FOEX: European publication paper prices all slightly lower, pulled down by continued weak demand and stronger euro; newsprint prices remain unchanged in US, off just €0.09/tonne in Europe, but European producers aim to lift prices in 2014

HELSINKI , December 10, 2013 (press release) –

Newsprint – Over the first three quarters, newsprint production is down in the CEPI-member countries by 4%. The Euro-graph estimated European demand is down more than that, or 5.9% and the total European shipments even more, or 7.3%. Compared to 2010, the production is already down by 400-500 000 tons by quarter and by nearly 2 million tons on an annual basis. After having seen prices drift down over 20 EUR/ton over this year, producers will aim to get some and hopefully all that back in 2014. The fundamentals are not very encouraging at present, especially with October statistics having been among the weakest in 2013, both in terms of regional demand and of export performance. Euro strengthened by 0.4% against the basket of non-EMU currencies. This had some downward impact on the benchmark. The PIX Newsprint index slipped by 9 cents, or by 0.02%, and closed at 472.97 EUR/ton.
 
LWC – In coated mechanical grades total, Q1-Q3 2013 production was down by as much as 9.4% in CEPI-member countries. Weak demand and capacity reductions both played a role in this drop. Price differential to uncoated mechanicals may have been another driver even if the production of uncoated mechanicals was down substantially as well, or by 5.5% over the first three quarters. October was another weak month for LWC with both internal and external deliveries down by about 7%. There appears to be little hope in breaking the downward trend even if a somewhat slower rate of retreat is foreseen over the year 2014, assuming a small pick-up in the economic growth. The approximately 0.4% strengthening of the EUR against the weighted basket of non-EMU currencies had a negative impact on the benchmark. The PIX LWC index came down again, this time by 88 cents, or by 0.13%, and settled at 660.78 EUR/ton.
 
Coated woodfree – In this grade, the first 9 months’ production in the CEPI-countries showed a drop of 5.1% against January-September 2012. Just about exactly the same rate of decline was seen in the European regional demand in October.  A nice gain of 6% over October 2012 in exports outside the region was one of the positive surprises. This export gain was seen just when Ilim reported having started the first coated woodfree machine in Russia, at their Koryazhma site. The strengthening of the EUR against the non-EMU currencies caused a downward force on the benchmark. The PIX Coated woodfree index retreated by 54 cents, or by 0.08%, and landed on 665.94 EUR/ton.
 
Uncoated woodfree – Uncoated woodfree was again in October the best grade of the weak graphic paper sector with the estimated European demand down by 2.4% and total shipments down by 2% against October 2012. UWF was also the least negative graphic paper grade in production terms over the first nine months of the year. CEPI member countries’ combined production of uncoated woodfree grades turned out to be -1.3%. In spite of the relatively smallest decline, UWF prices have come down in 2013 by almost as much as the price in other graphic paper grades or by almost 30 euro/ton between early January and early December. Price increase attempts from January 2014 have been made public by some producers – without defining the actual price targets. The 0.4% strengthening of the EUR against the basket of non-EMU currencies brought some downward pressure on the benchmark. The PIX A4 B-copy index lost 16 cents, or 0.02%, and closed at 833.87 EUR/ton.

US Newsprint – The weakness of the newsprint demand in North America persists. Recent gains in exports (up by 4.5% over the first 9 months) help the US industry volumes but has not prevented the production volumes from dropping in a double-digit pace (-11% over the first 10 months). In Canada, the recent weakening of the CAD against the USD has helped the financial results of the Canadian firms but give little respite there either over the newsprint production and shipments volumes. Old, already closed newsprint machines in North America are either converted into other grades, in NA or elsewhere, or sold as spare parts or scrap metal. Price negotiations over January volumes are starting with, once again, conflicting views between the sellers and buyers. In late November/early December, prices have remained static. The 30 lb index remained at 585.80 USD/ton, and the 27.7 lb index at 623.90 USD/ton.

General Economy – US: The main piece of economic news last week was the second large consecutive increase in the employment by just over 200 000 new private sector jobs. The US unemployment rate fell to 7.0%, the lowest level seen since 2008. And, there were also other encouraging pieces of news. Housing has remained a strong driver of the growth. Manufacturing output increased sharply in November and the number of new orders showed a solid gain as well. Production of plants and machinery goods led the growth hinting at the firms’ growing willingness to invest again.

The downside of all this optimism is that the Fed may start unwinding their massive stimulus programme soon. The former chairman Bernanke said before his term came to an end that when the unemployment rate dropped below 7%, the US Central Bank would cease their $85bn-a-month bond buying programme (one form of the quantitative easing).

The latest data suggests that the pace of economic growth may have started to weaken again. Consumer spending rose still by 0.3% in October, higher than the 0.2% rise in September.

Europe – The Euro-zone growth slowed down in Q3. The worst performing sector was imports, understandingly so when households are not consuming, firms are not investing and people prefer to buy domestic to help their own nation. No country or region has ever recovered through austerity. While the Euro-zone “balance sheet” will gradually get healthier through the belt-tightening, the recovery will be very modest and slow. Exports will support the growth while low private spending, lack of investments and high private and public debt in several member countries will keep the recovery at snail-pace speed. What would be needed to speed up the process is, among many other things, a change in the Central Bank mandate so that instead of focusing only on keeping the inflation low and Euro-currency strong, the mandate would include a commitment to support financial stability, economic growth and employment. With that mandate, we would see another interest rate drop in December and another longer term refinancing operation in early 2014.

Japan has revised its Q3 growth data downwards. The main reason for this was the finding that the private investment activity had lost pace faster than expected. The Japanese economy grew only 0.3% for the quarter and by 1.1% annualized, as opposed to the original estimate of a nearly 2% annualized expansion. While somewhat worrisome, the already taken aggressive measures in order to pull Japan out of deflation mode into a more rapid growth are still expected to pay off. The faster recovery seen in the US and expected in China and in a number of other emerging economies is expected to help in supporting a faster pace again in the coming quarters, at least as far as exports are concerned. Capital expenditure is most likely to recover as well. In Q4 and in Q1 2014, the domestic demand is also foreseen to strengthen, temporarily, before the sales tax increase on April 1, 2014.

In China, there are more and more signs that the economy will start to re-accelerate, not back into the over 10% annual real GDP-growth mode seen constantly a few years ago but towards – and over – 8%. The trigger for the improving growth would be a combination of export recovery and higher household demand within the country, the latter supported by the recently introduced structural changes. In the export sector, a stronger growth impulse is likely to come from the U.S. and from some closer-by Asian economies. China already recorded its largest trade surplus in several years in November with a 13% increase, up from a 5.6% gain seen in October. Exports to the US grew by nearly 18%. The statistics may lie a bit, though, as repatriation of investments could have inflated the export growth numbers.

There are also other downside risks. E.g. the growth and export performance of some of China’s closest neighbours, such as South Korea remains well below expectations. Also, the protectionist measures, such as the dissolving pulp import duties, could trigger counter-measures with some negative impact on Chinese recovery.

Paper industry – As always when nearing the turn of the year, the talk of the day are the starting, or already ongoing talks on prices. In the US, the price outlook is positive on three accounts. In spite of the speeding up of the economic growth, US dollar has weakened over the recent weeks. That will help the export volumes. Weakened currency typically also triggers higher inflation which, in turn, pushes prices higher. Finally, the supply has typically been adjusted faster to the demand changes in North America than in Europe. Consequently, the capacity utilization rates tend to be higher in NA than in WE. In 2014, this seems to be working two ways. In graphic papers, especially in uncoated free sheet, major capacity cuts have been announced – and partially already seen. On the other hand, the recent good demand for containerboards may have triggered too much new capacity. So both upside and downside price pressures have been reported by industry analysts.

In Europe, the volume-weighted average of those graphic paper prices which are reported by our PIX index system fell between January 2013 and early December 2013 by almost precisely 4%. Adjusting that to the modest 1.6% inflation rate in the EU, graphic paper prices fell in real terms by 5.5% in the past 11 months. So, there is obviously some catching up to do whether or not that is possible, and if so, to which extent is another question. Over the first three quarters of the year, graphic paper production was down in the CEPI countries by 5.0%. Case-making material production was, on the other hand, up by 2.5% and that much better starting point helped the prices up, in RP-based grades, by about 14% over the first 11 months.

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