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Canfor Pulp’s operating income up in Q1 2020 amid volatile market

Canfor Pulp Products has reported an operating income of $6.1 million in its first-quarter 2020 results, citing solid performance at its pulp and paper mills.

Operating income for Q1 2020 was up $29.6 million from the fourth quarter of 2019.

Reported results for the first quarter of 2020 included a $10.7 million recovery in the finished pulp and raw material inventory write-down provision at period end.

After adjusting for this, the company recorded an operating loss of $4.6 million for the first quarter of 2020, a $21.9 million improvement from a similarly adjusted operating loss in the previous quarter.

“Our top priority is to ensure the health and safety of our employees, while taking the necessary steps to protect the business and optimize liquidity in response to the global impacts of the COVID-19 pandemic,” says Don Kayne, chief executive officer of Canfor Pulp Products.

“While we saw improved financial results in the first quarter and kept a strong balance sheet, events were overshadowed by the virus outbreak and the extreme market volatility and major economic uncertainty it has caused. We continue to actively monitor the ongoing situation in these unprecedented times and remain prepared to take further action if required.”

In support of the company’s cash preservation efforts, the board of directors has decided to suspend the quarterly dividend for the foreseeable future.

Operating performance

Canfor Pulp’s operating results reflected a solid operating performance at the company’s pulp and paper mills, as higher production and a corresponding decline in pulp unit manufacturing costs combined with a one-cent, or two per cent, weaker Canadian dollar mitigated the impacts of the coronavirus outbreak in the latter half of the quarter.

After a modest rebound in Asian pulp markets early in the quarter, global pulp markets weakened in late February and into March reflecting the spread of COVID-19.

Demand for tissue, however, remained solid, which helped to offset weakness elsewhere, particularly in the printing and writing segment.

Global softwood pulp producer inventories ended February at 37 days of supply, in line with December 2019, but still well above the balanced range.

US-dollar Northern bleached softwood kraft (NBSK) pulp list prices to China averaged US$573 per tonne, up US$10 per tonne, or two per cent, from the prior quarter.

The company’s NBSK pulp unit sales realizations were broadly in line with the prior quarter as slight increases in US-dollar unit sales realizations to most regions and the benefit of the aforementioned weaker Canadian dollar, were offset by the company’s regional grade mix.

Bleached chemi-thermo mechanical pulp (BCTMP) unit sales realizations showed a moderate increase from the previous quarter reflecting a gradual improvement in BCTMP US-dollar prices through the quarter combined with the weaker Canadian dollar.

Energy revenues were up quarter-over-quarter, largely reflecting seasonally higher energy prices combined with increased energy production in the current quarter.

Pulp production

Pulp production was 298,000 tonnes for the first quarter of 2020, up 12,000 tonnes, or four per cent, from the previous quarter, principally reflecting improved productivity and increased operating days in the current quarter, following a market-related curtailment early in the previous quarter at the company’s Prince George NBSK pulp mill.

Pulp shipments were up 23,000 tonnes, or nine per cent, from the previous quarter, largely due to the aforementioned increase in pulp production quarter-over-quarter combined with the modest improvement in purchasing from China, which outweighed the impact of transportation challenges in the current quarter.

Pulp unit manufacturing costs were modestly lower than the prior quarter, as the benefit of increased production and lower maintenance spend in the current quarter more than offset seasonally higher energy costs. Fibre costs were slightly lower than the previous period primarily reflecting a lower proportion of higher-cost whole log chips consumed and, to a lesser extent, seasonal pricing adjustments.

Paper segment

Operating income in the company’s paper segment was $6.8 million, up $1.8 million from the previous quarter, principally reflecting a 8,000 tonnes, or 31 per cent, increase in paper shipments. This was combined with moderately higher paper production accompanied by lower paper unit manufacturing costs, which more than offset the impact of modestly lower paper unit sales realizations.

The latter resulted from the carry-over of weak global kraft paper market conditions from the previous quarter into January and February, before recovering somewhat in March.

Mitigating market conditions

In response to the significant global impacts of the COVID-19 pandemic, on March 26, 2020, Canfor Pulp announced a series of significant measures, including a three-week curtailment of the company’s Northwood pulp mill in place of the previously scheduled spring maintenance turnaround (postponed until later in 2020).

This will result in a reduction of approximately 35,000 tonnes of NBSK pulp production in the second quarter of 2020.

The company also announced the reduction of its planned capital expenditures for 2020 by $15 million to $25 million (in addition to the previously announced $40 million cost containment measures), representing a $78 million decrease from 2019 capital expenditures.

This reduction will be realized through the deferral of planned projects and suspension of in-progress initiatives that can be paused without significant impact.

In addition to the COVID-19 related temporary downtime, the company has maintenance outages currently scheduled at the Northwood NBSK pulp mill and the Taylor BCTMP mill in the third quarter of 2020 with a projected 30,000 tonnes of reduced NBSK pulp production and a projected 5,000 tonnes of reduced BCTMP production, respectively.

Outlook

Looking forward, the impacts of COVID-19 on global macroeconomics are still unfolding and the company anticipates market conditions to remain volatile through much of 2020.

Global softwood pulp demand is currently projected to be solid through the second quarter of 2020, particularly from China as that region continues to recover from the pandemic, while containment measures across Western Europe and North America are forecast to weigh on market demand for printing and writing paper.

While pulp and paper operations are designated as essential services in many regions, it is projected that supply disruptions will continue in various regions as a result of the pronounced effects of COVID-19 on various business sectors, including lumber manufacturers.

The current weakness in lumber markets may result in extended sawmill curtailments in the British Columbia Interior, with the risk that lower volumes of sawmill residual chips available to pulp mills may cause additional downtime at the company’s operations.

Bleached kraft paper markets are currently anticipated to be solid through the second quarter of 2020, particularly in North America, as the impact of COVID-19 is projected to lead to increased demand for bleached kraft paper products that meet food grade specifications.

Read the Q1 2020 Canfor Pulp Products financial report.