FOEX Pulp & Paper Indices - Nov. 15, 2011

Kendall Sinclair

HELSINKI , November 15, 2011 (press release) – US NBSK – Several key producers announced a 30 dollar decrease in the gross price of NBSKP for the US market for November, bringing it to 920 USD/ton. The gap to hardwood pulp is also in the US market exceptionally wide. There is also a wide gap between the spot offers and the contract price within NBSKP grade, even after taking into account the large discounts granted, as always, from the contract prices. The spot volumes typically increase in winter time when logistics to deliver pulp outside the continent become more difficult and when the northern mills find it very costly to take downtime. So far the spot volumes appear not to have risen, maybe partly because the net prices are uncomfortably close to the cost break-even point. Our PIX US NBSK index remained flat at 920.00 USD/ton.

US Newsprint – The price of the US newsprint announced by most of the key suppliers has remained unchanged at 640 USD/metric ton for over a year now, in spite of the continuous fall of the US newsprint consumption. Good export performance has obviously helped the producers’ efforts. The strength of the Canadian dollar and the other non-US supplier currencies has supported the unchanged price structure. Our benchmark values have been below the announced gross contract prices but have also remained virtually flat for a prolonged period of time. The PIX US Newsprint 30lb index remained at 623.80 USD/ton, as did the 27.7lb index at 664.58 USD/ton.

General economy: US – US economy appears to have done better-than-expected in September-October and this smoother run may last over Q4. Inventory re-builds and a small private spending increase helps. In fact, a fairly large portion of the US economy is not doing badly. Major concerns remain over the high unemployment which will restrict the household consumption at a little longer term. Also, housing itself and several sectors related to home construction continues to have major difficulties. In 2012, the US economic growth is highly likely to slow down anew. The political problems to pass the legislation needed for economic growth worsen when presidential elections get nearer. European debt crisis is likely to hurt exports both through the lack of demand and through euro-weakening against the USD. OECD lowered their US GDP-forecast from 3.1% to 1.8%.

Europe – Merkel’s words: "The hard part is that this crisis was not created overnight. It is the result of decades of mistakes, and we can't solve it in one fell swoop. We have a long, tough road ahead of us." describe well the situation in Europe. The financial market as well as the man from the street wait for a “quick-fix”, a “miracle solution”. There are none. It may be necessary to “buy time” with unsatisfactory solutions on the road back to a far-from-perfect but better-functioning Europe and European economy. Patience is badly needed. Capital run outside Europe must be stopped. Europe is likely to see a double-dip in Q4 2011-Q1 2012, hopefully not longer. Productivity in the European Union has been falling very fast. Construction activity is contracting.

Japan – Rising or not? In July-September, Japanese economy grew at an annualized rate of 6%. Much of this growth came from an increase in exports which are now cooling off rapidly. Chinese are not buying when driving down their inventories and e.g. the Thai floods play a role in Japan. Yen has strengthened again and the robust growth of Q3 may be hitting a wall pretty hard. In spite of the reconstruction activity picking up pace, some analysts expect the drop in the external demand to drive Japan back to a negative growth in Q4, before a modest recovery replaces the downfall in 2012. The funds for reconstruction granted in last week’s extra budget will help. IMF’s latest forecast pegs Japan’s GDP-growth in 2012 at 2.3%, much in line with the consensus of the other forecasting bodies.

China – OECD’s composite leading indicator showed a marginal decline in their September survey, leaving China with an index value of 99.8 suggesting a further minor decline in the economic growth rate but no hard landing. Chinese economy cannot escape the ill-effects of the global slowdown. Even if the domestic sector continued to grow at a strong pace, which it may will, the exports are likely to grow less than in previous years. Already in October, exports grew at a slower pace, “only 16%”, compared to 18% in September and 23.5% in August. The slowdown of the inflation supports the real growth momentum but in 2012, the real GDP-growth is unlikely to exceed 9% and, as the risks are mainly on the downside, will probably be a bit less. Chinese government is likely to start releasing the presently very tight fiscal policy in early 2012, if not already in Q4 2011.

Paper Industry – The first data over October confirms what the seasonally weak order books had been indicating; the decline of paper demand in the industrialized world continues. US printing and writing paper shipments were down by 3.4%. This decline was considerably smaller than the one seen in September, however, partly due to the lower number of comparison. The improvement seen in the short-term economic outlook probably played a role, too. A more genuine reason of joy was the clear, although uneven, improvement of the profit margins of the US paper companies during Q3. This was a combination of productivity gains, fibre price movements, active cost control measures, currency assisted export performance and relatively firm product prices, supported by the capacity closures and other measures adjusting the companies’ production to the level of the order books. Things are less fortunate in Europe. Order books have been weak in printing and writing papers through most of the year but have recently grown thinner also in the packaging sector. Some of the smaller speciality grades are still doing OK and tissue remains more or less flat against last year. Export performance has been mixed but has, in general, weakened during the 2nd half, partly due to the continuously over-valued Euro. The offer of SCA to acquire Georgia-Pacific’s tissue business in Europe would, if approved, give SCA a 30+% market share in European tissue business.

NBSK pulp Europe – Fibre prices continue to head southwards. The decline of producers’ stocks in September did not help. The imbalance between the good shipping numbers and the buying performance of the paper makers was too clearly visible. The further weakening of the economic outlook in Europe renders the paper production budgets uncertain. This has made it more difficult to agree on the tonnage and grade break-down in the annual/multi-annual pulp purchasing agreements. Signing of the contracts typically timed over the Pulp Week in London was in several cases postponed until later date as terms could not be agreed upon. Prices continue to trend lower. EUR weakened by 0.9% against USD from the previous week. Our PIX NBSK index continued to fall, this time by 10.70 dollars, or by 1.2%, and closed at 882.79 USD/ton. The PIX NBSK index, converted into Euro, declined by 2.00 euro, or by 0.3%, ending up at 646.73 EUR/ton.

BHK pulp Europe – The growth of integrated (and market) pulp supply in Asia during 2011 has limited the positive impact of the wide price differential between hardwood and softwood pulps on market BHKP supply/demand ratio. The big difference in the growth rates seen during the first half has narrowed, though, indicating that the expected furnish change in favour of hardwood pulps is taking place. Downtime announcements have been seen mainly from Indonesia and China. EUR weakened by 0.9% against USD from the previous week. The PIX BHKP index-value in EUR retreated by 5.24 Euro, or by 1.03%, and closed at 501.17 EUR/ton. The PIX BHKP index value in USD lost 13.38 dollars, or 1.9%, and closed at 684.10 USD/ton.

BHK pulp China – After a very quiet period in purchasing in October, buying activity came partly back in early/mid November. It is, however, doubtful that the intake of pulp would be in the level of September shipments, as reported by PPPC, which volumes largely arrived to China in October. Also, L/C’s are still not easy to get. Spot volumes are available at low/mid 500’s for prime quality BEKP and even below that for other hardwoods whilst most of the contract volumes are traded at around 580-600 USD, 50 USD below the announcements and prices seen in October. The PIX China BHKP index continued to retreat, this time by 16.93 USD, or by 2.8%, and closed at 582.50 USD/ton. Yuan weakened very marginally, or by 0.03%, against USD compared to a week ago. The conversion of the USD value into Yuan resulted in a drop of 106.06 RMB, or by 2.8%, to 3694.33 RMB/ton.

NBSK pulp China – The strong resistance by the Chinese buyers and the low intake volumes pulled the prices below the levels announced by producers for October before the end of the month and prices have kept on falling in November. There have not been recent announcements of NBSKP prices in China after the drop of 60-80 dollars announced by some producers already well in October over the month of November. Radiata pine from Chile has been quoted at 670 and Russian BSKP at 710. Spot lots of NBSKP have been reported to be offered/sold at 640/660 USD but it is not clear if L/C’s have been obtained for these lots as the credit availability problems have continued. Our PIX China NBSK index retreated by 29.14 USD, or by 3.96%, and closed at 706.70 USD/ton. Yuan weakened by 0.03% against the USD. The conversion of the USD value into Yuan meant a decrease of 183.20 RMB, or 3.93%, to 4482.03 RMB/ton.

Newsprint – After the very weak month of September, both in terms of regional demand and exports, newsprint demand had fallen by just over 1% over the first 9 months in Europe against the already muted performance of 2010. Total shipments were down by 2.6% with a 15% drop in exports outside Europe weakening the total outlook. There are no signs of improvement during Q4 from the market. Prices have seen only small variations on both sides of the Atlantic since the summer. The EUR weakened by about 0.3% against the weighted basket of non-EMU currencies, which supported a small rise in the benchmark value. The PIX Newsprint index moved up by 52 cents, or 0.1%, and closed at 511.16 EUR/ton.

LWC – In the US, October shipments were down by over 6%. In Europe, UPM has made the final decision to close the Myllykoski unit in Finland, removing 230 000 tons of coated and 370 000 tons of uncoated mechanical printing paper capacity from the markets by the end of this year. Insufficient demand and weak cost-competitiveness position of the mill have been cited as the main reasons for the closure. Despite a small improvement of order books in October, LWC market remains weak. The approximately 0.3% weakening of the EUR against the weighted basket of non-EMU currencies gave the benchmark a small push upwards. However, the PIX LWC index lost 46 cents, or 0.07%, landing on 699.55 EUR/ton.

Coated woodfree – In the US, coated free sheet shipments surprised positively with a minor 0.6% increase in shipments in October, one of the few monthly increases reported in a major grade since last spring. In Europe, the demand remains tepid. The exit of coated mechanical paper capacity from the turn of the year will, indirectly support also CWF supply/demand balance. Falling fibre costs, both chemical pulp and pulp substitutes, helps paper makers’ margins. The 0.3% weakening of the Euro against the weighted basket of non-EMU currencies provided, in theory, a minor boost to the benchmark. Still, our PIX Coated woodfree index retreated minutely, i.e. by 2 cents, or by 0.00%, to 714.42 EUR/ton.

Uncoated woodfree – In the US, uncoated free sheet shipments continued their long string of negative comparisons against 2010 with a still preliminary 2.1% decline in shipments. In Europe, September was little less negative than the average of the earlier months but demand in Europe is still down over 6% against 2010 and the outlook over the final quarter does not appear any better. The roughly 0.3% weakening of the Euro against the weighted basket of non-EMU currencies helped the benchmark value higher. The PIX A4 B-copy index moved up by 1.14 EUR, or by 0.13%, and closed at 877.72 EUR/ton.

Containerboard Europe – The weakness of the European economy and the even weaker near-term future outlook depress the demand for packaging products. After a good start for the year, supported by the export boom in Germany, containerboard demand has gradually weakened and is already at/slightly below the 2010 volumes. The threat of a double-dip during Q4 2011 – early 2012 dims the outlook further. The drop of the demand and prices of recovered paper is reflected also in the pricing of containerboards, especially over the recycled grades. With limited amounts of downtime taken, at least for the time being, inventories have not come down. Relative to the recent shipment volumes, they have probably risen. With a further decline of the order books and with the over-supply environment, prices have been declining for all the brown grades, including virgin fibre kraftliner. White-top grades have been more firm, both volume as well as price-wise. The currency movements meant, theoretically, a small upward push on our packaging indices, as the Euro weakened against both the USD (by 0.9%) and the weighted basket of the non-EMU currencies (by about 0.3%). Our PIX Kraftliner index retreated by 4.44 euro, or by 0.8%, to 555.00 EUR/ton. The PIX White-top Kraftliner index moved up by 30 cents, or by 0.04%, closing at 783.63 EUR/ton. Our PIX Testliner 2 index declined by 7.31 euro, or by 1.55%, settling at 465.44 EUR/ton. PIX Testliner 3 index came down even more, i.e. by 10.10 Euro, or by 2.3%, landing at 430.04 EUR/ton. Our PIX RB Fluting index declined by 9.55 euro, or by 2.2%, to 422.68 EUR/ton.

Recovered paper Europe – Demand pull from China and other Asia has been lacklustre and export prices have been on their way down. Reduced regional demand and lower, at least temporarily, export volumes have created an over-supply situation. Consequently, the erosion of the recovered paper prices has continued, covering virtually all grades and all European markets. The same applies to the US market where the price erosion has been even bigger than in Europe. Most analysts expect the export volumes to move back up, possibly even soon, when the Chinese RP inventories have melted and the buyers return. Our two indices continued their recent downward trend. The PIX OCC 1.04 dd benchmark lost 4.20 euro, or 3.23%, and closed at 125.85 EUR/ton. As the testliners and RB-fluting prices fell even more, the price differentials narrowed. Against Testliner 2, the gap narrowed by 3.11 euro to 339.59 EUR/ton, against Testliner 3 by 5.90 euro to 304.19 EUR/ton, and against RB Fluting by 5.35 euro to 296.83 EUR/ton. Our PIX ONP/OMG 1.11 dd index went down by precisely 3.00 euro, or by 1.93%, landing at 152.41 EUR/ton. As the PIX Newsprint benchmark inched slightly higher, the differential to PIX ONP/OMG 1.11 widened by 3.52 euro to 358.75 EUR/ton.

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