FOEX Pulp & Paper Indices - July 10, 2012

Kendall Sinclair

HELSINKI , July 10, 2012 (press release) – US NBSK – Price erosion, seen elsewhere in the world already during Q2, touched the US contract pulp market with some delay finally at the end of June and was shown more clearly during the first days (and sales) in July. The driver of the price decline was not an excessively weak demand, the market pulp demand in May was, in fact, down by just 0.6% against May 2011 with BSKP demand dropping and BHKP demand marginally up. The pressures came from more supply being directed to the regional market, due to better net value than from exports, from the spot prices – even if at limited volumes - having fallen too much below contract prices and from the strengthening of the USD against several other currencies. Furthermore, lower wood prices reduced the production costs. Several producers published at the end of June their plans for a 20-dollar price drop from July 1 in BSKP grades in the US market. The need to stop the rise in the discounting is seen as yet another reason for the price drop. The benchmark value showed a major retreat dropping by 14.19 dollars/ton, or by 1.58%, with the NBSKP index closing at 883.43 USD/ton.

US Newsprint – The Stadacona newsprint mill, slated by White Birch to re-start first in May, then in June, appears not to have re-started yet. A re-start, when/if it takes place, with all of the capacity is seen unlikely, according to market observers. This re-start and the approval of the proposed new labour contract at Corner Brook and the subsequent continuation of production at that site risk keeping the market over-supplied. Demand has continued to fall among the major dailies. This drop in demand has been partially counter-balanced by some large retailers bringing in additional demand in form of newsprint insert programs. This and some new free delivery papers explain why the newsprint shipments to the North American market are down by just 1.4% while the page numbers of the major dailies have fallen much sharper. The PIX US Newsprint 30lb index retreated by 39 cents, or by 0.06%, closing at 620.58 USD/ton, and the 27.7lb index lost the same 39 cents, or 0.06%, and settled at 660.97 USD/ton.

General economy: US – US economic growth outlook has grown weaker as the year has progressed. The number of new jobs continued to be very muted in June while May numbers were, however, corrected upwards. With that correction the unemployment rate remained at 8.2%, too high for Obama administration with only limited time to try to correct the situation before the presidential elections. In June, the ISM manufacturing index fell into contraction mode for the first time since 2009. With this alarming backdrop, the Fed is likely to introduce new stimulation measures in the near-term future. The US business confidence has remained stronger over the 2nd half of the year and especially over 2013 than what the recent weak data would indicate. The weakening of the inflation and the assumed stimulation measures are some of the factors explaining the discrepancy between May-June numbers and future business activity expectations.

Europe – Markets remain suspicious over the success of solving the euro-zone crisis with and after the aid-package promised to Spain and the interest rates for getting new loans to cover the Spanish and Italian needs rose back towards/to 7%. The business confidence has fallen particularly sharply in Germany. In France the new government’s focus on growth has improved the confidence a little. Euro-zone PMI (by Markit) improved marginally in June from May but at 46.4 remained deep in the contraction territory. Productivity of the EU continues to decline. In order to support growth, ECB finally lowered the key interest rate but, as already seen before, that 0.25 percentage point drop was again too little and far too late. In the UK, business sentiment is also weakening but still better than in other large EU economies. Productivity continues to grow, even if slowly and investment and hiring plans remain positive as well.

Japan’s economic sentiment has two opposing forces. With poor export outlook, the confidence of the manufacturing industries is weak and getting even weaker. On the other hand, the confidence of the service sector – by Markit - was, in June, at the highest level ever recorded. The producers of goods see the prices and inventory/output ratio weakening, new orders quickly thinning, reconstruction work helping less and less and profits falling. The service sector activity is up, investments increasing, new orders on a high level and revenues as well as profits rising. Overall, the balance is mildly positive as to the future outlook expectations. The only clearly negative driver, across all sectors, is the output price.

China – China's recent business activity is muted. Chinese companies are still relatively confident over 2013 but the near-term outlook is weaker than in most other emerging economies. At present the business activity expectations are, in fact, historically low as to new business opportunities and revenues. With low prices, revenues and capital expenditure plans are also below average but not too bad. Business conditions are expected to be the weakest during the rest of 2012 but are foreseen to improve again all along the year 2013. Companies are also expected to hire more people again next year, especially in the service sector. The Beijing government is stepping up the stimulation plans, mainly through lower interest rates and also through further lowering of the reserve requirement ratios.

Paper industry – In North America, consumption volumes remain weak but the rate of decline has clearly flattened in most grades over the first half of this year, compared to the retreat seen in early 2011. In some segments, the fall in May was almost negligible. In fact, the overall US printing and support activity rate, measured by the Fed actually improved in May, after another small hike already seen in April. Another rise in that index may well be recorded also in June; the print industry had a bigger month-to-month gain in new orders than any other manufacturing sector. In order to put things into the right perspective, even after the April-May increases, the index value remained below the level seen in the 2009 recession months. US graphic paper operating rates were flat in January-May compared to the first 5 months of 2011. Tissue sector showed a minor gain in terms of volumes as well as operating rates. Prices have moved lower in late June/early July, especially in the RP-based packaging products.

In Europe, the rate of weakening is just as fast as in early 2011, maybe even faster, at least for the month of May. Operating rates are, even after substantial closures of capacity still in high 80’s and not in 90’s where they historically have been in times of price increases. The results of the price talks for the 2nd half of the year (or for Q3) are not known yet. With 2-4 week order backlogs, the impact, if any, on our indices is likely to be seen only at the end of July or in early August. The only grade with some evidence of at least partial success in bringing price increases through is uncoated woodfrees. Recovered paper prices continue to head lower which impacts especially the packaging sector and the newsprint. Downside pressures due to lower RCP-prices are compensated by wakening of the Euro and by increases in some other input costs.

NBSK pulp Europe – Global market pulp inventories appear near normal entering the seasonally slow summer months of July-August. Reduced price levels have not led to as much downtime announcements as have been seen in the history in similar market conditions. Downtime may be taken but companies have not made those plans public. Downside pressures continue with some buyers holding back with their purchases. It has been reported in the press that the idled Terrace Bay mill, under new ownership, would return to produce paper grades NBSKP from October, until conversion to dissolving pulp in 2015-2016. Another supply addition is IP’s Franklin mill with fluff pulp production from this month. Euro weakened by 1.7% against USD from the previous week. Our PIX NBSK index fell by 8.22 dollars, or by 1.0%, and closed at 812.14 USD/ton. Converted into Euro, the rapid weakening of the currency caused the index to move up by 4.57 EUR, or by 0.7%, with the index closing at 656.17 EUR/ton.

BHK pulp Europe – Reduced needs of hardwood pulp in Europe, mainly due to major declines in graphic paper demand and subsequent closures of coated and uncoated woodfree paper lines and the reducing price gap between softwood and hardwood pulps are the main downside risks in the BHKP market. In many ways, the market remains in a rather good balance, overall. The recent rise in the producer stocks has some impact but those stocks are not excessive, taking into account the increased average length of and risen average size of BHKP market pulp shipments. Switches to dissolving pulp, or to BSKP grade, have limited the net supply growth. The number of quotes received in Euro was again too low to calculate a meaningful average. Euro weakened by 1.7% against USD from the previous week. The PIX BHKP index headed higher by 10.59 Euro, or by 1.71%, and closed at 631.03 EUR/ton. The PIX BHKP index value in USD fell by 10 cents, or by 0.01%, to 781.03 USD/ton.

BHK pulp China – Increased integration of Chinese BHKP production and closures of the non-wood pulp based paper production have supported the imports of BHKP market pulp. The softness reported in the purchasing activity has had less impact on import volumes than what could have been expected. It remains to be seen if the June intake shows that slowdown more clearly. Over January-May, the imports of market BHKP were up by nearly half a million tons. The “negative” price difference between BSKP and BHKP appears to have had little impact so far. A fairly rapid switch from hardwood back to softwood in the furnish has been seen in similar price conditions in the past but this does not appear to be happening (yet?) this time. The downside pressures were seen, in a modest way, in our benchmark value. PIX China BHKP retreated by 1.60 dollars, or by 0.24%, and closed at 658.31 USD/ton. Yuan weakened by 0.2% against USD. The conversion of the USD value into Yuan resulted in a decrease of 3.33 RMB, or of 0.08%, to 4190.48 RMB/ton.

NBSK pulp China – The trading houses are reported to be more active in trying to reduce the softwood than hardwood volumes in their hands. This has added to the downside pressures on softwood pulp. With paper production going down in Europe in July and especially August, higher volumes of pulp are expected to be offered to the Asian markets. On the other hand, while little impact of the reverse price relationships between softwood and hardwood pulps has been detected by early July, some switches back towards softwood are still expected to be seen. Pulp buyers elsewhere in Asia appear to be holding back their purchases, hoping to see lower prices offered also outside China. This slows down global demand, until the day comes when speculative buying at low prices once again surprises the markets on the upside. Our PIX China NBSK index value decreased again, this time by 5.66 USD, or by 0.87%, and closed at 645.31 USD/ton. Yuan weakened by 0.2% against the USD. The conversion of the USD value into Yuan resulted in a retreat of 29.26 RMB, or by 0.71%, to 4107.73 RMB/ton.

Newsprint – The sinking of the recovered paper prices just prior to and during the price negotiations over the 2nd half sales volumes did not help the suppliers’ case in the talks. And even with strong export volumes (up over 1/4th during the first five months), the total shipments for Euro-Graph member country producers were down by almost 5% over the first five months. The results of the negotiations have not been published and are unlikely to show in our benchmark values before late July/early August, due to order back-logs. And, it is important to remember that part of the contracts continue to be on annual basis, even if the share of shorter contracts increased this year. Downside price pressures are most evident in the UK where the GBP strengthening against Euro has brought prices above the Continental levels. The approximately 1.1% weakening of the EUR against the weighted basket of non-EMU currencies helped to send the benchmark value higher. The PIX Newsprint index moved up by 79 cents, or by 0.16%, to 507.69 EUR/ton.

LWC – With total deliveries of coated wood-containing reels (mainly LWC) down by over 5% (i.e. nearly 200 000 tons) over the first five months, buyers appear to have had a stronger case than sellers in the mid-year price talks, in spite of the low profitability of the producers with the first half average net prices. Also in this grade, the downward pressure is reported to be the greatest in the pound-denominated sales to the large UK market. Pound was about 4% stronger against the Euro in early July than what it had been in January. The 1.1% weakening of the EUR against the weighted basket of non-EMU currencies compared to the previous week had a positive impact on our benchmark. The PIX LWC index inched up by 45 cents, or by 0.06%, and reached 702.19 EUR/ton.

Coated woodfree – In CWF, export performance has been weak but the drop in regional demand has been relatively limited, down by “only” 40 000 tons in January-May, according to figures from Euro-Graph. While less negative than in other graphic paper grades, the market situation has not been strong enough for the producers to push through the price increases the suppliers have been after already in June, at least not in any major scale. The price hike initiatives meet more resistance in reels than in sheets due to the substitution potential between medium-weight coated mechanical reels and CWF reels. The 1.1% weakening of the Euro against the weighted basket of non-EMU currencies gave an upward boost to the benchmark. The PIX Coated Woodfree index moved slightly up, i.e. by 19 cents, or by 0.03%, to 703.56 EUR/ton.

Uncoated woodfree – In uncoated woodfrees, the volume reductions have been fairly similar, or 3-4%, in all accounts, total deliveries, exports outside the region and in the estimated regional demand. Copy paper prices moved up gradually in June and again, with the help from the Euro-weakening, in early July and brought them, as the only key graphic paper grade, marginally above the level seen on the first week of January. The seasonal slow is approaching but in this grade there are also closures of production during the holiday period, especially in southern parts of Europe. In the past years, these supply reductions have typically offset much, if not all, of the thinning of the order books. Maintenance downtime in June-July, both in Western and Eastern Europe, has already reduced the supply to some extent. The effect of the 1.1% weakening of the Euro against the weighted basket of non-EMU currencies helped to push the benchmark higher. The PIX A4 B-copy index climbed up by 4.59 EUR, or by 0.53%, and closed at 867.57 EUR/ton.

Containerboard Europe – The demand for containerboards has weakened with the economic woes. This has hit the recycled fibre based grades harder than the virgin fibre based products. Combined with the recent rapid descend of the OCC and mixed grade price levels, the price pressures have also been clearly greater in testliners than in kraftliner. The recent strengthening of the USD against Euro also supports the virgin kraftliner prices as a large share of the European kraftliner consumption comes from suppliers outside the Euro-zone (such as Sweden and North America). Prices of brown virgin liner are today above the January 2012 level whilst the testliner and fluting are slightly down from January. In 2013, more regional supply is expected to be seen as VPK and Klingele, in the process of buying most of the Stracel asset from UPM, plan to convert the LWC machine into the production of testliner and fluting.

The impact of the exchange rate changes on the PIX indices was this time positive with the Euro weakening both against USD (by 1.7%) and against the basket of non-EMU currencies (by about 1.1%). With the USD-strength the brown virgin fibre linerboard moved up but all other packaging indices moved down from last week. The PIX Kraftliner index rose by 1.33 euro, or by 0.25%, settling at 540.81 EUR/ton. Our PIX White-top Kraftliner index value moved down by 1.15 euro, or by 0.15%, closing at 754.95 EUR/ton. The PIX Testliner 2 index headed down by 5.23 euro, or by 1.20%, and settled at 431.09 EUR/ton. Our PIX Testliner 3 index value dropped by 7.73 euro, or by 1.87%, to 406.15 EUR/ton. Our PIX RB Fluting index retreated by 5.85 euro, or by 1.48%, and closed at 389.58 EUR/ton.

Recovered Paper Europe – The demand for recovered paper in China and other Asia has continued to be weak. Apparently, the buyers have worked down their inventories. Also, with reduced demand pull for Chinese goods in Europe and other industrialized world, the growth in Chinese box production has slowed down. The low demand pull from outside Europe, coupled with sinking export prices and reduced regional demand during the summer lull have increased downside price pressures also within Europe. The softening of the supply potential has not been important enough to restore the balance, at least not yet. Lower recovered paper costs could help the profitability of testliner and corrugated medium production but the price movements for RP-based liners have followed the recovered paper prices down with not much change at all in the profitability. Our PIX OCC 1.04 dd benchmark retreated this time by 7.75 euro, or by 6.45%, and closed at 112.45 EUR/ton. The price differences between containerboards and OCC grew again. Against Testliner 2, the differential increased by 2.52 euro to 318.64 EUR/ton and against Testliner 3 the gap grew by 2 cents to 293.70 EUR/ton. Compared to RB Fluting, the differential widened by 1.90 euro to 277.13 EUR/ton.

With the weak demand for recovered paper from the graphic paper producers, our PIX ONP/OMG 1.11 dd index moved lower as well, now by 4.01 euros, or by 2.87%, to 135.76 EUR/ton. With the PIX Newsprint index heading higher with euro weakness, the price differential widened by 4.80 euros to 371.93 EUR/ton.

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