Pulp price fall continues into December worldwide, closing in on the bottom; Fibria's price hike announcements may not stanch further erosion

Diane Keaton

LOS ANGELES , December 4, 2011 (Industry Intelligence) – Pulp prices are continuing to fall in December around the world, although the decreases are relatively modest now that prices are scraping the bottom or close to it, depending on the market, the grade, and the deal.

A few northern bleached softwood kraft (NBSK) Dec. 1 decrease announcements in recent days have provided guidance for some major markets. Bleached hardwood kraft pulp (BHKP) pulp prices are nearer to the bottom than those of bleached softwood kraft pulp (BSKP), so the December BHKP decreases in some markets might be relatively more modest.

Meanwhile, in the past week bleached eucalyptus kraft pulp (BEKP) producer Fibria Celulose SA of Brazil surprised many pulp players by announcing respective December increases for Europe and Asia, to US$730 per tonne (list) and $580/tonne (net-net). However, pulp players widely saw these as efforts to keep prices from falling any further.

Fibria didn’t make an announcement for North America, but the news regarding other major market caused considerable buzz in North America. A North American pulp buyer suggested that Fibria’s move was aimed at influencing contractual negotiations, which he said was “nonsense,” adding that prices “are transparent to any buyer.”

Fibria’s announcement for Europe was quickly followed by Spain’s Grupo Empresarial (Ence). But as of week’s end, other BEKP producers in South America were silent regarding both Europe and Asia. A source for one of the major producers said his company would not be making an announcement for December and that he expects December to “be the worst of it…fundamentally and psychologically.”

Buyers are likely “to take a chance” and not accept Fibria’s increase, coming as it does at the end of the year and at a time when producers’ inventories have been high, he said.

Sources said Fibria’s move appeared to be aimed at establishing a bottom. A market pulp consultant said that, given its financial situation, Fibria “is under pressure to do something.” If it doesn’t get an increase, “will it take downtime, will it build stock?” he asked, adding, “There’s too much pulp around to make a really firm stand, especially this time of year,” with sellers anxious to move pulp before the year’s end.

“There will be a lot of pulp around in December,” he said. “It will be a tough December, for sure.”

Pulp sources have been pointing out that December is traditionally when suppliers are eager to clear out inventory as customers are trying to reduce stocks before the year’s end, and that this year there is the added element of difficult economic conditions.

But on a more positive note for producers, a sales executive for a major producer in Europe commented that Brazilian producers were expected to have normal inventories by the end of November, with Fibria said to have sold a lot of spot tonnage in the past month and another key BEKP producer having ongoing technical problems affecting output.

Among the NBSK announcements in recent days, North American producers Canfor Pulp LP and Mercer International Inc. followed Domtar Corp.’s earlier-announced $30/tonne domestic decrease, to a list price of $890/tonne.

And Canfor Pulp announced a $20/tonne decrease for Asia, bringing its list price in China to $690/tonne (this is for the reinforcing grade; the commensurate commodity-grade NBSK price would be $680/tonne).

Both Celulosa Arauco y Constitución SA of Chile and Ilim Group of Russia had previously stated December prices of $670/tonne for their respective BSKP pulps. Ilim also announced a $550/tonne CFR port price in China for BHKP.

Looking at the Middle East spot market, some substantial December BEKP business has been conducted at a price “starting with a ‘5,’” down from $620/tonne in November, said a pulp agent, while a consultant said there has been business at $500/tonne. A sales executive for a European supplier said NBSK pricing of $600-$610/tonne in the Middle East is likely below costs of production.

Separately, on Nov. 16, Deutsche Bank paper and forest products industry analyst Mark Wilde reported that at an industry conference in Vienna, Ilim announced a new $1.4 billion capital program, to be funded from internal cash flows, for the building of a bleached paperboard machine at one mill and the expansion of market pulp capacity at two other mills.

On Nov. 9, Wilde forecast improved BEKP prices next year “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.”

In a Nov. 29 research note, Vertical Research Partners industry analyst Chip Dillon said his group sees Fibria’s move “more as an attempt to stop the relentless erosion seen since mid-year, when BEK prices crested for several months at about $875/tonne.”

Dillon’s group also still sees an upturn in the spring. “With the soft January/February period on the horizon, we could see prices fall even farther than even our below-consensus near-term forecast,” he wrote. “Nevertheless, we believe market pulp prices are now beginning to bottom (hardwood prices in China are basically there), and that the next broad global pricing upturn will occur in spring 2012.”

Dillon noted that prices have not bottomed in North America and commented that both softwood and hardwood pulp prices in North America are at much wider-than-normal premiums to those in Europe, with NBSK currently about $65/tonne (8%) higher in North America than in Europe, while BEKP prices are nearly $100/tonne (15%) higher.

Downtime angle. Market-related downtime has been adding up in recent weeks. And various sources report that some North American company heads plan to shut their operations if prices fall below their costs. Certain CEOs are putting the word out that they have in mind the prices at which they will order their mills to close, sources said.

As reported previously, Terrace Bay Pulp in Terrace Bay, Ontario (350,000 tonnes/year of NBSK), was to go down Nov. 30 for at least three months.

Paper Excellence’s 235,000 tonnes/year NBSK mill in Mackenzie, British Columbia, extended its scheduled maintenance downtime from early October and has not yet restarted.

Södra Cell AB is taking market-related downtime at some mills. Its 400,000 tonnes year (BSK/BHKP) Tofte, Norway, mill will shut indefinitely beginning the week of Dec. 11 and its 100,000 tonnes/year hardwood bleached chemi-thermomechanical pulp (BCTMP) Folla mill in Follafoss, Norway, will shut on Dec. 12. Also for market reasons, Södra is extending a maintenance shut at its 425,000 tonnes/year (BSKP/BHKP) Mörrum mill in Blekinge, Sweden, keeping it down from Nov. 19-Dec. 7; the lost production at Mörrum will be about 20,000 tonnes.

Also as previously reported, two Tembec Inc. high-yield (also known as BCTMP) mills have market-related downtime on the books: three weeks for the mill in Matane, Québec, and an additional week beyond a scheduled maintenance/capital improvements shut for the mill in Temiscaming, Québec.

In addition, Asia Pacific Resources International Holdings Ltd.’s (APRIL) hardwood pulp mill is taking 160,000 tonnes of downtime at its Riaupulp mill in Kerinci, Indonesia, in the fourth quarter, for both stepped-up maintenance and market reasons. The amount was reported as 120,000 tonnes in mid-November, but a knowledgeable source said it has since been increased. As previously reported, APRIL’s hardwood pulp mill in Rizhao, China, is tallying 50,000 tonnes of downtime.

North America slow. With the NBSK list price for North America down $30/tonne to $890/tonne in December, the southern bleached softwood kraft (SBSK) list price is also expected to fall by $30/tonne, to $850/tonne. SBSK decreases have followed the official NBSK announcements in each of the months of the current price downturn.

Three major North American producers have announced the NBSK $890/tonne price: first Domtar Corp., then Canfor Pulp LP and Mercer International Inc. As the market has softened over the months, either Domtar or Canfor Pulp has led with $20/tonne or $30/tonne decreases. Sources said these were aimed at controlling the slide domestically, a tactic that appears to have worked. “They’ve done well, for sure,” said a market pulp consultant. “The U.S. has been relatively solid.”

Sources have said for several months that certain NBSK producers have been knocking off additional amounts (often $20/tonne) before discounts. Noting the latest decrease, a customer named a company that “in many cases” gives an additional $20/tonne. Technically, he said, his list price is not $890/tonne, but $870/tonne less his percentage discount.

Also Terrace Bay Pulp’s effective December list price is $860/tonne; in previous months, the mill’s prices for North America have also been below those of competitors and at least some of its discounts have been above 20%.

A supplier said that current discounts are 17%-18%, having inched up over the years, and that in this weak market, buyers whose contracts are up for renewal are seeking 20%-21%, which he said is not feasible at current dropping list prices.

As for spot NBSK, there doesn’t appear to be excessive amounts available, but tonnes can be had, sources said. An agent said he could get a couple thousand tonnes if necessary, say 1,000-2,000 tonnes from British Columbia earmarked for export if the pricing is right. And an Eastern buyer said he hasn’t seen efforts to unload 1,000 tonnes, or West Coast producers wanting to ship to the East Coast rather than to overseas; apparently it still pays them to sell to China, he said. Also the agent said Terrace Bay Pulp is looking to sell off inventory during this downtime period.

The agent said NBSK spot prices are mostly in the $680s and $690s/tonne, out of a $670-$700/tonne range, down from November’s $690-$720/tonne range, which was about $30/tonne lower than in October. A buyer said November spot prices were around $690-$720/tonne, with December prices heading down $30/tonne. Considering the percentage discounts needed to arrive at current spot prices, he said effective list prices are more on the order of $850-$870/tonne, rather than the announced $890/tonne.

NBSK buyers “can get another month or two of decreases” in spot prices, but after that, they can expect to see mill closures, the agent said.

And the buyer said a couple of suppliers have told him that $850-$870/tonne is the bottom. By the time suppliers factor in discount percentages in the high teens and tack on $75/tonne or so in freight, the mill nets are too low to make a profit, he said, adding, I’ve had more than one supplier say they won’t sell pulp below cash costs. If mills do that, they will turn the market.”

Looking at BHKP, a sales executive for a company that sells several pulp grades said he expects a $30/tonne December decrease for BHKP, as well, though it won’t be formally announced.

One exception was on Dec. 2, when Alberta-Pacific Forest Industries Inc. (Al-Pac) announced a $20/tonne Dec. 1 decrease for its aspen-grade NBHK, to $715/tonne, that is, down from $735/tonne. Another company is said to be looking at a $700/tonne price. (Al-Pac also followed the $30/tonne NBSK reduction, to $890/tonne).

Al-Pac’s $735/tonne NBHK price is close to the RISI Inc. November NBHK price of $730/tonne, which was $45/tonne below its October price of $775/tonne price.

RISI’s BEKP price of $770/tonne was down $55/tonne. Toward the end of November a North American customer said he had received BEKP spot offers of $620/tonne and $640/tonne.

Various buyer and seller sources said they had not expected RISI to drop BHKP prices so much in November. Although they generally said the new prices were more in line with the market reality, some commented that the November prices didn’t actually drop by $45/tonne in one month and that meanwhile RISI’s prices for the previous month or two had underplayed the extent of the price slide that was well underway. “It’s an arbitrary number,” said a U.S. pulp agent. “They should have dropped more in September and October.” Some sources said BHKP list prices in North America still don’t reflect reality, since spot prices are so low (mostly now in the low $500s/tonne).

One of the supplier sources said the size of the drop “was good in one regard for closing the gap with the spot differential” because, he said, if the list price is too far from the spot price, it upsets regular contractual customers who are obligated to take their tonnes and therefore unable to take full advantage of the spot deals.

Supplier, buyer, and agent sources said December NBHK spot prices are generally in the low $500s/tonne, whereas, they said, overall business in November was mostly in the mid-$500s/tonne. They said this is the bottom or very close to it, before mills can no longer afford to run.

One of the buyers said he doesn’t expect more than a $10-$20/tonne decrease for NBHK in December. He said the price of regular spot business in November was $550-$560/tonne, with December at $530-$540/tonne, and he expects January and February NBHK pricing to be flat. He said BEKP isn’t at the bottom and that softwood “has another $20-$40 left for January.”

A supplier said that the going rate in early November was in a range of $500-$550/tonne, but that December is likely to be in the lower range.

An agent said the November NBHK range was $550-$575/tonne; for December, he said, “There is still a lot at $530-$520.” January could see another $5-$10/tonne reduction, depending on the December starting point, he said, but hardwood pulp prices already are “definitely” close to the bottom. Noting production changes or problems at a few mills in the U.S. Northeast, he said there is less spot hardwood pulp available in the last three or four weeks. “I think that’s what’s swinging the market,” he said. (Also a buyer named a mill in Eastern Canada that might be shifting to less NBHK and more NBSK over time.)

Referring to some of the spot numbers he is hearing domestically, a sales executive for a North American supplier of both softwood and hardwood pulp grades said, “There’s no way they are making money on some of that.” He said the bottom appears to have been reached on hardwood and that it is “very, very close” on softwood pulp. He said his company has been squeezed nearly to its cash costs. “We are certainly playing at those numbers,” he said. “We don’t want to for long.” He said his company’s management won’t allow it to sell at a loss or chase the bottom number down, and that it will instead slow or stop production. “It’s gotten to a point where folks have drawn a line in the sand. They can’t afford to go on,” he said. At least Fibria has tried to put a floor to the slide, he said, adding that he doesn’t see the market turning on “Dec. 1, Jan. 1, or even Feb. 1.”

Still the “Number One” factor in North America is the state of paper markets, an agent commented. Only the tissue and towel business remains pretty strong, he said, while not only commodity paper, but also specialty paper sectors and to some extent packaging, are seeing reduced operating rates. He said his customers currently they have reduced capacity in their mills by zero to 20%, compared to zero to 10% a couple of months ago and mostly zero in the early summer before the normal seasonal slowdown. Buying patterns didn’t improve after that, for market and economic reasons, foretelling the pulp market downturn.

But the agent said some papermakers, apparently seeing that the market has nearly bottomed, have been looking to make some spot pulp purchases. Those who have the cash to do so are expecting to hold on to the pulp until the second quarter, saving perhaps $20-$40/tonne when prices are expected to start moving up, he said. This has been a boost for suppliers, whose customers had barely been taking even their contractual tonnage, he said.

For the week ending Nov. 26, FOEX Indexes Ltd. said the price of NBSK in the U.S. stayed flat at the November list price of $920/tonne, the level to which it dropped at the beginning of the month.

“The pressure on contract prices continues with the gradual strengthening of the USD and with spot prices substantially below the contract price for NBSKP,” FOEX wrote in its Nov. 29 comments. In its Nov. 22 comments, FOEX commented that the continuing fall of prices in China and other export markets was putting increased price pressure on the U.S. market, as well, “as spot volumes from North America are more easily directed to the regional market, instead of exports.” And on Nov. 15, FOEX noted that spot volumes typically increase in the winter, when logistics to deliver pulp outside the continent become more difficult and when the northern mills find it very costly to take downtime, but it said that so far, spot volumes had not appeared to have risen, “maybe partly because the net prices are uncomfortably close to the cost break-even point.”

In other news in North America, on Nov. 28, Resolute Forest Products, formerly AbitibiBowater Inc., announced its intention to make a formal takeover for Fibrek Inc., for C$130 million in a mixture of cash (55%), company shares (45%), and assume net debt of C$96 million. Resolute has a current capacity of about 850,000 tonnes/year. Fibrek has a 375,000 tonnes/year NBSK mill in Saint-Félicien, Québec, and two recovered bleached kraft (RBK) pulp mills in the U.S. (in Menominee, Michigan, and Fairmont, West Virginia, with capacities totaling 385,000 tonnes/year, so the acquisition would bring Resolute’s capacity to 1.6 million tonnes/year.

Commenting on the move in a Nov. 29 research note, analyst Paul Quinn said this expansion into market pulp would offset Resolute’s 8% annual contraction in its core newsprint market and increase Resolute’s overall market pulp capacity by 76%. Quinn said “the only real negative” is that Resolute’s softwood mix would decrease from 75% to 64%.

Europe settles. Supplier sources contacted in recent days have not tried to gloss over the current market conditions in Europe. “The mood is not good in Europe,” said a BEKP seller. A sales executive for a major European producer said the market scenario “doesn’t look too good.” Given the paper downtime, “demand is not very good,” he said, adding that economic issues will make for a difficult market at least through the first quarter.

One of the sources noted that business must be finished by around Dec. 20 because of mill and transport holiday schedules until the end of the year.

Supplier sources put the November NBSK prices in northern Europe in the $860-$870/tonne range, down from $900/tonne in October, and in Italy at $830/tonne, down from $870/tonne in October.

(After this report was originally posted, a pulp agent in Italy said business was closed at $820/tonne for NBSK and that the BEKP price was $510/tonne net, with some spot hardwood volume "even below $500." He said major tissue producers are worried about price pressure and he named three in Tuscany that he said will take a minimum of 10 days of production outages at Christmas. This is unprecedented, he said, and in contrast to the usual holiday downtime just for Christmas and New Year's days.)

One of the producer sources said December prices in Northern Europe could fall to $830-$840/tonne. European customers “are buying what they have to buy—a whole wait-and-see attitude and their inventories are relatively low,” he said, describing the prices as having come down in “an orderly adjustment.” Depending on the exchange rate, he said, prices could drop to $800/tonne before what he expects is an improvement in the market starting in the second quarter of 2012.

Producers are especially vulnerable now to currency swings, he commented, describing them as like a yoyo. Suppliers “cannot run a business like that. It’s absolute chaos as long as you’ve got contracts,” he said, adding that expensive wood costs—he said €300/tonne—are a further blow.

Sources said November effective BEKP list prices in Europe were in the mid-$600s/tonne or so, largely down $30/tonne from October. Demand has been down and doesn’t show any immediate signs of picking up, they said. Most pricing in Northern Europe was around $660-$670/tonne but some is at $680/tonne and some was said to be as low as $650/tonne or, for Italy, perhaps a bit below that.

Early last week, as business was still closing, a sales executive for a BEKP supplier said business had been done in Italy for large-scale buyers at around $660/tonne, while smaller buyers in Italy were paying $670-$680/tonne.

As reported on Nov. 29, the supplier said Fibria’s $730/tonne announcement for December is “absolutely useful for stopping the market collapse” as well as for helping close business for November. “We think this is the moment of stopping this drop. The fundamentals of the industry are not that bad,” he said on Nov. 29. He added that the price collapse was driven by the political and economic issues in Europe, “not really the lack of demand for pulp.” And the December price is unlikely to go up, he said.

Some sources said the Fibria announcement is helping put the brakes on the extent of the decrease, but not necessarily stopping it altogether, and that December prices for some customers could go down to the low $600s.

(Fibria’s most recent previous price announcement for Europe was when it dropped its August list price by $30/tonne, to $820/tonne.)

For the week ending Nov. 26, FOEX said the price of NBSK in Europe was $869.62/tonne, down $5.30/tonne. This followed respective decreases of $7.87/tonne and $10.70/tonne in the previous two weeks.

The euro price was €657.36/tonne, up €12.90/tonne, reflecting the 2.6% weakening of the euro against the U.S. dollar the previous week. The price hike was in contrast to the previous two weeks’ respective decreases of €2.27/tonne and €2.00/tonne.

For BHKP, FOEX said the price in Europe was $665.19/tonne, down $8.23/tonne, following respective drops in the previous two weeks of $10.68/tonne and $13.38/tonne. In euros, the price rose by €6.79/tonne in the week ending Nov. 26, to €502.83/tonne; in the previous two weeks, it fell by €5.13/tonne and by €5.24/tonne.

China buys. With pulp prices scraping the bottom in China, the country’s customers stepped up purchases considerably in November, buying from major companies around the world, said sources, who described volumes sold by some key producers in this or that multiple of 100,000 tonnes.

After so much purchasing activity, and going into December and then an early Chinese New Year (Jan. 23), pulp players don’t expect strong activity in China until after the New Year celebrations.

Vertical Research Partners industry analyst Chip Dillon, in his Nov. 29 research note, said China may already have reached the bottom, saying resale market pulp prices having been virtually stable since late October, with softwood pulp prices transacting at $660/tonne (net) and hardwood at $525/tonne (net). “These levels are the lowest since 2009 and are $200-$250 per tonne below the peaks seen last spring,” Dillon wrote.

A market pulp consultant commented that it could be difficult for pulp producers to increase their prices anytime soon because papermakers, who are currently oversupplied, don’t appear to be ready to move up their prices.

The BSKP list prices in November in China were $700/tonne for NBSK ($710/tonne for reinforcing grade from British Columbia’s Canfor Pulp) and $670/tonne for BSKP from Russia and for bleached radiata kraft pulp (BRKP).

The December list prices are Canfor Pulp’s $690/tonne for reinforcing NBSK (down $20/tonne) and the unchanged Russian and BRKP prices. Another British Columbia NBSK producer (commodity grade) is also said to have a lower price in December, that is, $680/tonne, down $20/tonne, which also may have been its price in November, according to what some other producer sources said they have heard.

A sales executive for a major European producer said the China NBSK list price in November was $680-$700/tonne, with spot pricing in the $630-$650/tonne range. “It should be at the bottom and not go further down,” he said.

As reported in mid-November, some sources were saying that net prices in China were already essentially $650/tonne for NBSK, $640/tonne for BRKP, $630/tonne for SBSK, and $520/tonne for BEKP.

An agent doing business in China said the net NBSK price in November was $660-$680/tonne and that the December price will be down minimally. “It might be $10 or something like that,” he said. But suppliers are getting to the point at which they are not willing to go further on the price, he said, adding, “I’m told by some (North American) suppliers that they will take some downtime.” He said the absolute bottom might not occur until March or April.

Sources said the going November rate in China for BEKP was $530/tonne, so Fibria’s announced $580/tonne would amount to an increase of $50/tonne. A few supplier contacts said some net BEKP deals were even as low as $500/tonne.

For the week ending Nov. 26, FOEX the NBSK price in China retreated by $9.20/tonne, to $684.65/tonne. In the previous two weeks, the respective decreases were $12.85/tonne and $29.14/tonne.

FOEX said the BHKP price in China “came almost to a halt,” inching downward by just 36 cents, to $572.76/tonne, following respective drops in the previous two weeks of $9.38/tonne and $16.93/tonne.

In its Nov. 29 comments regarding BHKP, FOEX said, “Chinese buyers appear to have come back and have been buying relatively large volumes in mid/late November.” It said credit availability remains an issue with some small and medium-size buyers but that business of the large buyers and the activity through trading houses has reportedly been quite good. FOEX cited some local market analysts who said one or more integrated customers are buying market pulp, replacing their own pulp production from imported high-cost wood.

(In a Nov. 23 research note, analyst Mark Wilde said trade contacts report that high-cost integrated mills in China are shutting down their pulp lines and buying pulp on the open market.)

According to Wood Resources International (WRI), hardwood prices have risen by an average of 14% during 2011, FOEX wrote.

FOEX said long fiber pulp purchases are reported to be livelier than before, too, although not to the same extent as those for BHKP. It noted that the price differential between softwood and hardwood is still above average at $110-$120 dollars/tonne. Overall for the year, BSKP shipments to China remain larger than those of BHKP, FOEX commented.

October pulp imports to China reached 1,200,433 tonnes, for an increase of 1.2% over September and a 44.7% jump over October 2010, according to China Customs Bureau statistics. For the first 10 months of 2011, China imported 11,675,717 tonnes, for a 28.4% increase from the same period in 2011.

Korea prices. Korean papermakers continue to struggle with high costs and competition in export markets, all affecting pulp demand and prices. October pulp prices fell and November prices were also deteriorating, a Korean pulp agent said several weeks ago.

In October, the net prices were about $770/tonne for NBSK and about $720-$730/tonne for BRKP and SBSK, he said, adding that China spot prices were much lower than that and that Korean customers have reduced their BSKP consumption due to high prices. He said the ratio of BSKP pulp is only 10%-15% of total pulp consumption purchased on contract.

He said the BEKP net price was about $600/tonne in October, with Indonesian mixed tropical hardwood (MTH) pulp around $570/tonne for contract volume. He said prices have decreased further since then.

October was a struggle in Korea for BCTMP suppliers because in September, BCTMP was priced between that of BEKP and Indonesian MTH, and customers wanted BCTMP to be more competitively priced with BHKP, so they reduced consumption, the agent said. This was in contrast to the last quarter of 2010 and the first quarter of 2011, when BCTMP was priced as much as $50-$80/tonne less than that of BHKP, leading customers to shift to BCTMP, he said, thus increasing their consumption of it by 18%-20%. Even with the $30/tonne decrease in October, buyers were not satisfied and they have shifted to more “normal” use of BCTMP, he said.

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