FOEX Pulp & Paper Indices - Dec. 20, 2011

Kendall Sinclair

HELSINKI , December 20, 2011 (press release) – US NBSK – The good shipment volumes to China in Q4 have not been good enough to prevent the market from deteriorating further with the regional demand down with reduced paper production activity. More downtime has been announced for partly market-related, partly maintenance/re-build reasons. Spot prices are well below the contract price levels, also after taking into account the present discount levels in the contract business. Most producers have announced lower prices for December, typically down by 30 USD to 890 USD/ton from December 1. As far as we know, no public announcements have so far been made concerning the January 2012 pricing. Our PIX US NBSK index remained unchanged at 890.00 USD/ton.

US Newsprint – The financial results of the major newspaper companies have averaged better than what would be perceived, looking at the declines in newspaper readerships or newsprint consumption. For newspaper producers, going continues to be tough, however. With the strengthening of the dollar, export prospects are weaker, too, at least as far as pricing is concerned. Newsprint industry expects some support in 2012 from major events, including the presidential elections and the Olympic Games. The PIX US Newsprint 30lb index remained unchanged at 623.81 USD/ton, and the 27.7lb index at 664.58 USD/ton.

General economy: US – More hesitant signs of an economic recovery are coming out of the US. E.g. the homebuilders’ sentiment rose for the third month in a row. Americans are becoming less indebted; they are now averaging 11% of their income for debt servicing, the lowest number in over 15 years. Christmas sales appear to be doing OK. The House and the Senate have finally passed the legislation which will continue to collect a reduced payroll tax rate. It also extends the benefits for the long-term jobless through 2012. Both of these measures will help further the private consumption. In spite of these bits and pieces of positive news, there are many clouds still hanging over 2012. Private sector added jobs in November and unemployment rate fell to 8.6% but layoffs by states and cities risk raising unemployment again in 2012. The pessimistic mode prevails in US economy, hampering growth.

Europe – European Union finance ministers fell clearly short of their target of finding the IMF 200 billion Euros to support the heavily indebted member countries’ economies as both the US and the UK decided not to participate. The big question now is: will the common currency prove to be, at the end, unsustainable with such large differences between the member-countries with different fiscal policies? The measures to save the Euro itself and the nations in quasi-bankruptcy may well have come too late to heal the badly deteriorated fundamentals. The measures already taken or about to be taken to reduce the indebtedness restrict the growth too much. Manufacturing and service sector expectations are both well below the 50-point benchmark. Euro-zone and, with it, the European Union are now highly likely to slide back into a recession. The analysts are getting unanimous on those expectations. They also agree that the recession will not last very long.

Japan – Bank of Japan’s December survey showed weakening of the business sentiment and Q4 growth risks being lower than the 1.4% rate recorded in Q3. November’s Purchasing Managers’ Index value was at 49 points in the contraction zone. The Japanese economy is likely to face further challenges in 2012. The distress of Europe keeps the Yen uncomfortably strong. Japanese government is taking measures to stimulate the domestic demand with little success so far. Unemployment is low but rising anew. The reconstruction investments and a possible Trans Pacific Partnership could help Japanese export industries in a slightly longer term. Meanwhile, the 2012 GDP-growth estimates have been revised downwards to 2%, or even below.

China – China’s economy is clearly slowing down. The good news is that inflation is loosening its grip on China. Housing inflation cooled off to its lowest level in November with the recent rapid slowdown of the property market. The bad news is that layoffs risk increasing substantially and could trigger more social unrest. Beijing is gearing to start stimulating the economic growth anew as the demand for Chinese export goods is beginning to fade away. China is planning to maintain an “appropriate” investment level in 2012, probably not as high as in 2011 (18% growth) but high enough to support the government’s 2012 GDP-growth target of over 8%. Their aim is to encourage investments which support the household consumption and increase the social security funding. Banks’ reserve requirement ratio was already lowered and new reductions of other measures are expected soon. The 2012 GDP-growth expectations have been pulled down towards 8% and some analysts’ projections start with a 7.

Paper industry – In the US, the market data on November has been rather encouraging. The still partially preliminary data suggests that declines in printing and writing paper demand were smaller than what they had been in the previous months. Packaging sector was actually up, even if by just 1%, compared to November 2010 and operating rates were good. So, even if the year as a whole has turned out to be disappointing, the final months are less down from 2010 than the cumulative total. Companies’ profits have started to improve with some of the earlier cost rises falling back. Several companies have announced or are planning to announce purchasing back their shares. In Europe, the November statistical data is not out yet. Quite weak market pulp consumption numbers from UTIPULP suggest that paper production and consumption remained in November. October paper production was down by over 7% compared to October 2010. Cumulative numbers over the first 10 months from CEPI show much less decline, due to the relatively good start for the year. For graphic papers the cumulative drop was 2.1%. Total packaging was down by 1.3% but the cumulative production of household and sanitary grades was up by 1.2%. The grand printing and writing total followed the packaging with a 1.3% drop. Paper price negotiations continue with limited results, at least in public.

NBSK pulp Europe – The most recent numbers confirm the perceived weakness. European market pulp consumption numbers, published by UTIPULP, were down in November by as much as 8% against November 2010. Softwood pulp lost 50 000 tons. Total market pulp inventories at consumers were down marginally, or by 0.7% from October but BSKP stocks were minutely up. Compared to last year or to longer-term history, consumer stocks are low. Port stocks moved back up by nearly 4% after the big drop seen in October, and were 43% higher than a year ago. The strengthening of the USD puts further downward pressure on the price of pulp in dollar-terms. EUR weakened by 2.4% against USD from the previous week. Our PIX NBSK index continued to fall, this time by 7.75 dollars, or by 0.92%, and closed at 838.63 USD/ton. With the stronger USD, the PIX NBSK index, converted into Euro, moved up by 9.56 euro, or by 1.51%, ending at 641.94 EUR/ton.

BHK pulp Europe – With woodfree paper production in CEPI countries down by more than 10% in October and with weakness obviously persisting also in November, the demand for market BHKP remains lacklustre although the growth in the tissue sector and the wide price gap between softwood and hardwood helps. UTIPULP’s November numbers showed BHKP consumption down by about 7% against November 2010 as well as against October 2011. Consumer inventories were down by 5000 tons against October and by over 6%, compared to November 2010. EUR weakened by 2.4% against USD from the previous week. With the dollar-strengthening, the PIX BHKP index-value in EUR moved further up by 10.47 Euro, or by 2.16%, and closed at 496.26 EUR/ton. The PIX BHKP index value in USD lost 1.87 dollars, or 0.29%, and closed at 648.31 USD/ton.

BHK pulp China – The Chinese New Year is approaching and typically the Chinese paper mills take downtime at that time. That impacts the willingness to receive pulp in the preceding weeks. Consequently, the December intake is likely to be lower than the likely high shipment numbers to be recorded for November. The buying activity has quieted down. The ordered closures of the non-wood pulp based paper mills could support woodpulp purchases in early 2012 if the closures are timed as ordered. While some sources report of slightly higher pricing of the lowest quotes in the recent past, the PIX China BHKP still retreated further, this time by 5.82 USD/ton, or by 1.03%, and closed at 557.02 USD/ton. Yuan strengthened by 0.1% against USD, compared to a week ago. The conversion of the USD value into Yuan resulted in a drop of 40.89 RMB, or by 1.15%, to 3526.06 RMB/ton.

NBSK pulp China – Gradual price erosion has continued also in softwood pulp. Price gap between softwood and hardwood pulps is clearly smaller than in Europe but still over 100 USD/ton which is enough to encourage consumers to switch from BSKP to BHKP, if technically feasible. The weakening of the dissolving pulp prices is likely to delay the planned switches from paper grades to dissolving pulp, either in softwood or hardwood. Recent demand for BSKP appears to have been relatively good and at least one NBSKP producer has announced to his customers a price increase to 670 USD/ton. Our PIX China NBSK index fell by 2.18 USD/ton, or by 0.33%, and closed at 667.44 USD/ton. Yuan strengthened by 0.1% against USD. The conversion of the USD value into Yuan meant a decrease of 18.62 RMB, or by 0.44%, to 4225.04 RMB/ton.

Newsprint – The readership continues to fall and readers continue to switch to reading their news from tablet reading devices. While consumption and production have been below last year’s levels over the past few months, newsprint production over the first 10 months was still up by 0.6%, according to CEPI. In 2012, production capacity will be slightly lower than in 2011, with some closures already announced and more possibly still to come as the restructuring of the industry continues. Very little has been heard from the on-going early 2012 price negotiations. The EUR weakened against the weighted basket of non-EMU currencies by about 0.9%, which helped the benchmark higher. The PIX Newsprint index inched further up by 81 cents, or 0.16%, to 512.34

LWC – In North America, the coated woodcontaining paper demand remains weak. Consequently, the exports from Europe are not expected to improve, even if the exchange rate changes make the US market relatively a bit more lucrative. In Europe, order books remain thin. Production was up marginally, or by 0.8%, over the first 10 months but the latest months have shown declines compared to the corresponding months in 2010. The approximately 0.9% weakening of the EUR against the weighted basket of non-EMU meant an upward push on our benchmark. The PIX LWC index moved up by 3.01 EUR, or by 0.43%, to 704.05 EUR/ton.

Coated woodfree – In North America, the slightly better economic activity during Q4 has reduced the rate of decline of the coated woodfree demand to 2-3% against the cumulative drop of 4.5%. In Europe, the development has been the opposite. The latest months have shown more decline than the annual average. While the first 10 months’ production was down by little over 6%, October production fell 14% short of October 2010. Downtime is being taken at some mills and permanent closures will be seen at the turn of the year, in addition to the Biberist closure seen already last summer. The 0.9% weakening of the Euro against the weighted basket of non-EMU currencies had an upward impact on the benchmark. The PIX Coated woodfree index headed up by 3.43 EUR, or 0.48%, to 715.95 EUR/ton.

Uncoated woodfree – The picture is very similar to that in coated grades. The rate of decline has been flattening in the US compared to the annual average of about 3%. In Europe, the year-to-date drop in production is nearly 5% but in October, production fell by nearly 12%. Also in uncoated woodfree, some downtime is taken to match the supply better to the demand. Also, at least 400 000 tons of production capacity will be permanently idled at the turn of the year. The roughly 0.9% weakening of the Euro against the weighted basket of non-EMU currencies meant an upward push on the benchmark. The PIX A4 B-copy index headed higher by 52 cents, or by 0.06%, and closed at 872.38 EUR/ton.

Containerboard Europe – In the US, November box shipments were released by the Fibre Box Association showing a 1% increase over November 2010. Inventories moved up more than the seasonal average, however. Containerboard shipments were up slightly more than the box shipments, or by 1.6%, and the operating rate remained high at 96.5%. Exports have done well over the year but are likely to face difficulties now with the USD strengthening and with prices in the key export markets heading lower. In Europe the first 10 months’ production was in case making materials down by 1.2% but also in these grades the latest months have been below the annual average. Order books have been thinning. Over-capacity in linerboards persists. The currency movements reduced again the downside pressures on our packaging indices. Euro weakened by 2.4% against the USD and by about 0.9% against the weighted basket of the non-EMU currencies. In spite of the help from the exchange rate movements, most of our packaging benchmarks continued to trend further down. The PIX Kraftliner index retreated by 3.13 euro, or by 0.58%, to 539.39 EUR/ton. The PIX White-top Kraftliner index moved back up by 48 cents, or by 0.06%, and closed at 778.60 EUR/ton. Our PIX Testliner 2 index declined by 5.00 euro, or by 1.11%, settling at 447.02 EUR/ton. PIX Testliner 3 index fell even more, i.e. by 9.47 euro, or by 2.25%, landing at 410.85 EUR/ton. Our PIX RB Fluting index declined by 8.68 euro, or by 2.13%, to 398.55 EUR/ton.

Recovered paper Europe – With downtime taken at paper and board mills, demand for recovered paper has been weak. Low paper consumption means, however, also reduced recovery potential. Inventories of RP at the collectors and paper mills are low. Somewhat livelier demand in China in December compensates the weakness reported from the European market. While some price increases have been reported from the Chinese market, the European regional prices continued to trend down. The PIX OCC 1.04 dd benchmark lost 2.41 euro, or 2.14%, and closed at 110.10 EUR/ton. As the liner and fluting prices fell more, the price gaps narrowed. Against Testliner 2, the gap was reduced by 2.59 euro to 336.92 EUR/ton and against Testliner 3 the differential narrowed by 7.06 Euro to 300.75 EUR/ton. Against RB Fluting, the gap tightened by 6.27 euro to 288.45 EUR/ton. Our PIX ONP/OMG 1.11 dd index retreated by 5.91 euro, or by 4.32%, landing at 131.01 EUR/ton. As the PIX Newsprint benchmark inched up, the differential to PIX ONP/OMG 1.11 widened by 6.72 euro to 381.33 EUR/ton.

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