A clearer picture of the pulp market has emerged from the uncertainty that gripped the market a year ago. We are now largely free from the burdens of logistics constraints and pandemic policies, but the volatility in pulp prices witnessed over the past two years remains front of mind. For many in the global pulp industry, scepticism of an extended downturn in the pulp market is still present. Source: Fastmarkets
Fastmarkets’ senior economist, Patrick Cavanagh, shares some of his key takeaways and what he expects to see in the pulp market for the next 12 months.
The main points include:
- Pulp inventory volumes are at a record high, with more capacity expansions to come
- Temporary and permanent mill downtime and closures will play an important role in balancing inventories
- Pulp demand will be dictated by shifts in the inventory cycle in the short term.
- Production costs play more of a role than ever for pulp producers
- Additional market risks and drivers to watch out for, including China’s economic recovery, US interest rates and the strength of the dollar and sudden shifts in future pulp availability.
Chemical market pulp producer inventory volumes have reached a record high, with the imbalance for bleached softwood kraft (BSK), including paper grade and fluff pulp, more pronounced than for BHK.
The latest bleached hardwood kraft (BHK) producer inventory volume reading remains below the historical peak registered in mid-2019, while BSK inventory volumes have continued to set new record highs in recent months. The inventory bulge threatens to overhang the market for an extended period as demand remains tepid and new supply enters the market.
The global market pulp capacity will expand significantly over the next three years as five projects ramp up, representing an influx of over 7.4 million tonnes of new, low-cost kraft pulp supply to the market:
The 1.56-million-tonne BEK Arauco MAPA project began ramping up in Chile in March and expects to produce about 800,000 tonnes of BEK this year.
UPM’s 2.1-million-tonne BEK Paso de los Toros greenfield mill in Uruguay started up in April and aims to reach full operation by the end of the year.
Metsä Fibre plans to start up its new Kemi mill in Finland by the end of the third quarter of 2023, representing about 880,000 tonnes of new (mostly softwood) pulp supply net of the old Kemi mill closure.
CMPC has invested to expand BEK capacity at its Guaíba mill in Brazil by 350,000 tonnes in the fourth quarter of 2023.
Suzano continues to build its new 2.55-million-tonne BEK Cerrado mill in Brazil, which is expected to start up in the second half of 2024.
Downtime and closures will play an important role in helping to draw down producer inventories and feather in the new capacity to the global markets.
Downtime will come in several forms, including unexpected events like the Svetlogorsk mill explosion in Belarus and Canadian wildfires that are currently impacting BSK supply, along with production slowdowns like Suzano’s decision to reduce its annual BHK operating rate in Brazil by four percentage points through the rest of the year.
Some producers are opting to take temporary curtailments, such as Paper Excellence’s Crofton mill downtime in July and International Paper’s economic downtime in the fourth and first quarters. Other closures will risk becoming permanent, with Stora Enso’s recent decision to shutter its Sunila BSK mill in Finland in the second half of this year highlighting the elevated risk of closure during a downturn in the pulp market.
In North America and Europe, signs of large volume pulp restocking action remain muted as buyers appear to be waiting for pricing on a net basis to align closer to net prices in China, which have led global markets in a sharp downward correction.
Large volume transactions were reported in the Chinese market as buyers were lured back with offers of BHK under $500 per tonne in the second quarter of 2023. Demand for imported BHK has experienced an additional tailwind from relatively high hardwood chip import prices, which made it more economical for integrated pulp and paper producers to purchase imported BHK rather than producing pulp domestically with imported chips.
On the softwood side of the market, the elevated spread between benchmark northern bleached softwood kraft (NBSK) and bleached eucalyptus kraft (BEK) in the Chinese market continues to favour substitution for hardwood.
Canadian and Scandinavian NBSK producers continue to lower prices to stimulate restocking demand from consumers and traders, and to gain market share from their competitors.
Production costs for market pulp producers are more relevant now than at any other point in the market cycle, as prices have fallen quickly to the high-end of the cost curve for both BSK and BHK producers, sharply reducing profitability and in some cases pushing some mills into the red.
Contrary to the last two years, which were dominated by rising and volatile transportation, energy, chemical, labour and wood costs, today’s market is beginning to see signs of cost deflation in certain regions and components of the industry cost structure.
Pulpwood and woodchip markets have seen reduced pressure in recent months as the downturn in paper and board markets has eased demand for wood fibre, allowing for declines in prices for woodchips in the high-cost Chinese BHK market and British Columbian BSK market. In Europe, lower natural gas and electricity rates should ease pressure on pulpwood markets from bioenergy producers, while also allowing energy and chemical costs to decline.
Although risks remain solidly weighted to the downside, upside risk is still present.
The Chinese government has recently stepped-up efforts to stimulate the economy into a much-anticipated recovery that has so far remained relatively sluggish. Further measures could be unfolded to help boost industrial production and the property sector, which should support growth in paper and board markets and thus motivate the start of a significant pulp restocking effort.
While the US economy has proven resilient to the high interest rate environment thus far, a pivot by the Federal Reserve to cut interest rates in the coming quarters could cool the strength of the US dollar. A weaker dollar would support pulp prices at a higher price floor by raising dollar-denominated production costs and increasing the purchasing power of pulp buyers, especially in China.
As witnessed in the past two major pulp pricing cycles, unexpected downtime remains the wildcard that has the potential to suddenly tighten supply to the market and shift buyer confidence in future pulp availability.
With the record-high pricing environment from last year still fresh on buyers’ minds, an unexpected outage or closure of a major pulp mill could act as the spark that stimulates the desire to stock up on relatively inexpensive pulp before the next major pricing cycle begins.
Fastmarkets is a cross-commodity price reporting agency (PRA) in the agriculture, forest products, metals and mining, and new generation energy markets.
