Global pulp markets continue to drag through October, with further price reductions expected in quarter and slow start to New Year

Diane Keaton

LOS ANGELES , October 16, 2011 (Forestweb) – As October heads into its second half, many pulp buyers around the world are in no rush to do business or are taking minimum volumes.

Eyeing troubling global economic conditions and in many cases their own lagging order books, customers are well-stocked enough with pulp to keep the pressure on suppliers, whose inventories have continued to climb.

October prices for both bleached softwood kraft pulp (BSKP) and bleached hardwood kraft pulp (BHKP) in North America have mostly settled US$20 per tonne below those of September. In Europe, where sales will be finalized at the end of the month, customers are expecting similar or larger price drops. And in China, business remains essentially at a standstill as buyers await significant price decreases.

Given the weak demand and plentiful supply, pulp prices are also expected to drop globally in November. There is ongoing talk about the mills that might be unable to meet production costs if pulp prices drop further, and whether they will shut. The BHKP side, which is more oversupplied and has seen precipitous price drops, is seen as more vulnerable than the BSKP side, but certain high-cost BSKP mills on are also said to be vulnerable.

The only way to stop the price slide is to shut pulp mills, commented a Chinese pulp agent. “I really hope pulp mills take downtime sooner rather than later, but the problem is they want someone else to do it first,” he said.

Meanwhile, buyers, being in the better bargaining position, are seeking longer-term deals and higher discounts.

Pulp producers’ stocks are expected to pile up, especially during December through February as the pulp industry normally attempts to operate at full speed, market pulp consultant Brian McClay wrote in his recently released Market Pulp Monthly. Though there is considerable maintenance downtime from September through November, this is being at least partly offset by increasing volumes of normally integrated pulp on the market, mostly from American and European mills, he wrote. There are also a number of modest hardwood and softwood capacity net increases coming on stream before year-end, he wrote.

(The Pulp and Paper Products Council (PPPC) in Montreal has scheduled Oct. 21 as the release date of the September “World 20” chemical market pulp producer statistics.)

On the demand side, most buyers are expected to continue limiting pulp purchases to minimum consumption levels at least through year-end and probably through much of the first quarter of 2012, McClay wrote. Though printing and writing paper production, which still accounts for more than 35% of world chemical market pulp demand, will contract more than other pulp end-use sectors in the near-term, the demand/supply balances for specialty paper and hygienic paper markets have also loosened recently, with output likely to be curtailed somewhat over the next few months, McClay wrote.

Tissue paper markets in particular, which account for about 28% of world chemical pulp demand, have become even more competitive than usual in North America and Europe, although any short-term modest declines in tissue output will likely be at the expense of still relatively high-priced recovered paper, he wrote.

(McClay said world chemical pulp demand includes 16% from specialty paper, 14% from fluff pulp products, and 7% from paperboard.)

McClay expects the Canadian dollar, the euro, and the Brazilian real to rebound from their current lows to approach their pre-crisis levels early next year, “which combined with modestly higher contract discounts in 2012, will lead to a surge in market-related downtime and the indefinite closure of some high-cost pulp mills in North America and Europe.”

Currency questions. Industry players are closely watching the effect of currency developments on pulp pricing. “It all depends on currency,” said a major buyer. “If the U.S. dollar weakens, buyers cannot survive,” but if the U.S. dollar strengthens against the Canadian dollar, pulp prices could go down, he said. If the currency doesn’t head in the right direction, suppliers cannot last more than two or three months and by December they will have to get stock off their books and drop their prices, he said, adding that the price releases to date “have been so minimal and not as we had expected.”

In its Oct. 11 comments, FOEX Indexes Ltd. said that with the U.S. dollar slightly less weak against most other key consumer or pulp-producing country currencies, along with higher port stocks, price pressures have continued. The weakening of the Canadian dollar, the euro, the Swedish crown, and others has eliminated much of the U.S. dollar price decrease in respective local currency terms, FOEX noted.

There was a lot of buzz last week over the large reduced pulp price forecast by Deutsche Bank paper and forest products industry analyst Mark Wilde. The research note, released on Oct. 11, included fourth quarter and 2012 cuts on the firm’s estimates for most pulp and paper commodities, due to “evidence of slowing global demand and increasing price pressure.”

Describing his firm’s stand as “more aggressive and out-of-consensus,” Wilde said it has cut 2012 prices of softwood pulp by $200-$220/tonne and of hardwood pulp by $225-$240/tonne, and that 2012 market pulp prices will be off ~$180/tonne versus 2011, bringing the NBSK price in North America to $800/tonne. Deutsche Bank has also cut its fourth quarter 2011 NBSK forecast to $920/tonne, or $73/tonne from the third quarter’s $993/tonne.

A rally in the U.S. dollar threatens to reduce U.S. exports as well as to increase the pricing risk on U.S. dollar-denominated commodities, Wilde wrote, noting that across the sector, market pulp is the commodity most sensitive to foreign exchange rates.

“The big issue is whether global uncertainty drives up the value of the US$---especially against the euro and C$,” wrote Wilde, adding that a weak U.S. dollar could make his firm’s revisions too bearish.

On a more modest note, RBC Capital Markets paper and forest products analyst Paul Quinn said in an Oct. 13 research note that his firm had lowered its 2012 NBSK price forecast by $30/tonne, to $920/tonne.

A market pulp consultant said he doesn’t expect such a big price drop as Wilde, unless the Canadian dollar falls to US$0.85; instead, he expects the Canadian dollar to rise above par on average.

The Canadian dollar fell below US$0.95 on Oct. 4 amid concerns about the euro, stock markets, and global economic factors, but today it was at US$0.99. “Canada’s dollar strengthened by the most since July as speculation that European officials are making progress fashioning a rescue plan for the region’s debt crisis stoked appetite for riskier assets,” Bloomberg reported on Oct. 15. The loonie had lost 6.9% in September, the most in almost three years, as volatility surged among speculation that European officials would fail to contain the debt crisis, Bloomberg noted.

A U.S. pulp buyer commented that if the economy stays weak and the Canadian dollar falls, so, too, will pulp pricing, “but it won’t be too low.” And although the drop in the Canadian dollar is said to have reduced eastern Canadian cash costs by $75/tonne since July, he said he doesn’t see this as a long-term correction.

North America subdued. North American buyer and agent sources have been reporting $20/tonne drops for softwood pulp, as announced, and mostly $20/tonne decreases for BHKP.

The announced October list price of northern bleached softwood kraft (NBSK) pulp is $950/tonne and the list price of southern bleached softwood kraft (SBSK) is $910/tonne. For several months, buyers have been reporting NBSK temporary allowances--most are $10/tonne or $20/tonne--before contractual percentage discounts. Another arrangement is to provide an allowance both before and after the regular discount.

Some North American BHKP spot pricing has headed closer to the mid-$500s/tonne in the last week or so. There are reports that the low end has reached $560-$570/tonne, whereas a month ago the range was in the high $500s/tonne to $600/tonne or slightly higher. Prices in the low $500s/tonne or so, when also factoring in the cost of delivery of, say, $80/tonne, could lead to mill shuts, sources said.

Saying the spot price of northern bleached hardwood kraft (NBHK) pulp has dropped to $570/tonne and that spot tonnage as plentiful, a U.S. customer said the effective list price, which producers haven’t been stating, should be down $30/tonne. And by the end of the year, the NBSK list price could drop to as low as $900/tonne, the buyer said. “Some $40-$50 across the pulps has to come out the next couple of months,” said the buyer, noting customer’s hesitation to buy pulp while their order books are soft.

A New England customer, saying that his October BHKP and BSKP prices are down mostly by $20/tonne, described his NBHK net price range as $595-$605/tonne, compared to $610-$615/tonne in September. His NBSK net price range is about $790-$805/tonne, he said. Suppliers expect prices to drop “a little more” in November and in this uncertain climate, and with troubled paper markets, “people are getting nervous,” he said.

In an Oct. 14 research note, paper and forest products industry analyst Chip Dillon of Vertical Research Partners said there is “stabilization in spot prices.” He said spot NBSK pricing “is down just $10/tonne from mid-September” and that hardwood pulp prices likely would drop by $20-$30/tonne from those of September.

Meanwhile, a large-scale buyer was not seeing stabilization. “The huge variance between spot and list the last couple of months is more pronounced now, he said. “Mills are back from Green Energy shuts and demand has not picked up. Even with Green Energy shuts, there has been a demand shift and suppliers have tonnes.”

He commented that suppliers will be running full in December and January, that demand is down in China and that the North American and European industry business struggles without a push from the tissue market. With plenty of spot tonnage availability, “There should be a substantial reduction” of “at least $60-$80,” bringing the likely November NBSK list price to the $860-$880/tonne range, he said. The NBSK prices in October and September of $970/tonne and $950/tonne were “not the right level,” even with temporary discounts, he added.

As for BEKP, he said prices would also drop. “There is so much volume available,” he said.

One of the buyers last week said his deinked pulp (DIP) price fell by $10/tonne in October. As previously reported, some DIP pricing has dropped $20/tonne this month. Buyers report various DIP prices and changes, depending on the brightness and quality factors, but as a whole, they have complained in recent months that the DIP prices, which have been driven by wastepaper costs, are as high as some virgin pulp grades.

For the week ending October 8, FOEX said the NBSK price in the U.S. sank by $15.58/tonne, to $954.19/tonne, reflecting most of the announced $20/tonne decrease for October. (The September effective list price in North America was mostly $850/tonne.)

In its Oct. 11 notes, FOEX said the slight appreciation in the U.S. dollar is reducing export volumes or prices or both. The weaker Canadian dollar means that the Canadian NBSK producers have a lower break-point in U.S.-dollar terms when comparing their net prices in U.S. dollars with their costs, which are mainly in Canadian dollars, thus increasing their readiness to run and their readiness to hunt for additional spot volumes, FOEX wrote. Even though August was a relatively good delivery month to the North American markets, the cumulative 2011 decrease of nearly 4% reflects the weakening paper demand, and consumers’ pulp stocks in the U.S. are moderately lower than a year ago, or by the same 4%, which is also seen as delivery decline, FOEX observed.

Paper side. Preliminary North American printing and writing paper statistics worsened in September as the decline in shipments accelerated and operating rates weakened, noted RBC Capital Markets’ Paul Quinn in an Oct. 12 research note. Citing a PPPC preliminary report—the final statistics will be released Oct. 22—he said September shipments declined 7.2% year-over-year and by 3.1% month-over-month, “marking an acceleration on the 5.6% decline YTD compared to 2010.” Year-over-year shipment declines included 11.2% for both coated groundwood (CGW) and uncoated groundwood (UGW), 6.0% for coated freesheet (CFS), and 3.6% for uncoated freesheet (UFS).

The overall North American operating rate was ~91% compared to 96% a year ago. Quinn noted that producers are attempting a $30/ton October price increase for UGW (SC-A) and that UPM-Kymmene Corp. has already announced a $30/ton January price increase for coated groundwood grades.

In an Oct. 13 research note, Quinn said most price benchmarks were slightly higher in the third quarter over the second quarter. He said directory papers improved by 10% with the successful implementation of a July $70/tonne price hike, and that SC-A and LWC 40-pound paper prices also improved by 3% quarter-over-quarter. He said UFS pricing was mixed in the third quarter as cut-size prices improved by 2% but offset rolls declined by 1%.

Europe quiet. European pulp customers are not expected to settle pricing until the end of the month, as usual, and meanwhile they are putting pressure on suppliers.

With Italian NBSK customers having paid $910-$920/tonne in September, Northern European customers expect to pay those levels in October, sources said. The Northern European price in September was generally $950/tonne, sources have said.

Italian BEKP customers, having paid $710-$730/tonne in September, will probably seek October pricing in the $660-$680/tonne range, before discounts, said a market pulp consultant. A major Brazilian BEKP producer with excess tonnage is said to be offering $560/tonne for spot tonnage in Europe, he said. (In the previous week, as reported, the same producer was said to be making spot offers into Asia of $540/tonne for 10,000 tonnes or more.)

In his Oct. 14 research note, Vertical Research Partners’ Chip Dillon said European spot NBSK prices have dropped by $30/tonne from September and that he expects the list price also to fall by $30/tonne.

Separately, on Oct. 14, UPM announced that its third quarter pulp and fine paper deliveries in Europe were lower than expected and had an adverse impact on its operating profit. “Fine paper demand continued to be low in Europe and deliveries did not recover in September from the seasonal summer slowdown,” the company said. “However, stable demand continued in publication papers.”

For the week ending Oct. 8, FOEX said the NBSK pulp price in Europe dropped by $8.75/tonne, to $934.16/tonne. In euros it fell by €2.93/tonne, to €695.37/tonne, as the U.S. dollar strengthened by 0.5% against the euro from the previous week. FOEX noted that prices in both currencies are now below their early January index levels, down $15.05/tonne and down €15.01/tonne.

On the BHKP side, the price in Europe fell by $10.80/tonne, to $750.34/tonne, and in euros it dropped by €5.14/tonne, to €558.54/tonne.

Between the end of June and the end of August, market pulp producer stocks rose by 20% from the long-term average level to clearly above it, FOEX noted. It said NBSK pulp consumers’ stocks are low and are being brought further down, due to fading expectations of paper demand pick-up during the seasonal peak. But with cumulative 2011 BSKP demand for market pulp still up 6% at the end of August, producers have been encouraged to run at fairly elevated operating rates.

On the BHKP side, FOEX noted that the weakening of Brazil’s real and the currencies of several other producer countries has lowered the break-even point in U.S. dollar delivered net costs for a large part of market BHKP production. This, along with increased spot volumes from partly integrated producers having shuttered paper capacity or taken paper production downtime, has continued to weaken the supply/demand balance, FOEX said. The strengthening of the U.S. dollar has meant limited or no reduction in purchased pulp prices in local currency terms and has strengthened consumers’ resolve to keep their stocks as low as possible, which is aided by the high producer and port stocks, FOEX wrote.

China waiting. Although Chinese customers returned from a weeklong holiday period early last week, they have been in no rush to place October orders. There are mixed reports about the extent of their pulp inventory levels, but no one is saying they are very low.

In mid-week, an executive for a BSKP producer dependent on sales to China said there was a standoff and that his company still had not done any business. He said he had no idea when deals would conclude or at what price. But with so many days of October already past, he said when there is an agreed-upon price, it likely would cover business written for both this month and November.

In recent days, some bleached radiata kraft pulp (BRKP) is said to have been sold in China at $740/tonne, down from the list price of $820/tonne, after customers rejected offers said to be at $760/tonne, then $750/tonne.

There have been also been rumors in recent weeks of some quiet deals of European NBSK at $750/tonne, and of some Canadian NBSK offered at $780/tonne, rather than the commodity NBSK list price of $830/tonne. (One Canadian supplier in particular offered $780 mid-week, sources said.) Sources reporting such offers and deals, which are not necessarily widespread or acknowledged by suppliers, said they provide further incentive for Chinese buyers to sit back and wait for further price decreases.

Those deals that have been done are on a customer-by-customer basis, so it can take months for others to find out what the price was, a Chinese agent noted. He said buyers’ inventories are “very high” and that volumes purchased are minimal, for the purposes of maintaining relationships with suppliers. Regarding the $780/tonne Canadian NBSK offer, he said customers are unlikely to accept it because they are waiting for it to go down further. As for BHKP, he said production costs among large-scale Chinese producer may be higher than $600/tonne, begging the question as to whether mills can keep running.

He said he wouldn’t be surprised to see NBSK drop close to $700/tonne in November. (And today a source said Chinese buyers are pushing for the mid-$600s/tonne for BSKP.) But even so, papermakers would still have to consumer earlier-purchased higher-priced inventory, and they would have to drop their own prices commensurate with pulp price decreases, the agent commented. Chinese papermakers’ conditions are “much worse” than during the 2008 economic downturn because now they face higher costs, more price pressure, and credit line issues, “everything all together,” he said, noting that conditions are making it difficult to buy pulp in quantity. “There is no good news in the near future,” he said.

A market pulp consultant noted that in contrast to 2011, the paper industry in China experienced very good years leading up to 2008. On the brighter side for Chinese papermakers, he cited news in recent days that the government is making a commitment to help smaller and medium-size companies (not just in the pulp and paper industry) get financing, apparently because the impact of the recent restrictions has been too severe overall. But he, too, said customers so far are taking only minimal volumes, and he added that plenty of tonnage is en route to China. He noted that in this kind of market, there are more generous terms with letters of credit (LCs), of up to 180 days. He said current contractual discounts are typically 2%-3% for NBSK and as much as 6% for BEKP.

The decrease in, say, the Canadian dollar, gives “more ammunition” to Chinese customers to push the price down further, commented another pulp agent doing business in China. Customers’ inventories “are a little on the low side, but nothing desperate. They will keep their purchases moderate,” he said, but this doesn’t mean that unwanted pulp will head elsewhere. “I think all of the markets are close to equally bad shape, so there will not be shifts,” he said.

In his recent Market Pulp Monthly report, consultant Brian McClay said that in China, the pulp-buying surge of August, which was very close to an all-time monthly high, is unlikely to be repeated over the next few months, given what he described as exceptionally tight credit conditions, more paper mill downtime/closures and with most of the pulp purchased in August continuing to arrive in Chinese ports over the next few months, thus adding to already elevated pulp stock piles. “Any sustained revival in China’s pulp purchases could still be five months away, after the Lunar New Year break,” McClay wrote.

For the week ending Oct. 8, FOEX said that with the yuan strengthening by 0.4% against the U.S. dollar, thus lifting the local currency quotes in U.S. dollar terms, the price of BHKP pulp in China moved up, by $1.08/tonne, to $654.20/tonne. The NBSK price fell by $1.49/tonne, to $815.24/tonne. FOEX said the gradual strengthening of the yuan has accentuated the drop in pulp import prices and has helped keep the fiber price versus the paper price ratio from tightening too much.

Paper prices continued to slip in September, thus putting increased pressure on pulp prices, FOEX observed. With new paper machines still starting up, the problem of paper overcapacity has worsened and a lot of downtime is being taken, FOEX said, adding that lower paper prices have speeded up the closures of non woodpulp-based paper capacity

Noting the lack of Chinese pulp stocks statistics, FOEX said the feeling on the market is that while stocks of paper are above normal, the stocks of market pulp at consuming mills are below the average. “With more downtime in sight on the paper sector and with recent price trend still downward, there is no need to build those stocks higher either,” FOEX wrote. Furthermore, the availability of credit has tightened and the move to use less official loan sources has lead regulators to look into this “off-book” lending, FOEX wrote, adding that sources of credit could also start drying up. Company finances might not allow higher pulp stocks anyway, FOEX commented.

Separately, in an Oct. 11 research note, Dundee Securities paper and forest products industry analyst Richard Kelertas said dissolving pulp prices have recovered from their $1,400-$1,500/tonne cyclical lows and “are currently edging up” to $1,600-$1,700/tonne. Prices have shown signs of strengthening as rayon VSF (Viscose Staple Fiber) manufacturers have ramped up production again, and clothing & garments manufacturers continue to substitute more rayon for cotton,” he wrote.

Korea market. In September in South Korea, the prices of BSKP were unchanged. But prices dropped for BHKP, bleached chemi-thermomechanical pulp (BCTMP), and unbleached kraft pulp (UKP), according to a South Korean pulp agent.

With the nearly 10% depreciation of the Korean won against the U.S. dollar, Korean pulp customers are expected to push for lower prices in October.

For September, prices remained at $895/tonne for NBSK (net is about $820/tonne), $880/tonne for BRKP, and $870/tonne for SBSK pulps (net for both is about $780-$790/tonne).

All of the BHKP list pricing in September was at $685/tonne, down $25/tonne except for BEKP from Brazil’s Fibria Celulose SA, which was down $45/tonne. The agent said a “sudden” $25/tonne BEKP price decrease by Chile’s Celulosa Arauco y Constitución SA led to the other BHKP decreases. Furthermore, net prices off of contracts were down in August by about $30-$35/tonne and in September by $30/tonne, resulting in September net prices of $630/tonne for BEKP and of $600-$610/tonne for Indonesian mixed tropical hardwood (MTH) pulp, he said. Also South American BEKP and Indonesian MTH was offered at around $600/tonne for large-quantity purchases, the agent said.

As for Korea’s Moorim Pulp and Paper, which produces BHKP, the prices were too high for the market and there were no sales, so the pulp was used internally, said the agent, describing the prices as $620/tonne from the mill and $650/tonne CFR China main port.

In light of the BHKP price drops, BCTMP prices also fell in September, by $15/tonne, to $645/tonne for aspen 85 bright and $645/tonne for softwood. Since BCTMP pricing was similar to net BHKP pricing, Korean printing and writing papermakers were considering reducing BCTMP consumption, the agent said.

The UKP price fell by $20/tonne, to $700/tonne, and demand was down. Domestic industrial paper demand worsened in September due to continued high wastepaper price, making it difficult for papermakers to cover their costs. Accordingly, kraft paper and kraft linerboard producers took three to five days of downtime to reduce raw material consumption. Also, where possible, they switched product grades that use low-priced grades of virgin fiber, the agent said.

On the paper side, nearly all of the Korean printing and writing paper producers and industrial paper companies reduced their production by three to five days during the Full Moon Festival holidays in September. The downtime was both planned and for market reasons, said the agent, adding that despite BSKP spot offers of about $750/tonne, “customers just could not afford to take it due to the low consumption.”

As for printing and writing side, Korean papermakers reduced their allocation to export markets in September due to seasonal domestic demand. The agent said the export price fell by $20-$30/tonne from August.

Cartonboard demand still was not good in September, with local prices going down by $20-$40/tonne but expected to rise in October due to the record-high price of recycled paper, the agent said, adding that the coming higher price nevertheless has not spurred buyers to stock up. Korean cartonboard manufacturers have struggled to keep their overseas volumes because they need to export almost 50% of their production, he said.

In September, Korean containerboard export volume shrank by 15% compared to “normal,” thus leading to increased inventory. Meanwhile, domestic recycled paper prices have stayed at record highs, the agent said. Some mills took downtime in September as well as August, and this situation might continue into early next year, he said.

Looking at the slow newsprint market, Korean producers have considered decreasing their price by $10/tonne for the fourth quarter starting October. The depreciation of the Korean won could offset the loss to some degree, but profit margins are getting slim, said the agent, adding that newsprint producers are counting on increased demand from developing countries to offset shrinking demand from developed countries.

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