February 25, 2014
– Newsprint – The January statistics will be out shortly after the release of this report. January volumes are reported to have been satisfactory, taking into account the seasonal factors. After a number of capacity closures in 2013, the supply/demand balance is healthier than in other graphic paper grades. In most cases, price talks have ended with 6-month price fixed deals with prices rising but with only part of the price hike, targeted by producers, having been achieved. And, in this grade, some negotiations are still going on, particularly in Germany. Euro strengthened by about 0.3% against the basket of non-EMU currencies which caused some downward pressure on the benchmark. The PIX Newsprint index retreated by 22 cents, or by 0.05%, and it closed at 479.82 EUR/ton.
LWC – Market participants in coated mechanicals watch closely the coated woodfree market development – and vice versa. Recently decided capacity closures, two by Stora Enso, support the market balance and pricing but the weaknesses persisting in the coated woodfrees, coupled with the 7% demand drop for coated mechanicals in Europe in 2013 makes the going tough in LWC and other coated mechanicals as well. A small drop, typically by 10 EUR/ton has been reported as a common result of the price talks. At this point, our benchmark is down by less than five Euros/ton. The approximately 0.3 % strengthening of the Euro against the weighted basket of non-EMU currencies had a negative impact on the benchmark. The PIX LWC index moved down this week by 86 cents, or by 0.13%, and settled at 657.83 EUR/ton.
Coated woodfree – While January volumes have been described as satisfactory and some capacity cuts have been seen (or will soon be seen); the over-supply problem persists in this grade after a full 7% drop seen in the European consumption in 2013. Also, even if the shipments in the beginning of the year have not been too bad, the order books are short and the heavy competition among the wholesalers applies to coated woodfrees as well. Spot volumes are readily available. Slight strengthening of the non-EMU currencies since the turn of the year, even including Euro’s strengthening last week, has helped in limiting the price decline since the turn of the year. The 0.3% strengthening of the Euro against the non-EMU currencies meant downward pressure on the benchmark. The PIX Coated woodfree index continued, however, to climb higher, this time by 1.75 euro, or by 0.26%, and reached 665.04 EUR/ton.
Uncoated woodfree – The volumes are reported to have been above (modest) expectations in January. However, in February, some re-shortening of the order books has been reported. February has also seen the pressure from imports increasing. With the weakening of the economic growth in parts of Asia, more Asian uncoated woodfrees have been offered for sale in Europe. On the other hand, major capacity reductions in the US reduce the competition on export markets already and maybe even more in not-too-distant future. In Europe, capacity is rather up than down from last year. This does not bode well with the supply/demand balance as the deliveries-to-capacity ratio was already in low 80’s in 2013 and demand fall in Europe was over 3%. The 0.3% strengthening of the Euro against the basket of non-EMU currencies provided a moderate downward impact on the benchmark. However, the PIX A4 B-copy inched up by 43 cents, or by 0.05%, and closed at 830.31 EUR/ton.
US Newsprint – A number of newsprint producers have signed a new labour agreement over the next five years, i.e. extending all the way to the end of 2018. That contract and the conversion of about 0.5 million tons of newsprint capacity to other grades, typically linerboard, should help to bring stability on the newsprint market. Longer-term, the demand risks falling further. A reduction of demand is likely to be seen also in 2014 but the improving economic outlook should limit the volume decline to a lower number than what was seen in 2012 and 2013. Maintenance downtime needs during Q2 will help to maintain a reasonable supply/demand balance in the coming 2-3 months. There is very little to report from the pricing front. Both PIX US Newsprint indices remained in place from last week, the 30 lb index at 584.42 USD/ton and the 27.7 lb index at 623.25 USD/ton.
General Economy – US: The harshness of the winter in the Eastern and Central parts of the US messes up the economic indicators and makes forecasting very difficult. In spite of the weather-impacted weakening of the data, the inner strength is still there. That shows in the West where the indicators are positive. Slightly further out, West could end up being the disappointment of the year as the drought threatens the agriculture and power generation. Even with cold and snow, the US manufacturing activity has been strong in February. The Markit Flash Manufacturing PMI showed a leap from 53.7 points in January to 56.7 points in February, the largest monthly gain since 2010. The combination of falling inventories and a sharp rise in order backlogs suggests that strong growth is likely to continue in the coming months. Analysts expect the US GDP growth to be nearly 3.0% this year and then reach that level fully in 2015.
Europe – In the Euro-zone, private consumption and service industries are still searching for a faster gear but the industrial output is already showing more strength than what was expected only a few months ago. The Flash Composite PMI, by Markit, retreated slightly in February to 52.7 points from 52.9 in January but that is till the 2nd best reading in 2.5 years. Service sector showed improvement, rising to 51.7 points but still well below manufacturing output which clocked, even after a decline, 55.5 points. Although the manufacturing PMI weakened in general, new order intake was at its highest level since early summer 2011. The first quarter growth could reach 0.5% (non-annualized), already a pretty healthy level. Further price fall reminds of the deflation scare. Unemployment remains the most acute problem, together with Greece’s need to borrow more money – again. The Consensus pegs the Euro-zone GDP growth at 1% this year and 1.5% in 2015. If 0.5% growth is reached in Q1, upside risk is bigger than the downside one.
Japanese economy is growing strongly but that is exactly as was predicted with the sales tax hike taking place on April 1, especially after the 4th quarter performance was clearly disappointing with just 1% GDP-growth (annualized). Among the different sectors of the economy, the manufacturing industry is doing the best but the retail sales and service sector are showing a reasonable growth as well. Capital spending has remained quite muted and the export sales have not grown as much as expected, partly due to slowing down of China’s and some other Asian economies. The slower-than-expected growth could be a sign that there are limits to what the “Abenomics” can do with fiscal and monetary stimulus programs in the short run. Further growth requires the promised structural changes as well. Japanese GDP- growth is expected to slow down in Q2-Q4 and average slightly more than 1.5% for this year and then slow down to 1.2-1.4% in 2015.
China’s Flash Manufacturing PMI (by HSBC) showed the activity numbers deteriorating further from February. The index value sank from 49.5 points in January deeper in the contraction zone to 48.3 points. Contraction does not mean negative GDP-growth in China, as it easily would suggest in the western world but rather an economic environment where jobs are lost and growth rates diminish against prior periods. Both the actual production and new order intake have weakened, prices continue to fall, jobs are lost and work backlogs and inventories are contracting. Lower stocks mean that they will be re-built, one day, which helps the growth prospects, at that time. Some targeted stimulation efforts are likely to be seen soon, so that the growth does not fall too low. With them, a 7.5% GDP-growth could still be reached this year. The risks are, however, on the downside.
Paper industry – Few numbers are out yet on the performance of the paper and board industries in January. US containerboard and box statistics were disappointing with shipments slightly down and inventories up fairly sharply. The extreme weather conditions in large parts of the Eastern and Central US may have worsened these statistics, however. In Europe, the market pulp consumption data from UTIPULP suggests that January was not a very good, nor a very weak month. Market pulp consumption was down by one per cent, compared to January 2013. The comments from the market on the order books in various grades could maybe be summarized by stating that most market participants were positively surprised by the volumes seen in January but the activity has quieted down in February. Between the different European countries, the situation in the UK appears to be better than on the Continent, reflecting the stronger economic growth on the British Isles.
Paper price negotiations are still going on in few cases in Europe but for the most part, the picture is getting clearer with most, if not all, negotiations concluded in France and the UK and most of them through now in Germany as well. The contract periods typically vary between countries and grades between 6-month and 3-month deals,. Woodfree grades have seen declines and coated mechanical prices have taken a small hit as well. In newsprint, producers have been successful in getting part of their price increase attempt through and some small increases have also been reported from uncoated mechanicals. As shown below, these changes have started to show also on our benchmark grades now that the order backlogs from 2013 have been depleted. After the recent strengthening of the Pound Sterling, price differentials between the UK and the Continent are fairly small.
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