/ton.

Our PIX ONP/OMG 1.11 dd index lost 54 cents, or 0.31%, and closed at 172.06 EUR/ton. As the PIX Newsprint index moved up, the differential to PIX ONP/OMG 1.11 widened by 2.67 euro to 337.01 EUR/ton.

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