FOEX Pulp & Paper Indices - Sept. 11, 2012

Sandy Yang

HELSINKI , September 11, 2012 (press release) – General economy: US – Global economic outlook weakened further in August. JP Morgan’s composite PMI retreated again, now to 51.1 points; weak but not contracting. In the U.S., unemployment rate fell to 8.1% but there is no reason to cheer. The drop was due to loads of people giving up looking for a job. Only 96 000 jobs were added in August, clearly less than what would be needed to get the recovery going again. Other data has been weak as well. Average private sector work week remains short at just over 34 hours and the average earnings have inched lower. US economy continues to slow down and it was not all that strong to begin with. Europe’s falling deeper in the recession and the sharpness of the slowdown in China mean worsening export outlook and the likelihood of a further slowdown of the US economy is likely. The greyness of the US economic outlook is putting more and more pressure on the Obama administration and especially on the Fed to act. The wait will not be long.

Europe – ECB appears to have finally decided that they will be ready to take the role of the lender of last resort. The Bank announced that they would resume intervening the government bond market. Using OMT’s (Outright Monetary Transactions) it will buy bonds. That is, however, conditional to the country in question having agreed to the fiscal adjustment program. The key word of the statement was that the purchases are, at least theoretically, unlimited. The statement led to an immediate drop of the highest interest rates. First market reactions were: “Not too little but definitely too late”. August data was very weak. Markit’s composite PMI numbers came out slightly below estimates at 46.3 with especially manufacturing weakening further. Productivity was down in the Euro-zone but back up in the UK. Further decline in new orders and in employment more or less guarantee that a) Europe will be proved to be in technical recession with Q3 numbers and b) the recession is deepening.

Japan – The sharpening slowdown in China is bound to impact Japan’s recovery, even if not nearly as much as Taiwan and South Korea will suffer. The persistent strength of the Yen is hurting exports also to other countries than China. It also continues to diminish the corporate profits and, consequently, erode the corporate sentiment. The problems of exports show very clearly in the data over manufacturing output and the new export orders. The domestic market continues to hold reasonably well, supported by a long string of monetary easing and other stimulation measures. The domestic market growth helps in keeping the real GDP-growth at near 2.5% this year, against very soft comparison data from 2011. Domestic consumption alone cannot carry the torch very high. Unless the export performance improves, next year’s growth will be only about half of this year’s rate. 

China – The macro-economic data from August offered no clear signs of recovery, rather the contrary, even if many of them look bullish from the industrial world’s point-of-view. Retail sales were up by 13.2%. Industrial production grew slower than earlier but still by 8.9%. To a European this sounds like a lot, but it was the weakest number since May 2009. Fixed asset investments slowed down but real estate investments picked up a bit. Inflation has slowed down. In August it was only 2.0%. Food prices were up but the prices of most other items showed only little or no growth. In spite of some still quite strong-looking numbers, slowing down of the Chinese economy is clear, so clear that the politicians are increasingly worried and feel that something should be done. It is quite plausible that China will very soon announce new stimulation measures in order to support the export sector.

Paper industry – For a seasonally weak month in a very weak economic environment, the market feel from August is probably more positive than what most analysts had expected. The US printing and support index inched a bit lower in August but not much. Seasonally adjusted, the numbers were better than expected. Data from supply managers was even better, according to Brian McClay, with new orders, production and employment in the sector all up. The high season typically seen in September appears to have started early this year. In Europe, the mood is not as bright as it appears to be in the US but not all that bad either. After slightly longer summer stoppages than in a normal year, inventories are below normal and the seasonal pick-up in orders in September should be felt quickly in the activity rate. July numbers from CEPI showed that the industry entered August after a month of a relatively small decline. Uncoated woodfree, tissue and wrappings showed actually an increase against July 2011. The total paper and paperboard production was still down by 1.7% against July 2011 with graphic paper sub-total showing a drop of 4%. News from the market in August suggests that the decline in August is likely to be a moderate one.

In China, paper production continues to exceed 2011 numbers, in spite of the production downtime taken. Preliminary July data shows a 6% increase over July 2011.

NBSK pulp Europe – August is typically a month of high market pulp production and low shipments before the things turn around in September. This appears to have been the case also this year as only limited downtime has been taken in softwood grade, or, at least, been publicly recognized. Looking into the coming months, things could change on the supply side. Closures of BCTMP will be seen and the start-up of the Bratsk mill has been delayed until December with no pulp coming to the market before 2013. Low consumer inventories of pulp trigger more shipments on short notice if the hopes for a normal seasonal pick-up on paper demand materialize. While pulp prices in China seem to have turned the corner and are on their way up, prices in Europe have continued to fall. But, several producers have announced price increases from October. Euro strengthened by 0.8% against USD from the previous week. Our PIX NBSK index fell by 8.07 dollars, or by 1.04%, and closed at 765.11 USD/ton. Converted into Euro, the index moved down by 10.94 EUR, or by 1.78%, and closed at 602.16 EUR/ton.

BHK pulp Europe – In BHKP, downtime has been taken in Asia. Also, the closures of non- wood pulp capacity have continued in China. Extra downtime at woodfree paper mills in Europe has further reduced the demand here but in China the purchasing activity appears to have been picking up over the past few weeks. Also Thailand will be buying more pulp due to major production losses at the local Khon Kaen facility. Tissue paper producers use increasing quantities of BHKP and that supports global demand growth. In Europe, tissue paper production capacity remains more or less unchanged (net) and no major increases in market pulp shipments to this sector can be expected which would compensate for the losses occurring with the decline of graphic paper demand and production. Euro strengthened by 0.8% against USD from the previous week. The PIX BHKP index headed down by 5.71 Euro, or by 0.95%, and closed at 593.24 EUR/ton. The PIX BHKP index value in USD fell by 1.57 dollars, or by 0.2%, to 753.77 USD/ton.

BHK pulp China – Purchasing activity appears to be picking up in China. Market pulp production downtime, for technical and market reasons, in the region is thinning the regional supply since August. Continuing large increases in tissue paper capacity and production will add to the demand again over the remaining 4 months of the year. There are also several paperboard mills which have either just started up or will be starting up before the end of the year and which are dependent on market pulp, both BSKP and BHKP. Following softwood, now also the hardwood pulp price decline appears to have turned into a rise, at least it did over last week’s business. PIX China BHKP started to move back up, at least for this week, and rose by 4.03 dollars, or by 0.64%, and closed at 635.14 USD/ton. Yuan strengthened by 0.1% against USD. The conversion of the USD value into Yuan resulted in a rise of 22.53 RMB, or of 0.56%, to 4029.18 RMB/ton.

NBSK pulp China – The announcement of Ilim of a delay at the major new line at the Bratsk mill reduces the supply pressures for the risen producer inventories. Several producers have now announced price increases also in other Asian markets than China, believing that the increased purchasing activity will be more than a brief spurt. The level of Chinese consumer stocks is not known but if already relatively low, as some observers believe, this could combine the purchases to fulfil the real needs with the common speculative elements. On a sourer note, the slowdown of the economy has added to the inventories of finished goods and especially the paperboard producers may face lean weeks and months of demand. Our PIX China NBSK index value climbed higher by 4.31 USD, or by 0.7%, and closed at 628.94

USD/ton. Yuan strengthened by 0.1% against USD. The conversion of the USD value into Yuan resulted in a rise of 24.34 RMB, or by 0.6%, to 3989.85 RMB/ton.

Newsprint – The retail chains’ fights over the market share have increased the size of their advertising campaigns but it appears to have little impact on the continuing structural erosion of the newsprint demand impacted by exits of some newspapers, few pages in many others and by the change into a smaller format at some. Olympics boosted advertising but, once again, the electronic media were the ones clearly profiting. There is unlikely to be much change over the remainder of the year in the 5% decline trend in demand seen over the first 7 months. The approximately 0.5% strengthening of the EUR against the weighted basket of non-EMU currencies pulled the benchmark slightly lower. The PIX Newsprint index fell by 68 cents, or by 0.14%, closing at 499.32 EUR/ton.

LWC – In the US, the LWC market has tightened considerably, following the capacity reductions and a minor turnaround in demand trend with a small increase in shipments shown over July. Also in Europe there are some signs of hope. July demand was up here, too, against July 2011 but the decline in the export volume was disappointing. One reason behind the small improvement in the demand is the switch of some catalogue producers from SC to LWC grade which at least partly offsets the continuing decline in the magazine sector. The 0.5% strengthening of the EUR against the weighted basket of non-EMU currencies gave our benchmark value a downward push. The PIX LWC index retreated by 1.54 EUR, or by 0.2%, and settled at 694.54 EUR/ton.

Coated woodfree – In this grade the July statistics were better than what the feel of the market indicated. Good growth in export volumes was real but did some of the regional shipments just mean an increase of the end-users stocks or driven by speculative purchases ahead of the new round of price talks in September. In August, order books remained relatively thin and some increase in spot offers was reported. September-November are strong months, seasonally. Against soft comparison from 2011, there is some hope for positive volume changes if the recent political actions get some activity back into the general economy. The 0.5% strengthening of the Euro against the weighted basket of non-EMU currencies caused some downward pressure on our benchmark. In spite of the negative currency impact, the PIX Coated woodfree index gained 81 cents, or 0.12%, and reached 703.78 EUR/ton.

Uncoated woodfree – High unemployment numbers are a negative driver for uncoated woodfrees. With record unemployment prevailing in the Euro-zone, a small increase in demand against last year in July could be considered as a very positive sign. Order books are not thick but described as adequate in August. The slowing down of the global economy shows as a drop in the export volumes which dampens the mood of the market. The 0.5% strengthening of the Euro against the basket of non-EMU currencies had a negative impact on our index. The PIX A4 B-copy index inched down by 23 cents, or by 0.03%, and landed at 866.09 EUR/ton.

Containerboard Europe – In the US, recent fall of the ISM manufacturing index into the contracting zone (=below 50 points) could be bad news for the containerboard and box demand in the coming months. The uplift of the mood with the positive July numbers was short-lived. Producers have announced price increases and the next few weeks will tell the rate of success of this move in challenging conditions. The conditions are challenging also in Europe where, equally, price increase announcements have been published. The general economic environment means low demand and limited price pull. On the other hand, recovered paper prices have started moving up, first in China and now also in Europe, at least as far as last week’s business was concerned. Containerboard market behaves differently between markets and between end-use segments. E.g. Germany is doing better than UK or Spain and food packers were busier than the electronics sector.

Last week the Euro strengthened by about 0.8% against the USD and by 0.5% against the weighted basket of the non-EMU currencies. Impacted by the downward pull from the exchange rates, the PIX Kraftliner index lost 6 cents, or 0.01%, and landed at 544.57 EUR/ton. The PIX White-top Kraftliner index value showed also another small retreat of 35 cents, or of 0.05%, closing at 757.93 EUR/ton. In the recovered paper based containerboard grades, the quotes were also relatively limited. The PIX Testliner 2 index moved lower by 1.60 euro, or by 0.4%, to 410.14 EUR/ton. The PIX Testliner 3 index value lost 4 cents, or 0.01%, and closed at 384.65 EUR/ton. Our PIX RB Fluting index retreated by 95 cents, or by 0.26%, to 369.43 EUR/ton.

Recovered Paper Europe – The threat of a long-shoremen strike in the US is a new driver in the recovered paper market. The potential difficulties of shipping RP from the US ports to China has increased the purchasing activity for recovered paper by the Chinese and not only in the US to get the product out before the strike, if it takes place, but also in other markets, including Europe and Mexico. The regional demand in Europe for recovered paper remains moderate although up a bit in late August/early September. The stocks of RP are still partially fairly high, at least in the UK. But this rising interest of the buyers outside Europe, coupled with seasonal factors, is beginning to show in the pricing.

Our PIX Recovered Paper benchmarks headed both a bit higher, after a long-lasting gradual decline. The PIX OCC 1.04 dd moved up by 49 cents, or by 0.5%, landing at 102.95 EUR/ton. The price differentials between containerboards and OCC narrowed again: against Testliner 2 the differential shrank by 2.09 euro to 307.19 EUR/ton, against Testliner 3 the gap declined by 53 cents to 281.70 EUR/ton and against RB Fluting, it narrowed by 1.44 euro to 266.48 EUR/ton.

Our PIX ONP/OMG 1.11 dd index moved back up as well. The rise was 1.75 euro, or 1.4%, to 128.56 EUR/ton. The PIX Newsprint index movement was the other way and the price differential narrowed by 2.43 euro to 370.76 EUR/ton.

US NBSK – Ilim’s capacity increase in Russia has been delayed but the plans to re-start Terrace Bay mill in Ontario with paper grades pulp are still on. If the long-shoremen were to go on strike, there would be added pressure to place NA supply in the regional market. Prior to the potential strike, the threat increases both buyers’ and sellers’ desire to move the purchased volumes out before the deadline date, just play it safe. This is likely to increase the shipments from North America to overseas destinations, mainly thus in softwood grade. Meanwhile, the US market has been weak. Some producers have publicly announced price reductions for September shipments, typically down by 20 USD/ton, both for NBSKP and southern pine pulps, valid from September 1After the removal of the top and bottom 10% of the quotes received, our PIX US NBSKP benchmark value moved substantially down. The index value retreated by 17.14 USD/ton, or by 2.02%, to 832.86, not too far from the 830.00 USD/ton, the list price announced by most producers, separately, from September 1.
US Newsprint – The restructuring continues – and halts. RISI reported that the sale of SP Newsprint assets (under Chapter 11 ruling) to an investment group is about to be completed. On the other hand, Verso announced that they will not pursue the talks with NewPage. Newsprint demand continues its downward slide. Supply cuts, some of them large and permanent and some recent ones small and temporary have maintained a fragile balance and enabled the producers to withstand much of the downside pressures throughout the year, as shown by the limited 4-5 dollar drop in our benchmarks since the turn of the year.

After applying to the 10% removal system on the price data received, the indexes were stable compared with last week’s values. Both benchmarks remained unchanged, the PIX US Newsprint 30lb index at 619.73 USD/ton, and the 27.7lb index at 658.87 USD/ton.

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