Upward outlook for hardwood pulp prices continues globally following descent to bottom, with softwood pulp recovery still lagging

LOS ANGELES , February 12, 2012 () – Major pulp markets have been devoid of drama so far in February, with buying remaining fairly steady around the world, as was the case in January.

Bleached hardwood kraft pulp (BHKP) prices are on the upswing globally, with markets continuing to be stronger than those of bleached softwood kraft pulp (BSKP), which is still struggling to gain some momentum.

Meanwhile, BSKP buyers are generally keeping up demand, taking advantage of the overall low prices while they can.

In China, where buyers have recently returned from their Lunar New Year holiday break, BSKP net prices are inching up a bit while list prices remain flat. Although the big BSKP discounts in Europe and North America may have fallen a bit closer to “normal” levels, some customers are pushing for lower list prices, with suppliers so far resisting.

In a Feb. 6 research note, Vertical Research Partners pulp and paper industry analyst Chip Dillon wrote, “We are already beginning to see some stabilization in market pulp prices in Europe and Asia, and are currently modeling in a gradual recovery into the back-half of 2012. Should pulp and uncoated free sheet prices recover faster than currently modeled, or should white collar unemployment drop faster than anticipated (make our 3% papers shipment decline in 2012 overly pessimistic), there could be significant upside to our estimates.”

Eucalyptus, softwood. As previously reported, there have also been production losses among Latin America bleached eucalyptus kraft pulp (BEKP) producers over recent months, for both mechanical and maintenance reasons as well as for market reasons during the price dive.

In his just-released February Market Pulp Monthly report, market pulp consultant Brian McClay said operational problems in the region are estimated to have removed more than 200,000 tonnes of BEKP over the past two months. And he noted that during the same period, there were sizeable output losses in Indonesia, from reduced wood supply due to seasonal flooding. (Indonesia is not included in the “World 20” Pulp and Paper Products Council’s (PPPC) trade statistics.)

On Feb. 10, Reuters reported that Brazilian producer Suzano Papel e Celulose SA said on that day that it had lost about 2.6% of its annual production capacity after a forced stoppage of a recovery boiler in its Mucuri unit in January. The company said the facility is now operating at full capacity and that it will implement measures to partially recover its losses during the year, Reuters reported.

Reuters did not report the amount of lost tonnage, but Suzano’s market pulp capacity is 1.920 million tonnes per year, so the January loss of 2.6% would be about 50,000 tonnes. This figure is also what some non-Suzano sources in recent weeks have told Forestweb that they had been hearing. Mucuri's total capacity is 1.450 million tonnes/year, including 1.1 million tonnes/year on Line 2 and the rest on Line 1. (Note: this paragraph was revised to include more detail subsequent to the original publication of this article.)

Looking ahead, Brian McClay wrote, “Even though hardwood prices have started to move higher and should continue to do so into March, pricing momentum should then start to lose some traction as supply will have revived absent a repetition of the unplanned outages of the past two months and as there will unlikely be large volume ex-contractual deals done at the higher prices expected in the short-term.”

McClay said list prices for chemical softwood pulp should remain under downward pressure over the next couple of months, before maintenance and increased market-related downtime along with modestly higher demand combine to tighten the softwood market.

As such, softwood pulp prices should start to edge higher late in the second quarter while hardwood pulp prices plateau in March, McClay wrote. He pricing momentum is likely to be relatively flat through the summer before prices for all grades start to push higher again around September and through most of 2013. He expects a “significant downward correction” around the fourth quarter of 2013 due to a sharp increase in new BEKP capacity.

Changing mood. Seasonality factors in the next four- to five months will be favorable to pulp producers, but conditions might worsen in mid- or end-year, depending on relative interest rates and risk factors in various economies, said a pulp agent in North America for an international company.

By May it will be more clear as to whether Chinese customers will have replenished their stocks, which would lead them to halt their buying in June/July, and by May it will be more clear as to whether Western economies will improve, leading to more jobs in the U.S. and therefore improved paper consumption and the need for printing and writing papermakers to replenish their supply chain, he said. (He noted that in the summer of 2011, Western printing and writing papermakers did not see improvement and China’s buying fell off.)

These are big questions he said, noting that economic conditions have not stabilized and that there is no clarity as to whether a full recovery is yet underway. But, he said, “We’re in a much better place from where we were six weeks ago,” and that there is hope for continued improvement.

Market psychology has improved from the fourth quarter, when the European financial crisis began unfolding, he said, noting that the general slowdown in the economy during the second half of 2011 made business people hesitant to act in many ways. At the same time, the impact of late-2011 Chinese pulp buying had not yet been felt or analyzed because the data wasn’t yet in, he observed.

He said that although there continues to be a lack of pulp demand from Western printing and writing papermakers as well as a lack of good demand from their customers, his firm has seen a change in psychology in Europe in the last three weeks. People don’t necessarily have expectations about a positive resolution to Europe’s financial problems, but they are more optimistic than before and are getting on with business these days and ordering pulp again, he said.

Looking at hardwood pulp, he said his group has seen global hardwood spot markets picking up by $20-$50/tonne in the last four to six weeks, first in China, then in the past two weeks, in Europe and the U.S. He expects transaction prices to come back “to more normal” by mid-March. “Let’s say January was 25% ‘off list’—those numbers will probably be closer to 18%-20% by the end of February,” he said.

He noted that transaction prices for BSKP haven’t fallen quite as much as for BHKP, which weakens first and recovers first. Seasonal factors will help the BHKP market get back to normal, including spring pulp mill maintenance outages, the empty supply chain, and demand for printing and writing paper.

Integrated papermakers have already begun slowly withdrawing pulp from the market in preparation for their maintenance outages, he said, adding that the pulp they put into the market “was part of how we got to such a bad place over the summer…it was clear that every producer of hardwood was making too much in the summer.”

He said the coming summer could see more of the same, with a consequent market downturn. There will be “huge problems if the integrateds continue to make market pulp and the Brazilians continue to make pulp,” he said, adding that this could well end up being the case. “There is tremendous consistency in the behavior (in the industry),” he commented.

North America market. Some sources report continued tightening of the hardwood pulp market in North America, saying that prices are starting to move up from the bottom.

“In February it won’t all conclude at $790 but it certainly will in March and it could be higher,” said a BEKP seller last week, adding that some business has already been finalized at that price. “At the end of March and the beginning of April there will be a eucalyptus shortage in North America,” driven by some ongoing operational problems and a delayed vessel that serves Brazilian BEKP producers and “is already two weeks late,” he said. He said he has been getting calls from would-be buyers that his company does not currently serve and has had to turn them down.

The $790/tonne price originally announced for January by Suzano and is quietly being followed in other quarters, sources said. One hurdle is that RISI Inc. showed a price for both December and January of just $740/tonne, that is, $50/tonne under the announced price, the BEKP seller said. (Another BEKP seller described the gross price in January as $750-$760/tonne, up about $10-$20/tonne.)

Yet another BEKP seller said his company is achieving the $790/tonne price in February, except from customers who are on the RISI one-month lag, and that he expects $790/tonne to solidly be in place in March. There is undoubtedly a drop in inventory and demand has picked up, he said. “It’s not an unduly rosy picture, but we are seeing some pickup as well,” he said, adding that buyers have begun acknowledging that prices are on the rise.

Buyers of domestic BHKP contacted in recent days added to earlier reports from buyers who say they haven’t seen a change in North American spot prices in February over January. “I think the hardwood bottom is here,” said a northern bleached hardwood kraft (NBHK) buyer in mid-week. He described his spot price range as $495-$520/tonne. As reported in recent weeks, others have quoted similar ranges or ranges up to the mid-$500s/tonne.

A mid-sized buyer, citing prices in the lower $500s/tonne and essentially unchanged for him, nevertheless said in recent days that “all the NBHK you want” can be gotten from “any” of the East Coast and Midwestern suppliers. As for the $790/tonne BEKP list price, he said his company has “walked away” from it “and gone back to NBHK.”

The NBHK market is “very flat--there’s still a lot of spot available,” said a pulp agent, citing a price range of $490-$500/tonne since late November. But he said the pricing is “probably a little better than December” because considerable volume was moved then. He said the spot price of southern bleached hardwood kraft (SBHK) is in the mid $500s/tonne, unchanged--some buyers have cited prices in the lower $500s/tonne to Forestweb--and that more SBHK than before has been coming into the market lately from integrated producers that are not running full on the paper side.

An executive for a North American NBHK producer said his company has been able to move up its February spot prices by an average of $20/tonne or so for most customers, especially for those at the low end of the price scale, and that domestic demand and pricing have improved to the extent that his company no longer finds it worth exporting.

Commenting that hardwood pulp prices “overcorrected,” during the downturn, falling harder and faster than softwood pulp prices, he said it is reasonable for hardwood pulp prices to be moving up from the bottom—“not rebounding by $50 or $100, but I think they have fallen to below a sustainable level,” he said.

A deinked pulp (DIP) buyer said that although wastepaper prices have been increasing, his company hasn’t had price increases so far- other DIP buyers in recent weeks have reported flat to lower prices for February, saying that their January prices fell by $20-$25/tonne. A sales executive for a DIP producer said the February price is generally flat and that in January it dropped by $10-$15/tonne for his company.

Separately, Fibrek Inc. announced on Feb. 10 that it will take five weeks of market-related downtime at its 215,000 tonnes/year recycled bleached kraft (RBK) market pulp mill in Fairmont, West Virginia, starting Feb. 20. Fibrek aims to reduce production by about 25,000 tonnes.

But the big Fibrek-related news on Feb.10 was an announcement that Fibrek and Mercer International Inc. have agreed for Mercer to take over Fibrek, thus spurning the earlier unsolicited insider bid by Resolute Forest Products Inc. A source familiar with Fibrek noted, however, that if Resolute were to respond with a counter offer preferred by shareholders, the deal would still be in play.

In a Feb. 12 research note about the Mercer move, RBC Capital Markets paper and forest products industry analyst Paul Quinn wrote, “Looked at from a capacity viewpoint, assuming no value for the two RBK mills, the offer represents $705/mt for the NBSK pulp mill.” He said Mercer would want Fibrek “(e)ntirely for the low-cost Saint-Felicien NBSK mill,” which has a capacity of 375,000 tonnes/year.

Looking at NBSK, FOEX Indexes Ltd. said that for the week ending Feb. 4, the price in North America fell by $1.86/tonne and closed at the announced (for January) list price of $870/tonne. FOEX said prices for contract business continued to be under downward pressure as BSKP spot volumes continued to be offered in “at prices well below the contract price levels.”

As previously reported, some buyers told Forestweb they have been pushing for a reduction in the $870/tonne NBSK list price, arguing that demand is lackluster and also that the $40/tonne differential with the $830/tonne Northern Europe price is too wide. When FOEX said that its price in Europe for the week ending Feb. 4 dropped to $826.46/tonne, down $4.60/tonne, buyers had another argument for a price reduction in the U.S.

But so far suppliers have been holding on to their $870/tonne price, saying supply and demand are well enough in balance.

A NBSK buyer who is hoping for $860/tonne, down $10/tonne, commented that any such move would involve adjusting $870/tonne invoices because the pulp has already been shipped out.

One of the BEKP sellers opined that “nobody should lower the price $10,” especially when the price is in the $800s/tonne and would amount to a “silly” reduction of 1%. A $10/tonne drop, he said, “is not worth reprinting the invoice.”

Also it doesn’t reflect the direction of the market, because orders are picking up in Asia and softwood pulp maintenance outages will get underway in March, he said. As well, when there is a solid upward direction on eucalyptus pulp, there is no reason to reduce softwood prices, he said.

One of the North American buyers said the spot price for NBSK has moved up by about $20-$40/tonne to around $660/tonne. Given the strengthened Canadian dollar, he said the list price of $870/tonne has effectively moved down by $15-$16/tonne, thus cancelling producers’ $20/tonne January decrease, to $870/tonne. He said there is a 50%-50% chance this month of a $20/tonne list price decrease, to $850/tonne.

Though some NBSK buyers have been talking up lower prices, several have commented that Canfor Pulp LP, with its monthly $20-$30/tonne price reduction announcements during the market downturn, has done a good job of steering an orderly decline in the market. “It’s good if you have a company that’s willing to stick its neck out there,” said one of the buyers. “Most companies won’t announce a price increase.”

As for printing and writing papers, in a Feb. 7 research note, Deutsche Bank paper and forest products industry analyst Mark Wilde wrote that demand for uncoated freesheet (UFS) paper remains sluggish, but that domestic prices have held up better than his group had expected, with both Domtar Corp. and International Paper Co. reporting essentially flat domestic prices in the fourth quarter. However, he is expecting first quarter price realizations to be down from the fourth quarter.

“Low price imports are contributing to the pricing pressure. Coated paper producers are also contributing by ‘lifting’ their coaters and running uncoated rolls,” Wilde wrote, describing January cut-size prices as falling by $10/ton to $1,045-$1095/ton and offset prices as flat at $920-$940/ton.

Europe mixed. Sources said the BEKP price in Northern Europe will likely settle at $730/tonne, up $30/tonne, and some sellers said some business has already concluded at that price.

A buyer said Brazilian producers are pushing for the higher price and that their stocks appear to be low. He said there is very little spot BEKP in Europe this month, although a sales executive for a non-Brazilian BEKP producer reported that there was still some low-priced North American mixed hardwood pulp and European domestic hardwood.

FOEX said the BHKP price gained $14.65/tonne, to $684.49/tonne in the week ending Feb. 4, and that the price in euros rose by €10.55/tonne to €520.13/tonne.

FOEX said in its Feb. 7 remarks that the hardwood pulp market has tightened over the past few weeks, with contributing factors including the record high shipments in December, news over the “clear drop” in producer stocks and several supply losses. The downtime taken at Södra Cell AB’s Tofte, Norway, pulp mill, the switch of its Mörrum, Sweden, birch pulp line to dissolving pulp, the major demand pull in China and delays in shipments by several BHKP producers “were enough to tighten also the European balance even if the December consumption and demand for pulp were weak in this market,” FOEX wrote.

As for softwood pulp, FOEX said the NBSK price decrease in Europe of $4.60/tonne, to $826.46/tonne, occurred in spite of the 0.1% strengthening of the euro against the U.S. dollar. It said the euro price fell by €4.22/tonne to €628.01/tonne.

The reduced FOEX price is encouraging an NBSK buyer effort to get the February list price in Northern Europe reduced to $820/tonne. A market pulp consultant said he is not surprised at such an effort. “There is no shortage of softwood pulp,” he said, adding, “$820--I don’t think it is crazy.” He noted that a $730/tonne BHKP price would mean a $90/tonne gap, half of what it was not long ago, and that if BHKP pricing continues to rise, it could bring an end to some of the substitution that has been underway.

But a sales executive for a North American NBSK supplier doing business in Europe downplayed the notion of a move off of the $830/tonne price, adding that he has customer feedback that the price is likely to remain at the higher level. He commented that the $826/tonne FOEX price may have been a reflection of the already-lower January price in Italy of about $800-$810/tonne.

His customers, which are mid-to large-sized printing and writing papermakers, are reporting that the first quarter “is not bad at all,” he said, “not that it’s a boom, but January was better than the second half of last year and February is basically a repeat of January.” Though their paper prices are not quickly shooting up, his customers “are not pessimistic about the market. They can see things remaining positive this year and are seeing a positive EBITDA (earnings before interest, taxes, depreciation and amortization) in the paper business--not major, but all are feeling good about it,” he said.

In his monthly report, market pulp consultant Brian McClay also wrote that reports from the field “indicate that order inflow, especially for uncoated free (sheet), has been more active than expected through January, as European merchants and end-users restock with lower-priced paper.” Noting the improvement in contract hardwood pulp market conditions, he said there were reports that at least one South American BEKP supplier had continued its recent practice of reshipping pulp already in European ports to China via very low freight-rate container vessels.

“As such, many European papermakers had no option other than to pay higher prices for the pulp needed to keep machines running,” and January BEKP prices rose by about $40-$50/tonne, McClay wrote. McClay, too, said reports from the field suggest that the $730/tonne price looks set to be firmly in place in February.

However, McClay said there has been more NBSK from Finland and Sweden, market and integrated, freed up by market-related paperboard and publication-grade paper downtime and permanent machine closures in Northern Europe.

FOEX said in its Feb. 7 remarks that the odds are high that the closures of printing and writing paper capacity, mostly in coated grades, will result in reduced market pulp demand in 2012, especially given the estimated 20% December drop in demand for lightweight coated (LWC) paper. FOEX noted that although the price gap between softwood and hardwood pulp is narrowing, it remains much larger than the long-term average, driving ongoing downward pressure on softwood pulp.

A market pulp consultant said he is not very certain about the sustainability of paper demand. Freesheet is “probably stronger than publication paper,” he said, adding, “I’m not hearing good things about LWC anywhere and prices are to ranges where they’ve got to be thinking about downtime, certainly in Europe and the U.S., where most of it is made.”

Middle East. February spot prices in the Middle East are unchanged for NBSK and SBSK, at $680-$690/tonne and $640-$650/tonne respectively, said a buyer in the region. Also fluff pulp is up to $670-$690/tonne from $$640-$650/tonne, he said. Although Turkey has seen some NBSK deals at $635-$645/tonne, he said the exchange rate at the time was a factor, as is the lower shipping cost to Turkish ports compared to other areas in the Middle East.

As for hardwood pulp, he said BEKP and NBHK prices are up $20/tonne this month, to $580-$600/tonne and $570-$590/tonne, respectively, and that SBHK is up $30/tonne, to $550-$570/tonne. Noting that the FOEX price gap between softwood and hardwood pulp is more than $140/tonne, he said most end-users are working hard to maximize their hardwood pulp consumption, which is creating more demand for it than for softwood pulp.

In his latest monthly report, Brian McClay said spot prices for BEKP in the Middle East are around $600/tonne, or as much as $100/tonne above their November lows.

China buying. With Chinese buyers having returned about a week ago from their Lunar New Year holiday break, sources have been reporting steady buying, although customers are generally well-stocked from the heavy buying of previous months and are mostly now sticking to their contractual obligations, sources said.

Gross BEKP prices have continued upward and softwood pulp prices have risen a bit. Local prices of both hardwood and softwood pulps have gone up, sources said.

Separately, according to China customs data, imports of pulp into China soared to 14,354,966 tonnes in 2011, for a year-over-year increase of 27.0%. Full-year BSKP imports of 5,826,792 tonnes were 46.0% above those of 2010, while BHKP imports of 5,256,208 tonnes rose by 19.0%. BSKP imports rose in December year-over-year by 10.6%, to 504,176 tonnes. Imports of Canadian NBSK of 204,952 tonnes in December marked the fourth month in the year that they were above 200,000 tonnes. (This corrects the originally posted version, which said it was the second month.) December imports into China of BHKP of 547,171 tonnes increased year-over-year by 55.4%.

A sales executive for a non-Brazilian BEKP producer said current buying in China is healthy, possibly because there is speculative buying from buyers who see prices coming up. He said he expects a major Brazilian producer to announce a March price increase of $20-$25/tonne, and he said the price needs to reach $650/tonne in order for producers to cover their costs of production and debt obligations.

An executive for a North American hardwood pulp producer said his company has been getting requests in the last few weeks for pulp for China, with offers $30/tonne above what they were previously. “That tells me they are looking for sources of fiber,” he said, but added that the offers “are still crummy compared to domestic sales.”

Chinese and other Asian papermakers considerably destocked pulp in the second half of 2011, bringing them to low levels as the months unfolded, the BEKP executive noted. “They all expected the price to come down further,” he said. “They were caught off guard.” In December, January, and February, the papermakers probably brought their pulp stocks back to normal, but not to the extent that they are overstocked, he said, “So I think the price in March could go up further.”

He expects announced China paper price increases to exceed to some extent because paper stocks in the distribution pipeline are low, and this will help the pulp price hike push, he said. But if the paper price hike effort doesn’t go well, neither will the pulp price hike effort, going into the seasonally slow summer months, he said.

A Chinese pulp buyer described the softwood pulp market as quiet, with contract NBSK prices still at $680/tonne for commodity grade and $690/tonne for premium grade. He said he isn’t hearing any spot softwood pulp deals for February, while in January, there were still European NBSK volumes available, and priced in the $660-$670/tonne range.

Local prices for softwood and hardwood pulp are stable to higher by RMB50-RMB100/tonne (about US$8-16/tonne) in the past week, he said. NBSK is at RMB5,100-RMB5,300/tonne, depending on the grade, he said. Traders are refusing to take anything less that RMB5,000/tonne for BRKP, up RMB/100/tonne from the previous week, he said. He named a major Brazilian BEKP producer he said is asking for RMB4,500/tonne in Eastern China. A BEKP producer source also cited this price.

A number of other sources report the February BEKP list price of $605/tonne has succeeded. This price was announced by Suzano, up from a net price of $580/tonne, and other major producers have told customers that that is also their price, sources said. A BEKP seller said there wasn’t much business transacted in January but that in February, Chinese traders—he said they bought BEKP heavily in November-December at the very low prices—are interested in seeing the price go up so they can cash in.

While there has been much talk about tightened BEKP supply in Brazil due to a sell-off at the end of 2011 as well as unexpected mechanical outages, the Chinese buyer said the main supply issue for Chinese customers was the reduced production in Indonesian pulp mills in recent months, in the wake of heavy monsoon rains.

Supply issues in Indonesia have a major impact on the China market because that is the source of about a quarter of its demand and because any snags have a quick impact, since customers normally can expect to get their orders from Indonesia in a month “and into their machines,” compared to some 45-60 days from Brazil, he said. But he said the situation in Indonesia appears to be better this month because more tonnes have been arriving from that country.

The aforementioned non-BEKP sales executive downplayed the impact of the Indonesian outages, noting that the monsoons affect production every year in the November-through-January time frame and that this year wasn’t atypical. Instead, he said, pulp customers were understocking even as less Indonesian pulp was becoming available.

As for the shuts of some Chinese hardwood and non-wood pulp mills when prices cratered to around $520-$530/tonne, the Chinese buyer said he doesn’t think significant tonnage was involved. “There was not a big impact in the market,” he said. He noted that the recent bottom-level BEKP prices were nevertheless “much higher than in early 2009, when the price was around $400 for local.”

The buyer said he expects Chinese customers to continue buying softwood and hardwood pulp because the current price range of $600-$700/tonne, particularly the low-$600s/tonne, is still comfortable. Depending on the economic situation and other costs, it is difficult for paper mills to make a profit when prices are higher than the low- to mid-$600s/tonne, but also if the price is too low, it is not healthy for the paper industry, he said. If the gap between softwood and hardwood pulp narrows to $60/tonne, papermakers will be more inclined to use less hardwood, opting for the better quality of softwood pulp, he said, adding that such fiber adjustments are very easy for mid-sized mills to make.

A market pulp consultant, describing the health of the global pulp market as “fragile,” said, “If China wanted to push prices lower, I think they could. I don’t think they would—they want to get paper prices up.” Also he said that buyers want their pulp suppliers to stay in business. “Softwood is already a risk,” he said, noting that some softwood pulp capacity has already been idled recently for market reasons.

For the week ending Feb. 4, FOEX said the NBSK price in China increased by $4.19/tonne, closing at $674.25/tonne, while BHKP rose by $11.01/tonne, to $591.05/tonne.

Although BSKP prices are moving up in China, the global softness has prevented them from advancing as much as BHKP prices and the price differential therefore has continued to shrink, FOEX wrote in its Feb. 7 remarks.

Brian McClay wrote in his newsletter that as dissolving pulp prices have risen—he said they now surpass $1,200/tonne and that a major supplier is seeking $1,500/tonne--there is some revived interest from viscose staple fiber (VSF) producers in paper-grade softwood pulp around today’s prices. He said there have been few major transactions reported to date.

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