Newsprint – Only a small drop in demand over the first two months of the year, at least, and the substantial cuts in production capacity gave hope to the producers that the prices could finally be raised as the capacity utilization rates were quite good, especially in February. The price negotiations are finally over for a very major part of the contracts, now also in Germany. The achieved gains appear to have been smaller than hoped for. As the talks ended so late, the full impact may still not a part of the price data we receive but the 11 Euro gain since the year-turn in our benchmark matches the analysts’ reports talking about 10-15 Euro price gains. Euro strengthened by about 0.3% against the basket of non-EMU currencies which meant a downward impact on the index. The PIX Newsprint index lost a marginal 5 cents, or 0.01%, and closed at 484.37 EUR/ton.
LWC – A major part of the latest capacity closures in the European graphic paper sector is in LWC-grade. Approximately 700 000 tons of coated mechanical supply has been closed. In 2013, the demand in this grade fell by 600 000 tons and the capacity utilization rate of 86% meant that about one million tons of capacity was unutilized over the year. The recent closures remove most of the slack, but the demand in Europe has continued to fall at a rate of slightly above 5% or by another 25 000 tons or so each month. Prices remain under downside pressure with the strength of Europe making the earlier substantial exports outside the region difficult to maintain. The approximately 0.3% strengthening of the Euro against the weighted basket of non-EMU currencies caused further downward pressure on the benchmark. The PIX LWC index lost 31 cents, or 0.05%, and landed at 652.80 EUR/ton.
Coated woodfree – The 2nd quarter tends to be the time for maintenance downtime and some seasonal improvement on the demand side, resulting in a healthier balance. Little of this is seen at present. The Euro-graph statistics are not out yet over February but other sources estimate the European demand further down by 3.0-3.5% over the two first months. The gradual picking up of the European economy has not yet been felt as an improvement over the advertising sector, and especially not in the paper-based products. Exports outside the region continue to struggle. The 0.3% strengthening of the Euro against the non-EMU currencies tried to weigh down the index. The PIX Coated woodfree inched up by a minor 2 cents, or by 0.00%, and heaved to 658.82 EUR/ton.
Uncoated woodfree – Office and other uncoated woodfree papers are not doing well but they are in a relatively better shape than the other graphic paper grades. In Western Europe the production is actually marginally up from last year. In North America, the capacity utilization rate exceeded 95% in February – after major capacity cuts, but preliminary data over March appears weak. And, in the world as a whole, a 2-3% growth is projected for the year and new capacity continues to be planned in the emerging markets, such as a recently announced 600 000 tons plan in the Middle East, seemingly without sufficient sweet water resources! After having seen the prices decline marginally over the first 3.5 months, some producers in Europe are reported to have announced undetailed price increase initiatives from May 1. The 0.3% strengthening of the Euro against the basket of non-EMU currencies meant a negative driver on the benchmark. In spite of this downward pressure, the PIX A4 B-copy index climbed up instead, by 1.78 EUR, or by 0.22%, to 823.35 EUR/ton.
US Newsprint – The February data was clearly better than the January “frost-bitten” numbers. Capacity utilization rate moved up to 94%, one percentage point up from last year. Still, with total demand continuing to decline rapidly – 8% down over the first two months – more capacity closures have been announced. The latest announcement by De Ridder, by coincidence, reduces US capacity by those same 8%. Regionally, most of the closures are in the South so the historical movement of capacity moving from North to South is being changed the other way around, at least for now. The PIX US Newsprint 30 lb index remained at 583.42 USD/ton as did the 27.7 lb index at 620.30 USD/ton.
General Economy – US: Global growth estimates have been revised slightly downwards, mainly due to the weakening of the growth in many key developed countries, most notably China. In the US, the economic growth will end up showing only modest gains in Q1 but much of the softness of the performance is linked to all sorts of problems which the harshness of the winter caused. But the weaker-than-hoped-for Q1 numbers will mean a slower pace of fiscal tightening. Consequently, starting from this April, stronger gains are expected. Consumer confidence readings are at their highest levels since the start of the 2008-early 2009 recession. Combined with the positive development on the pay-roll data and with some pent-up demand inherited from Q1, consumer spending is likely to show a solid gain in Q2 and beyond. Corporate spending is likely to increase as well, even though the Q1 earnings were reduced by the weather-related problems.
Europe – The Euro-zone recovery has been picking up speed. However, two major concerns remain. The political tensions are running high after the Russians invaded Crimea and the pressure has now risen over Eastern Ukraine. The other threat deals with the rising risk of a deflation. Euro strength hampers export growth and imports lower inflation. The ECB is still expected to engage in a further easing once the even lower than today’s 0.6-0.7% inflation numbers from Q2 become evident. The time to pre-empt the deflation is now. After just one further major external shock, it could be too late already. Fortunately the PMI’s on manufacturing as well as on services are in the growth territory in most of the euro-zone economies. In February, manufacturing gained 0.2% against the previous months and 1.7% against February 2013. Also, consumer spending is picking up but the gains are too modest to trigger a higher inflation rate. Corporate investments are up as well, but from a very low and fragile base.
In Japan, the economists are expecting to see a clear negative impact from the April 1 sales tax hike from 5% to 8%. Most of them believe that the slow-down is likely to be much shorter than in 2009, however. If all goes well, another smaller hike from 8% to 10% will be seen in October. If there is, meanwhile, no recovery after the first hike, the latter increase may still end up being postponed. The gross debt is now over 240% of the GDP – and still rising. Not only the state lacks money, the banking sector, or rather parts of it, is also undercapitalized. This means that the private sector cannot borrow enough money. The tightened credit conditions have raised the wave of bankruptcies now that the crisis seems to be over but actually is not.
In China, the efforts to rebalance the economy are slowing down in the short term. Part of this is structural but part of it is cyclical. All the same, the government realised the risks and introduced in early April a new small stimulus package, again mainly on the infrastructure items. Before this package, a growing number of economists have started to talk about a scare of a hard landing but the worst of the fears have been dissolved. With the slower growth in the US giving way to a faster pace and with also the Euro-zone economic growth picking up, Chinese exports are likely to profit from Q2 onwards. The transition towards a consumer economy will start bringing its share into the national growth, more probably only from 2015 onwards, however. Even if the Chinese GDP continues to grow, it struggles to be able to reach the government’s 7.5% growth target. We - and China - may rather see the 2014 rate at 7.0%, with the 2nd half gains bigger than the present ones.
Paper industry – March numbers are awaited with particular interest as the particularly difficult weather conditions still disturbed paper industry production and deliveries in North America and in Japan in February. In the industrialized countries, February remained weak with North American printing and writing paper demand down 4.4% for the month. In Europe, the drop was even bigger with 5.6%. In spite of heavy rains, Japanese graphic paper production showed a nice, nearly 5% gain. Shipments in and to the developing world continued to grow, however, and PPPC’s statistics are reported to show an estimated increase of 0.7% in February for the printing and writing papers as a whole. Judging by the news on the order book, inventory development and other demand drivers, it appears that some but not all that much better comparisons could be seen for NA and WE, but in China and other Asia, the gains could easily be smaller than those shown in February numbers. The news of very small gains in 2013 in loading books electronically (up only about 2% in WE) raises hopes that some sectors may not suffer in 2014 as much as earlier feared.
Outside printing and writing, tissue sector appears to do a bit better after a somewhat muted start for the year. Brown packaging materials had a good run in late 2013 and still in early 2014 but the capacity conversions from other grades, mainly newsprint, to corrugated boards is beginning to build an over-capacity situation and prices have come under downside pressure on some markets, especially as the OCC prices have come down, first in China and now also in WE and NA. Extended downtime has been reported around the approaching Easter holidays. Carton boards did not do as well as their brown cousins in 2013 but the activity is, on average, maybe healthier now than in the containerboards. Sack and bag papers are doing quite OK as well.
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