FOEX Pulp & Paper Indices - Jan. 17, 2012

Kendall Sinclair

HELSINKI , January 17, 2012 (press release) – US NBSK – The recent decline in softwood paper grade pulp prices has spread into the fluff pulp sector which, together with weaker fluff pulp demand growth may slow down the switch from paper pulp to fluff pulp at mills in conversion process. Paper grade NBSKP supply stoppage continues at Terrace Bay beyond the announced March 1, 2012. Even if much of this pulp has been exported outside NA, it will limit supply of market NBSKP. Facing the weak paper market and low softwood market pulp delivery rates to the regional market, several producers announced a price decline to 870 dollars from the turn of the year. Our PIX US NBSK index retreated again, this time by 10.96 USD, or by 1.23%, and closed at 876.90 USD/ton.

US Newsprint – Supply of newsprint continues to go down, following the structural weakening of the demand. White Birch announced a permanent closure of the Stadacona mill after the negotiations with the union failed to lead to necessary cost reductions. Also, the potential restart of the earlier closed Port Hawkesbury mill will not apply to the newsprint capacity on the site. December delivery data has not been released and the press as well as the companies involved have remained very quiet over the results, if any yet, from the year-turn price negotiations. The PIX US Newsprint 30lb index retreated by 24 cents, or by 0.04%, and closed at 623.61 USD/ton. The 27.7lb index value fell by almost the same amount with a 25 cent, or 0.04%, drop to 664.32 USD/ton.
Jan 17, 2012

Pellet Nordic - The supply of industrial pellets and other woody bio-mass continues to grow at least as fast as the demand and the recent over-capacity situation persists. The mildness of the winter in the Nordic region as well as in large parts of North America has reduced the demand pull for climatic reasons. Relatively low prices of fossil fuels are another driver keeping a lid on demand growth. Overall demand is increasing, however, virtually around the world. Conversions of fossil fuel consuming plants to bio-fuel installations continue with RWE’s conversion of a coal power plant to bio-fuels as an example. Also in Finland and Sweden, the installations of power plants using pellets or forest residues continue.

On the supply side, the output of forest residues is up. In the Nordic area and northern parts off the Continent, severe winter storms in December & January knocked down at least 10 million cubic meters of wood, adding to the residual supply. In North America, especially on the West Coast, the barking of logs to be exported to China has led to an over-supply of bark in the region. Excess supply of bio raw materials has not allowed to bring prices to levels budgeted when making the investments.

Our Nordic industrial pellet benchmark value reflected the mildness of the winter and the over-supply situation and again headed lower, even if only moderately, in Swedish Crowns. However, in Euro-terms the benchmark value headed slightly higher, reflecting the weakening of the Euro against the Crown, USD and several other currencies . Our now reported Nordic pellet index value in December moved up, compared to the November prices, by 34 cents/MWh, or by 1.14%, and closed at 30.23 EUR/MWh.

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Jan 17, 2012

General economy: US – The recession in Europe and slowing down of the growth in Asia and in some Latin American trading partners continue to pose a threat also on the US economy. Other than that, most of the economic indicators have come up with positive surprises in the US. This encouraging news comes mainly from the job market with new jobs being added in the private sector and with the unemployment rate falling. Consumer sentiment hit an eight-month high in early January as Americans grew more optimistic about job prospects. As cautiously more optimistic tone prevails also in industrial activity and even in the still depressed housing sector, the short-term outlook is rather for a better than weaker growth rate. Key interest rates remain close to zero and credit availability has improved. The US GDP forecast over 2012 has been revised slightly upwards to 2.1-2.3%. Consumer price inflation is coming down, helped by the USD strengthening. After over 3% inflation in 2011, the 2012 estimate is at or marginally below 2%.

Europe – The expected downgrading of the Euro-zone sovereign state debt ratings was seen last Friday with ratings of 9 nations taken down by one or two steps and with only four Euro-zone countries now left with a triple-A rating. Furthermore, no agreement was reached between the Greek government and the banks in the negotiations to have private sector participating in the saving of Greece from defaulting. These events underline the weakness of the European economy, in spite of some faint positive signal received over the performance of the EU economy. Euro continued to depreciate, approaching finally the long-term average level against the USD. This could turn out to be the one driver saving Europe from a deep double-dip. Inflation is still running above 2% and the ECB left the key interest rates unchanged last week against the hopes of most experts for another drop. The Euro-zone GDP growth for 2012 is now expected to be negative for the annual average by about 0.3-0.4%.

Japan – The good news is that the new machinery orders appear to have picked up at the end of 2011 supporting the growth in early 2012. The rise of ISM new order data from the US is encouraging for the Japanese export outlook. But total cash earnings are falling. Consequently, domestic consumption continues to drag its feet and domestic (or Europe) related industries are expected to suffer through the first half of 2012, if not longer. Prices are falling and the deflation mode persists. With deflation, even the smallest nominal growth means positive real growth. Japanese GDP is still expected to grow, in real terms, by nearly 2% in 2012. This forecast carries more downside than upside risk.

China – China’s GDP growth estimate over Q4 has been revised downwards to 8.7%, the slowest quarterly growth since the mid 2009 world recession. Export expansion has slackened following the weakening of the global demand. There are signs of slowing down of the domestic growth as well, most notably through a nearly 3% decline in the imports from the US in December. The slower flow of goods to China means trouble also to commodity exporters, including Brazil. One of the key determinants over the 2012 world economy is China’s capability to control the slowing down of the growth and keep it moderate. Inflation is already slowing down. This is a good sign as it allows stimulation measures to be reintroduced, case need. Banks’ credit requirements have already been lowered. More measures are likely to follow soon.

Paper industry – The first, still preliminary numbers over December activity from the US showed further declines in the US printing and writing paper shipments. The retreat is estimated at over 8% against December 2010. Uncoated free sheet showed a slightly bigger drop than the average of the year. In LWC deliveries fell in a major way but this was partly at the expense of coated woodfree which actually showed a small gain against December 2010. Improvements in consumer confidence and in the ISM-data give hope for flattening of the 2011 decline in the domestic front with increasing shipments possible in some grades. On the other hand, the USD strengthening makes exports more challenging.

In Europe, the outlook is opposite as far as the economy is concerned. The prospects of a further weakening in the regional demand are counterbalanced by an improved export potential and reduced import pressure from outside Europe, due to the weakening of the Euro. Also, the closures of production capacity are as big, if not larger, than the drop in demand and thus the supply/demand balance could well be improving.

In China, over-capacity persists. Inventories of paper moved reportedly up during the 4th quarter and there have already been announcements of extended downtime to be taken during the Chinese New Year at the end of the month. This is likely to be reflected also in the fibre import volumes.

NBSK pulp Europe – Weakened financial results of pulp producers during Q4 culminated in the announcement of Terrace Bay postponing the re-start and filing for a CCAA protection (again). Reduction of spot sales and weaker price/cost ratio supports sellers’ efforts to get price increases through. On the other hand, buyers’ resistance, USD strengthening, weak pulp demand in Europe, weakening of the fluff pulp market and mixed price announcements (blend between 830 and 850 USD/ton) make it more difficult to get the price increase initiatives through. The final outcome of the price negotiations is still not known. EUR weakened again, this time, however only most marginally, or by 0.04% against USD from the previous week. After a long period of declines, our PIX NBSK index moved this time up by 5.72 USD, or by 0.69%, and closed at 834.55 USD/ton. Converted into Euro, the index, moved up by 4.73 euro, or by 0.73%, ending at 653.47 EUR/ton.

BHK pulp Europe – The numbers are not yet known but the first indications suggest that the BHKP shipments, at least those in BEKP, have continued reasonably lively also in December despite the weaknesses of the woodfree paper sector, especially in Europe. Downtime taken by BHKP mills in Asia and the continued good demand by tissue sector, as well as the still very wide price gap between BSKP and BHKP support the hardwood market pulp delivery volumes. Together with low consumer stocks – leading to “forced to buy” situations - they also support the price increase initiatives. EUR weakened by 0.04% against USD. With the minor dollar-strenthening, the PIX BHKP index-value in EUR moved up by 7.32 Euro, or by 1.43%, and closed at 520.99 EUR/ton. The PIX BHKP index value in USD gained 9.10 dollars, or 1.39%, and closed at 665.36 USD/ton.

BHK pulp China – The monsoon rains in Indonesia have, once again, caused wood supply & logistics problems in Indonesia. This has increased the downtime at local pulp mills and increased the import needs of Chinese buyers from other sources. The sense that the bottom of prices was reached/near and the uncertainty over the fate of the non-wood pulp mills may have led to some speculative buying in December. Over-capacity of paper and board, announced extensions of downtime during the Chinese New Year season in late January and increasing domestic wood pulp production capacity are the key drivers working against the price increase initiatives. Price increase efforts appear to continue to be at least partly successful. The PIX China BHKP moved up by 6.11 USD/ton, or by 1.07%, and closed at 574.79 USD/ton. Yuan strengthened by 0.01% against USD, compared to a week ago. The conversion of the USD value into Yuan resulted in an increase of 38.16 RMB, or by 1.06%, to 3629.76 RMB/ton.

NBSK pulp China – Since the peak of prices in Q2 2011, BSKP prices in China have fallen more than in Europe or the US. Also, the gap between BSKP and BHKP prices has recently been smaller. Consequently, the pressures of furnish changes in favour of hardwood are not as high either. Volumes lost at Terrace Bay and in Chile need to be replaced by pulp from other sources. The earlier started and continuing rise of BHKP prices supports also softwood pulp price increase initiatives. Our PIX China NBSK index increased by 1.41 USD/ton, or by 0.21%, and closed at 666.33 USD/ton. Yuan strengthened by 0.01% against USD. The conversion of the USD value into Yuan meant an increase of 8.41 RMB, or of 0.20%, to 4207.83 RMB/ton.

Newsprint – The annual drop in CEPIPRINT member country deliveries of about 3% is less than some analysts expected. Still, the market remains weak and the economic outlook over 2012 is far from promising. The exchange rate of the Euro is getting closer to the levels seen when the currency was introduced, after many years of severe over-valuation. This supports export sales and reduces import threat. Little has been revealed over the still on-going negotiations over the 2012 prices other than that at least some of the producers are after quarterly or half-year price fixation periods instead of the earlier more normal annual pricing period. The EUR strengthened against the weighted basket of non-EMU currencies by about 0.6%, putting a downward pressure on the index. The PIX Newsprint benchmark lost 62 cents, or 0.12%, and closed at 513.31 EUR/ton.

LWC – In the US, December deliveries were very weak in coated mechanicals, down by nearly 11% against December 2010, bringing the annual drop to about 7.5%. In Europe, production capacity is now down after the closures and should gradually show in the practical supply as well. Order backlogs are sufficiently long to push the deliveries against new 2012 contracts further out into late January/February. Consequently, the price negotiations continue with little known so far of the likely outcome. The approximately 0.6% strengthening of the EUR against the weighted basket of non-EMU currencies had a negative impact on our benchmark. The PIX LWC index slid down by 1.11 EUR, or by 0.16%, to 704.16 EUR/ton.

Coated woodfree – In North America, December printing and writing paper shipments appear to have been even weaker than the annual average for most grades of paper. Coated woodfree was the positive exception. US shipments of coated free sheet were up in December by 1.2% against December 2010 with annual total still 4% down, however. In Europe, the 11-month total from CEPIFINE showed an even larger drop of 5%. Negative general economic growth does not promise an improvement in advertising, the main demand driver, in early 2012 either. Supply reductions limit the negative impact and supply/demand ratio could actually improve, even if demand decline continued. The 0.6% strengthening of the Euro against the weighted basket of non-EMU currencies pulled the benchmark lower. The PIX Coated woodfree index retreated by 3.24 EUR, or by 0.45%, to 714.57 EUR/ton.

Uncoated woodfree – In the US, uncoated free sheet is clearly the largest printing and writing grade. In December, preliminary numbers show demand down nearly 5% against December 2010. The annual drop was slightly less, or 3.2%. In Europe, CEPIFINE reported an even bigger drop than that over the first 11 months in the regional deliveries but the total shipments, including the positive statistics in exports, were down little less than in North America, i.e. by 2.7%. Producers have seen their hardwood pulp costs starting to creep up, especially in Euro-terms which may or may not show, once the results of the price negotiations finally are out. The roughly 0.6% strengthening of the Euro against the weighted basket of non-EMU currencies meant a downward pressure on the benchmark. The PIX A4 B-copy index decreased by 3.63 EUR, or by 0.42%, and closed at 863.07 EUR/ton.

Containerboard Europe – Demand outlook has turned a bit more positive in the US, following the more optimistic mood in the general economy. In Europe, weakening against shipments 12 months ago appears to have continued. The little less strong Euro supports the export efforts, at least in theory. The several month long declines in recovered paper prices appears to have come to a halt, at least temporarily, since the turn of the year, following the increase of prices paid in China already since December. The next few weeks will tell if this trend continues and what sort of an impact it ends up having on containerboard prices.

Last week, the currency movements had a predominantly negative impact on the packaging benchmarks. Euro weakened by 0.04% against the USD but strengthened by about 0.6% against the weighted basket of the non-EMU currencies. Apart from Testliner 2, all of our packaging benchmarks registered further decreases. The PIX Kraftliner index retreated by 3.81 euro, or by 0.72%, to 525.80 EUR/ton. The PIX White-top Kraftliner index moved down by 1.78 euro, or by 0.23%, and closed at 771.77 EUR/ton. Our PIX Testliner 2 index remained unchanged at 435.73 EUR/ton. PIX Testliner 3 index fell by 2.22 EUR, or by 0.55%, and landed at 404.61 EUR/ton. Our PIX RB Fluting index declined by 1.22 euro, or by 0.31%, to 391.17 EUR/ton.

Recovered paper Europe – Recovered paper prices in Europe, as well as in the US, followed a downward trend over several months during the 2nd half of 2011. In China, the prices turned back upwards in December and have continued to rise through early January. Better pricing in the export markets, moderately weaker Euro and reducing supply with weaker demand appears now to have halted the price decline in the regional market, at least as far as the main export grade, OCC, is concerned and a minor increase was shown. In ONP/OMG the price decline continued but was quite limited.

The PIX OCC 1.04 dd benchmark moved up by 78 cents, or by 0.71%, and closed at 110.49 EUR/ton. The price gaps narrowed as most containerboard prices retreated. Against Testliner 2, the gap narrowed by 78 cents 325.24 EUR/ton. Against Testliner 3, the differential narrowed by 3.0 EUR to 294.12 EUR/ton. Against RB Fluting, the gap shrank by 2.0 euro to 280.68 EUR/ton.

Our PIX ONP/OMG 1.11 dd index retreated by 13 cents, or by 0.10%, landing at 128.59 EUR/ton. As the PIX Newsprint benchmark decreased more, the differential to PIX ONP/OMG 1.11 shrank by 49 cents to 384.72 EUR/ton.

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