Further chemical pulp price declines expected in North America, Europe in October; China might hold

Diane Keaton

LOS ANGELES , September 25, 2011 (Forestweb) – Chemical pulp prices have been weakening in North America and Europe this month, but in China, which led the downward pricing, both softwood and hardwood pulp prices appear to be fairly stable. More of the same in these markets is expected in October.

There has already been an announcement of unchanged October prices in China of bleached radiata kraft pulp (BRKP) and bleached eucalyptus kraft pulp (BEKP).

Producers had generally expected August World 20 chemical market pulp producer stocks to increase one or two days, so the two-day increase in the report released by the Pulp and Paper Products Council (PPPC) Sept. 22 is not expected to be a game-changer going into October. However, the increase, to 41 days, puts producers’ stocks farther yet from the 32 day-mark that is often cited as indicating a balanced market. Both softwood and hardwood pulp stocks rose in August by two days, to 34 days and 50 days, respectively. Shipments increased month-over-month by 5.1% and year-over-year by 7.4% on an 85% shipment-to-capacity rate.

Sources continue to report that papermakers, their customers and others down the pipeline have the jitters about economic conditions, and that this appears to be curbing the appetite for pulp.

Indeed, on Sept. 23, The Wall Street Journal carried a banner headline across the front page, “Markets Swoon on Recession Fears,” above two stories headlined “World-Wide Distress Rises as Investors See Futility of Governments, Central Banks” and “Economic Signals Heighten Worries of a Double-Dip.”

Some pulp agents in North America said in recent days that pulp demand is down, ascribing this to the economic uncertainty. One of the agents said customers tell him they aren’t ordering because they “don’t know what’s going to happen in 30 days.” They understand their business and it is weak, “but what they don’t understand is ‘what is my bank going to do for me, what is the government going to do to me, and how will Europe affect me?’” he said.

He said it is all related to consumer demand in local markets, with makers of many kinds of paper apparently waiting until there is real demand before buying pulp and adding to their finished product inventory levels. “This is the first time I can remember across the board these people (having) such uncertainty going into the fourth quarter,” he said. “This is really alarming and needs to improve quickly and dramatically to offset” increasing pulp supply, he said.

Compared to the backward-looking August statistics, Canadian northern bleached softwood kraft (NBSK) producers have been saying that their current supplies are at least somewhat limited because of fall maintenance shuts, many of which are combined with Pulp and Paper Green Transformation Program projects. Thus, the slowdown in demand is counterbalanced, said one such source in recent days.

And some sales executives for BEKP suppliers have been saying in recent weeks that net prices are fairly even around the world. It waits to be seen whether certain financially stressed producers will run for cash, said one, who doesn’t expect a turnaround until the first quarter.

In a Sept. 21 research note, Deutsche Bank paper and forest products industry analyst Mark Wilde noted that spot prices “are weak and far below reported list prices” and that falling prices are beginning to trigger supply responses, with several producers having announced fourth-quarter downtime. He said his group is closely watching foreign exchange rates. If the U.S. dollar appreciates against the euro or Canadian dollar, it will aid margins for high-cost producers and could produce lower-than-expected “trough” prices, he wrote. He added that his group is also eyeing the declines in the Brazilian real.

North America slow. Pulp producers have not made October price announcements yet for North America.

The main September list price of NBSK for the region is $970/tonne, down $20/tonne from August. There were been no September announcements for list prices of BEKP, northern bleached hardwood kraft (NBHK), or southern bleached hardwood kraft (SBHK), except for Alberta-Pacific Forest Industries Inc. (Al-Pac) saying its list price for aspen-grade NBHK would be unchanged at $820/tonne. (RISI Inc.’s August price of aspen and mixed hardwood pulp was $815/tonne, with maple NBHK and SBHK at $825/tonne and BEKP at $870/tonne.)

As previously reported, there have been comments that spot prices in North America are in the mid-$700s/tonne and some buyers have been citing temporary allowances off of their NBSK list prices since August or before. But a major buyer said in recent days that he is not seeing the latter. All of his regular suppliers tell him they are not selling for less than $970/tonne (before regular discounts), he said.

A sales executive for an NBSK supplier said his company’s supply is limited but since spot tonnage is still being offered on the market, October could see another $20/tonne decrease in the list price. This would also be helping out and working together with contractual customers, he said, and it would help close the gap with China.

The wide gap between the list and spot price makes for “a difficult choice” for buyers as to whether to support their contracts or to cut their prices by turning to the spot market, he commented. But he said customers are continuing to buy on a contractual basis so their suppliers will be there for them when the market picks up again. He expects September volumes to be about the same as in the previous three months, describing them as normal. “The contract orders are pretty regular,” he said. “We have had more demand in North America without having to sacrifice on price and that has offset the reduction in Asia,”

An executive for a company selling NBHK said there could still be pressure in October to knock off another $20-$30/tonne. “I can see prices in the mid $5s for spot,” he said. “I don’t think the slide is over yet, but the price is not plummeting.”

He said there is still room for further reduction, “especially with European inventories full and China not purchasing as much as it could, given the freight cost.”

He said his company’s net prices off of contracts are an average $645/tonne and that it is seeing the back off in demand due to reduced paper machine running rates. He expects the NBSK price to drop in October, too. “It can’t stay if hardwood doesn’t,” he said.

Some pulp agents in recent days have added to other pulp players’ reports this month of slow business in North America. Spot demand has slowed as printing and writing and some specialty papermakers shut their machines, although tissue and towel are still strong, said one of the agents. He said the coated sector has slowed from where it has been, while uncoated has been sluggish for a few months. The last three weeks have been slower than papermakers would have expected a few months ago, leading to the machine downtime, he said. “Demand is not there,” he said. “I think it’s the economy.”

Also, he said, with prices having fallen, integrated producers don’t find it financially advantageous to provide as much spot tonnage to agents these days and are choosing to use it internally instead.

He said the spot price for NBHK in the U.S. is in the $580-$600/tonne range, down $10-$20/tonne from the end of August. The low end of the pricing is in the Midwest, while the East Coast and West Coast are on the high end, he said. October discussions are just now starting, he said, and he expects the October range to be about $580-$590/tonne. “For October I would be surprised if it gets below $570,” he said.

As for NBSK, he said his customers are mainly contractual, and none have asked his company to find spot tonnage. But he said producers aren’t clamoring to move tonnage, as they have done in previous years when the NBSK market has been very sloppy. As for talk in the market that spot NBSK is being offered for $740/tonne, he said, “I’m sure it’s not prevalent or we’d be getting the call.” He said some southern bleached softwood kraft (SBSK) producers have no spare pulp at all and that availability has been tight all year and continues to be so.

One of the buyers said that wastepaper prices have peaked, perhaps for seasonal reasons and overseas reluctance to pay high prices, and he hopes this helps bring down market deinked pulp prices, which for the kind he buys are in the high $700s/tonne to low $800s/tonne (net), that is, “just below softwood” prices.

For the week ending Sept. 17, FOEX Indexes Ltd. said the NBSK price in the U.S. gained 11 cents, to $971.54/tonne. This was after it dropped by $17.33/tonne the previous week.

In its Sept. 20 notes, FOEX commented that the price differential between contract business and spot offers has widened again, thus creating price pressures. It said the drop of paper demand over the summer was met by a more or less equal reduction in market pulp shipments to the North American market, and that consumers’ stocks of pulp remain relatively low. FOEX said the slightly smaller-than-normal price differential between the cif-based NBSK prices in Europe and the delivered-term prices in the U.S. is helping producers to defend current price levels.

Europe lagging. Buyers and sellers in Europe don’t expect to finalize September pulp business until the end of the month, as usual, and October price plans are a further unknown.

Customers in Europe are hesitating to negotiate and some “are beginning to think about shorter order books,” with conditions not looking as promising as before the summer, said a sales executive for a major European integrated producer in recent days. He expects volumes to be all right in September, “but at the expense of price,” with further price erosion likely. But he said fourth quarter volumes might be weaker.

He noted that softwood pulp is in “much better balance” than hardwood pulp and “there is a good chance of being able to defend $980 (for NBSK) in many quarters.” (Others in recent weeks have said it will likely drop in the north to an effective price of $950/tonne, which was the August price in Italy.)

But the European sales executive said that BEKP, which is “clearly fundamentally more oversupplied, could drop by “$20-$30-$40,” perhaps to $750/tonne, which he said would be at or close to the bottom in Europe. (Another BEKP producer said Europe “is going through a tough time and I personally think that $750 is on the high side, at least based on customers’ expectations.”) “It is approaching that level where it won’t go any lower for long,” the European source said.

Those producers that have been “bouncing around the bottom” can’t seem to generate sales because buyers are not stocking up, he said, adding, “There is nothing too positive in the short term” for European papermakers. He said the paper machine closures in Europe are greatly beneficial for those companies that are doing the closures, such as Sappi Ltd., M-real Corp., and UPM-Kymmene Corp., “but probably not until the first quarter of next year, he said. In the short term I don’t see much good (news).” Commenting that business has picked up in some other industries, such as steel and chemicals, he asked, “Are we that fundamentally different or is there just a delay in our sector? Do we have a too-long pipeline or a too well-filled pipeline?”

A buyer said prices are expected to decrease, and “there is pressure for eucalyptus (producers) to do what they need to do, especially the Brazilians, who are holding out the most.” He said buyers are cutting purchases as much as they can and are also turning to Iberian BEKP and Scandinavian hardwood pulp. “There is no lack of hardwood options,” he said. Also, he noted, with the euro weakening, the price is going up in euro terms.

A sales executive for another BEKP producer said the September price is likely to settle at $780/tonne in the north and around $760/tonne in the south. (This is also what a source with another major producer said in the previous week.) He said the August price was in the $800-$820/tonne range, and as for reports of $770-$780/tonne in Italy, he said he had heard that this involved deals that combined such extra purchases with regular contracted tonnage at $820/tonne. The $780/tonne price seemed to be used “to create more noise but it was not standalone” purchasing, he said.

He named some BEKP producers said to be relatively tight on supply while another, which is a major player, is said to have plenty of supply. “Customers have no trouble getting pulp,” he said. But, he has heard that there might be tonnage being diverted from a European port to China, and noted that this happened with several vessels in 2009, leading to the correction in stocks in Europe and the recovery of the overall market from the crisis that started in 2008.

Like others, he said European papermakers’ orders are not what they should be in September. Tissue is “more or less fine,” but not printing and writing, he said. But he said that despite the market situation, most of his customers are economically sound, having cut costs and becoming more competitive after the challenges of 2008-2009. Keeping less stock on hand has allowed them to have “quite a good margin now,” he said. And the current economic issues in Europe has caused a lot more caution about where their money goes, he said, describing the modus operandi as “no spend, no spend, no spend.”

The value of the euro today is US$1.343. On Sept. 23, the Associated Press reported that the dollar gave back some of its gains against the euro that day, a day after hitting an eight-month high against it. The dollar had risen nearly 1.5% against the euro since Tuesday, as demand for the U.S. currency increased with fears about the global economy, and at one point on Thursday, the euro fell to $1.3384, its lowest level since Jan. 18, the AP reported.

FOEX said that for the week ending Sept. 17, the NBSK price in Europe dropped by $7.52/tonne, to $960.23/tonne. In euros, the price fell by €2.57/tonne, to €697.84/tonne. The slight (0.4%) strengthening of the U.S. dollar against the euro from previous week limited the fall of the benchmark in euro terms, FOEX noted.

FOR BHKP, FOEX said the price fell by $6.13/tonne, to $793.10/tonne. In euros, it fell by €2.06/tonne, to €576.38/tonne.

FOEX noted that the sluggish paper demand and production has kept pulp buying in low gear and that prices remain under pressure. But it added that there have been pulp production losses with more downtime taken, along with fire and boiler problem losses at Södra Cell AB’s mills in Mönsterås and Värö, Sweden, respectively, Mönsterås restarted in early September after an Aug. 12 fire and Värö reportedly restarted in mid-September after a four-day outage.) The new Pulp and Paper Swap Market Report from Tradition observes that “lower forward prices are bringing consumers back in the swap market,” FOEX said.

As for BHKP, FOEX said in its Sept. 20 notes that the high level of port inventories, weakness of woodfree paper demand and the speculation over another rise of producer inventories in August have been maintaining downside pressure on prices.

China moves. Softwood pulp producers are expected to aim to hold their September prices in China in October.

This would keep commodity NBSK at a list price of $830/tonne. A few producer sources said the price could move up a bit in the fourth quarter, while others discounted the possibility.

Chile’s Celulosa Arauco y Constitución SA (Arauco) announced an unchanged October net price of bleached radiata kraft pulp of $820/tonne. Arauco’s effective net BRKP price in August was $800-$810/tonne, rather than the announced unchanged net price of $820/tonne.

Also for October, Arauco announced an unchanged BEKP price of $650/tonne. Arauco’s September $650/tonne BEKP net price represents a decrease of about $10/tonne from the $660/tonne net price in August, an Arauco official said.

Various producers’ BEKP prices vary and are subject to negotiation, sources have been saying. Several sources have described the net price range as about $630-$640/tonne, and a non-BEKP supplier doing business in China said some $630/tonne business has moved up from $620/tonne. An agent in North America said there have been “contradictory reports” regarding the China market in the last five-to-seven days, including that “there is all kind of pulp in ports;” meanwhile, his colleagues selling pulp in China are saying the market is good and that prices are going up.

A sales executive for a BEKP producer said in recent days that the net price has stayed around $630-$640/tonne and that customers these days are asking for blocks of tonnes of several thousand tonnes, up from, say, 500 tonnes, apparently on the assumption that the bottom has been reached and that the tonnage can be resold at a higher price down the line. As reported a week earlier, sources have said the effective list price is around $650-$680/tonne before discounts.

FOEX said the NBSK pulp price in China fell by $1.99/tonne, to $824.39/tonne, in the week ending Sept. 17, thus losing part of the gains of the previous three to four weeks.

FOEX noted that the fall of the softwood pulp prices ended about a month ago, with prices stabilizing and in some cases moving back up. “The coast is not necessarily clear, though,” FOEX said. Although consumer inventories in China appear to have continued their downward trend, the present stocks are not very low, FOEX wrote. It said the lowest spot prices have disappeared and that the offered spot volumes do not appear very substantial, but that producer inventories are nevertheless above average. It said demand-pull in some other markets has been very weak and that the large price differential between softwood and hardwood pulps is promoting switches from BSKP to BHKP “in the price-conscious and technically flexible Chinese market.”

For the week ending Sept. 17, FOEX said the BHKP price in China rose by 86 cents/tonne, to $679.98/tonne. “The buying spree in China is not very strong but satisfactory volumes continue to be traded and shipped.” FOEX wrote. It said some pulp buyers still appear to be working down their stocks but the large number of new machines producing woodfree papers, paperboard and tissue need increasing volumes and need to have pulp in stock already prior to the startup. FOEX said the lower paper prices are expected to speed up the closures of some of the non-wood pulp based paper capacity that has been ordered to cease production by the end of the year, or for pollution control mechanisms to be installed.

Looking at bleached chemi-thermomechanical pulp (BCTMP), a sales executive for a supplier said his company’s $30/tonne China price hike in August went through in about 40% of the cases and the rest was at $25/tonne. He said the effective list price range was $560-$580/tonne. “Everyone got a net $20-$30 increase,” he said. The effort for softwood BCTMP was helped by the end-use market (cartonboard) and also operational problems of a BCTMP mill in China, causing customers to look offshore. The sales executive said prices could continue upward, but he noted that the market is watching to see what impact the restart of Tembec Inc.’s Matane, Quebec, BCTMP mill will have. The mill shut May 10 over labor issues that were not resolved until August, with the restart scheduled for Sept. 11. Shipments would not arrive for several more weeks.

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