Global pulp market deterioration continues, with prices not expected to bounce back to peak levels once market turns around; uncertainties and concerns abound

Diane Keaton

LONDON , November 12, 2011 (Forestweb) – The mood at London Pulp Week was decidedly downbeat, reflecting the difficult state of printing/writing markets, the still-falling pulp prices, and a gloomy macroeconomic situation punctuated during the week by news developments concerning the financial crises in Greece and Italy.

Pulp markets are expected to slow further as the year draws to an end and buyers and sellers try to reduce inventories.

“None of this would have happened if it weren’t for the confidence crisis,” said a sales executive for a pulp producer.

China, where prices have already fallen dramatically in recent months, was a much-discussed region, but the conference drew few players from China. Another industry conference was underway in China this week, plus an annual market pulp industry conference that has been held in China in recent years now draws attendance away from established venues elsewhere.

People attending the London Pulp Week meetings said there were tough negotiations between buyers seeking lower prices and higher contractual discounts and sellers trying to prevent further sliding and to hold on to current terms.

Suppliers needing to offload inventory were seeking out pulp agents to help with the job. “I’ve never seen our dance card this full (during a London Pulp Week),” said an agent. “Everyone’s looking for orders but not at the right price. I think they will be more flexible on pricing because a week from now they will be even lower, for any grade.”

Sources have also been reporting very low prices in such spot markets as Turkey. An agent said the bleached eucalyptus kraft pulp (BEKP) price was US$540 per tonne in recent days, that he expects $515-$520/tonne next week, then down to $500/tonne. The low hardwood pulp prices are causing a shift in pulp imports to Turkey to about 70% hardwood and 30% softwood, compared to about half each before. A buyer in the Middle East reports offers of $600/tonne and lower for NBSK and of $540-$550/tonne for BEKP, and, he said, “No one’s buying, they’re waiting for it to go lower.” (There have been other reports, though, of steady business in the Middle East, albeit at low prices.)

For the most part, attendees said they don’t expect the pulp market to pick up again until after the Lunar New Year celebrations in China; the Lunar New Year begins earlier than usual, on Jan. 23.

Some northern bleached softwood kraft (NBSK) pulp producers said that when the market does turn around, they will quickly try to recover a chunk of the pricing they so quickly lost. They are hoping for $40 or $50 or $60/tonne or so. But a sales executive for a BEKP producer said a big jump “would not be good for anyone” and that “a fair price for both sides would be better.”

For now, as a buyer put it, everyone is pushing any price increase out further, thus bringing the number down. Sources say tissue is the exception, although it has seen a bit of weakening, too; they note that tissue also accounts for a smaller share of paper production than printing and writing paper, thus having less impact on the pulp market.

Sources said that when prices do rise again, they wouldn’t go as high as their peaks earlier this year, because of weak paper demand and the difficult global economic conditions. The earthquake in Chile of Feb. 27, 2010, which forced the temporary shuts of the country’s market pulp mills, has been widely cited for the run-up in prices that eventually topped $1,000/tonne this year for NBSK in North America and Europe. Now some forecaster and market sources doubt that the 2012 price will average even as much as $900/tonne.

In a Nov. 11 research note, Deutsche Bank paper and forest products industry analyst Mark Wilde said he has lowered his 2012 BEKP price (CIF) in Europe to $763/tonne from $843/tonne. “While down significantly from our prior estimate we forecast an improvement in prices next year from current levels based on expectations that Chinese demand will remain strong and that high-cost producers will be compelled to reduce output if prices worsen or stay at existing levels for an extended period,” Wilde wrote.

Unlike pulp producers, buyers, of course, have welcomed the price drops. Given the current market conditions favoring buyers, suppliers generally have been agreeing to add a few percentage points during contract negotiations. Some buyers are getting additional discounts of 2% and there were also reports of 1% or 3%, depending on freight and other factors. Suppliers said some buyers are asking for discounts even higher than 3%, at least when kicking off negotiations.

Discounts in North America and Europe had already risen over the years to around 15%-20% or more, depending on the grade, the deal, and the shape of the market. Suppliers have been saying that they can ill afford even-higher discounts at a time when prices are so low. One said this is “a killer” that will lead to more rapid shuts of mills and that increased discounts will cause list prices to “just go higher again.”

If there was any positive news for producers, it was that Chinese customers have stepped up their pulp purchasing, to some extent at least, in response to prices that have bottomed or are very close to bottoming and also because the Chinese government has loosened credit restrictions in recent weeks. But most sources say they don’t expect pulp prices to bump up much any time soon, since paper prices have weakened so much in oversupplied China, for example, to $700-$720/tonne for coated woodfree, which is not enough to cover pulp costs. In a presentation at the British Wood Pulp Association/Hawkins Wright Ltd. symposium during London Pulp Week, Oliver Lansdell of Hawkins Wright said a 15%-30% reduction in printing and writing paper prices in China since August has led to downtime among producers.

Downtime notes. There are expectations that a number of pulp mill closures are bound to happen before long because prices have fallen too low for some mills to cover their production costs. One of the big questions in London was whether any pulp producers had yet announced market-related downtime.

Closures are inevitable under current conditions, sources said. As a sales executive for a North American pulp producer put it, “There will be shuts because there are no orders and then we will see inventory go down.”

A pulp agent attending London Pulp Week said producers shouldn’t have kept producing so much pulp during the summer, thus running the risk that the market wouldn’t come back in the fall. FOEX Indexes Ltd. commented in its Nov. 8 comments that the first signs of price deterioration were seen in China in April/May, or nearly half a year ago, and that there has been a weakening since mid-May of the FOEX bleached hardwood kraft pulp (BHKP) benchmark price. (FOEX tracks eucalyptus and birch pulps.)

Another pulp agent said he expects the bottom to go to as low as the $400s/tonne for hardwood pulp and to $600/tonne for NBSK, sometime before Christmas, “and then mills will shut down.” Echoing others, he noted the difficulties of shutting down in the dead of the Northern Hemisphere winter, adding that if mills are going to shut, “They should go down right now.”

Sources commented that some operators might reduce some production without making announcements.

Asia Pacific Resources International Holdings Ltd.’s (APRIL) hardwood pulp mill is taking 120,000 tonnes of downtime at its Riaupulp mill in Kerinci, Indonesia, in the fourth quarter, for both stepped-up maintenance and market reasons. Its hardwood pulp mill in Rizhao, China, is tallying 50,000 tonnes of downtime.

Various contacts noted that prices of woodchip imported to China have tightened, thus affecting production at some key mills. In addition, the recent flooding in Thailand has affected access to wood in that country, which could be the case for some time to come. A contact said some pulp producers in Asia are looking in the U.S. for some wood supply.

Sources comment that it is now less expensive for Chinese pulp producers to buy pulp than to manufacture it themselves.

Two Tembec Inc. mills producing high-yield pulp (also known as bleached chemi-thermomechanical pulp (BCTMP) will be taking market-related downtime; the mill in Matane, Quebec, will be down for three weeks and the mill in Temiscaming, Quebec, will lose an additional week following a scheduled shut for maintenance and capital improvements.

A sales executive for another BCTMP producer said BCTMP suppliers have lost about $30/tonne of the approximately $45/tonne they managed to gain in China in recent months and that this followed relatively flat prices over a long period, so they have “no more to give.” Order books are “reasonable,” the supplier said.

Terrace Bay Pulp in Terrace Bay, Ontario, was up and running as of Nov. 11, following an explosion at the mill on Oct. 31 that killed a worker, said an industry source.

As previously reported, sources said Terrace Bay Pulp had reduced its effective November list price in North America to $880/tonne, down $70/tonne (other NBSK producers are at $920/tonne). A North American buyer named a high-cost Canadian producer that he said could not afford to go any lower than a list price of $880/tonne or a spot price of $690/tonne. Meanwhile, NBSK spot tonnes in North America are hovering around $690-$700/tonne, some sources said.

Said to still be down in Canada is the Paper Excellence mill in Mackenzie, British Columbia, which has been undergoing boiler repairs.

North America prices. Producers announced a Nov. 1 $30/tonne reduction in North America for NBSK, to $920/tonne and FOEX said that in the week ending Nov. 5, the U.S. price dropped by $30/tonne to that new level.

As the weeks go by, the prices offered for spot North American-produced hardwood pulp continue to decline overall. The market for northern bleached hardwood kraft (NBHK) is still mostly in the mid-$500s/tonne but there are ongoing reports of pricing of as low as around $500/tonne or so, which could be below the cost of production for some mills.

A BEKP buyer said he is receiving “multiple low spot offers” of large volumes at very favorable prices. He said there is a $150/tonne delta between BEKP and NBHK pricing.

Europe discussions. Sources said November pulp prices in Europe are expected to decline by $20-$30/tonne by the time business is settled at the end of the month.

No one interviewed during London Pulp Week had anything positive to say about the state of printing and writing paper markets in Europe, and thus, its effect on pulp demand.

A sales executive for a North American producer selling into Europe observed that it is hard to negotiate contracts when the market has been so weak and buyers are asking for discounts of 5%-6%-7% on top of current 14%-15%-16% discounts. Meanwhile, he said, “Order books have dried up and it’s almost Christmas.”

A sales executive for a Brazilian BEKP producer expects the price in Europe to fall by $20-$30/tonne by the end of the year. Customers are looking for a $50/tonne decrease, he said, “but that is too much.”

There is no good news in Europe for paper mills and business is continuing to decline, said a pulp-sales contact based in the region. Once pulp prices bottom in Europe, they are likely to be flat for six months, he said.

In his presentation during London Pulp Week, Oliver Lansdell of Hawkins Wright said that although paper buyers are postponing purchases amidst uncertainties, “if we do get a solution to the European debt crisis, there’s a lot of pent-up demand.”

Sources note that port stocks are high in Italy, especially for hardwood pulp. A major Brazilian BEKP producer is said to be shipping tonnage from Italy to Asia in response to breaches of contracts in Italy. Some sources have said the October softwood and hardwood pulp prices in Italy were down $30/tonne but that some buyers were pushing for $50/tonne. In recent days, an Italian agent said there were October gross price decreases in Italy of $50/tonne.

Separately, Nov. 10 saw the announcement that European tissue producer SCA has delivered a binding offer to acquire Georgia-Pacific LLC’s European tissue operations for €1.32 billion. In a Nov. 11 research note, Deutsche Bank’s Mark Wilde said the deal would give SCA ~30% of the European market share in the away-from-home tissue business and a 33% share in consumer tissue.

FOEX said in its Nov. 8 notes that the pulp market has deteriorated in response to the weakening of economic activity and, with it, paper demand in North America and Western Europe. “The deterioration shows more in prices than in volumes,” FOEX wrote. “The main driver for the weakening, in pricing terms, has not been the lack of demand as such but rather the large increase in actual production volumes.”

FOEX showed the NBSK index in Europe down $20.59 dollars, to $893.49/tonne, for the week ending Nov. 5. The NBSK price in euros rose by €3.19/tonne, to €648.73/tonne, reflecting the 2.7% weakening of the euro against the U.S. dollar from the previous week.

For BHKP, the price in Europe fell by $18.32/tonne, to $697.48/tonne, but in euros it gained 90 cents/tonne, to €506.41/tonne, FOEX reported.

China challenges. Some sources said net prices in China are essentially $650/tonne for NBSK, $640/tonne for BRKP, $630/tonne for SBSK, and $520/tonne for BEKP.

The announced China prices for November include $700/tonne for commodity NBSK (and $710/tonne for reinforcing-grade NBSK), down $80/tonne, and $670/tonne for bleached radiata kraft pulp (BRKP).

FOEX said that for the week ending Nov. 5, its NBSK index in China was $735.84/tonne, down $26.87/tonne, and that its BHKP price index dropped by $8.76/tonne, to $599.43/tonne.

Early this week Russia’s Ilim Group reduced its November BSKP price from $710/tonne to $670/tonne, saying that was the price at which Chinese customers would buy and the price it is holding for December. Also Ilim said its December price for BHKP is $550/tonne and that customers have accepted it.

Separately BCTMP prices are under challenge in China, with prices so close to that of hardwood kraft that customers are turning to the latter. High deinked pulp prices have also been causing some customers in North America to switch to hardwood kraft pulp.

It’s not that China hasn’t been buying pulp at all in fairly recent months. According to the Pulp and Paper Products Council, shipments to China in September, of 934,000 tonnes, were the fourth highest level ever. They rose by 21.0% over August and for the first three quarters of 2011, the deliveries to China soared by 36.0% compared to the year-ago period.

Though most people interviewed during London Pulp Week said the China market remains weak, a sales executive for a softwood and hardwood pulp producer said the bottom has been reached, that China has been buying a lot of pulp in the last week or so, and that prices are on the verge of improving. Though the NBSK list price is at $700/tonne, the net price could be from $630/tonne to $680/tonne, depending on the supplier, he said. He said Chinese customers would keep buying in December, since the pulp won’t arrive until February. Sales are likely to slow down in January in advance of the Chinese New Year celebrations, he added.

Other contacts’ comments were more along those of a BSKP supplier to China, who said the market is confusing and that it is difficult to determine the actual price. Another such source said it is necessary to travel personally to customers’ locations to get them to stick to their contracts. Concerns about the economy along with the high paper inventory in China make for “completely unchartered territory,” he added.

Sources noted that now is the time for traders to stock up so they can resell the pulp sometime next year when prices are higher. (Softwood pulp, not hardwood pulp, accounts for most of the pulp bought and resold by traders in China.)

Chinese customers “have not stopped buying, but it’s a matter of price,” said a sales executive for a BEKP supplier. A $550/tonne price is sustainable, but a $520/tonne price is not, he said, adding that he has heard speculation about spot pricing in the $510-$520/tonne range and “we know $530” has been done. The decline of prices in China to the bottom has caused some pulp production downtime in the country, he said.

Various sources gave differing accounts as to how much pulp inventory Chinese papermakers have on hand, ranging from normal to a lot. One estimate was for as little as one-and-one-half months.

Other markets in Asia, such as South Korea, are also seeing difficult markets, with papermakers holding large stocks of pulp as well as their own product. Paper demand is so weak that pulp prices are not necessarily the issue, although buyers are nevertheless holding out for further decreases, sources said.

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