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Chemical Costs are on the Rise

Tight chemical supplies and higher costs can also be added to the list of challenges currently facing Canada’s mills. Bleacheries, in particular, will have to shell out more money for chemicals in 2004. Tight supply/demand balances and higher costs for sodium chlorate, hydrogen peroxide and sulphuric acid will prompt suppliers to boost their prices this year. With little new capacity expected in the short term, markets could remain tight heading into 2005.

On the pulping side, price increases will be more modest. Higher raw material and energy costs will continue to put upward pressure on prices, but good supplies of pulping chemicals will prevent prices from escalating. Pricing and supply of caustic soda will depend on overall economic conditions. The caustic market will resemble a tug of war this year as producers’ attempt to raise prices to offset higher costs and improve profit margins will be encountered with heavy resistance.

Prices for most papermaking chemicals will rise early in 2004 and then flatten out for the rest of the year. Supply will generally be good for papermaking chemicals.

Pulping

Canada’s pulp mills ran at a slightly higher rate in 2003, producing about 2% more pulp than in 2002. Bleached kraft and mechanical pulps accounted for most of the growth.

New pulping capacity includes the startup of the Skeena Cellulose mill in Prince Rupert, BC and the restart of Tembec’s Chetwynd high-yield pulp mill in northern British Columbia. The latter was restarted after Tembec purchased the 160-kt/y facility from Louisiana-Pacific Canada Pulp.

Canfor will account for a greater share of Canada’s pulp and paper capacity when it completes its acquisition of Slocan Forest Products early this year. The combined company will have capacity to produce more than 5.2 billion board ft/y of lumber, 1.2 million tonnes/y of pulp, 950 million ft2/y of plywood and oriented strandboard and 150 kt/y of kraft paper. By combining operations, Canfor also expects to save $60 million/yr through synergies.

The supply of sulphur dioxide and sulphuric acid improved late last year following resumption of operations at Inco’s Ontario division. Unionized employees went on strike in the second quarter, forcing the shutdown of the company’s Sudbury smelter. A significant amount of Canada’s sulphur dioxide and sulphuric acid capacity was also shut down. Chemtrade Logistics, which markets Inco’s sulphuric acid output, was forced to declare force majeure as a result of the strike. A settlement was reached between Inco and its employees in the third quarter.

Marsulex, another major Canadian producer, expanded its sulphur dioxide business last year when it the sulfur product assets of Duke Energy Gas Transmission. The deal included a plant in Prince George, BC that upgrades molten sulphur, a by-product of environmental controls in the western Canadian oil and gas industry, into sulphur dioxide, sulphuric acid and aluminum sulphate. The chemicals are sold mainly to local customers in the pulp and paper and water treatment sectors.

There was some firming of sulphur dioxide prices last year, but price increases were modest. Adequate North American supplies should keep prices in check in 2004.

In contrast, sodium sulphate supplies were plentiful last year. Domestic production declined, but imports increased to make up the shortfall.

Prices for sodium sulphate remained stable in 2003. Plentiful supplies should ensure than prices remain flat in 2004.

Prices for elemental sulphur have skyrocketed over the past year, albeit from extremely low levels. In some markets, contract prices rose by more than 50%. Price hikes will moderate in 2004, with increases averaging about 10%.

Pulp mills will have no difficulty purchasing lime this year as supplies will be more than enough to meet demand. Prices went up by 2-3% in 2003 and a similar increase is expected this year.

Despite the closure of some chloralkali capacity in the U.S., sluggish North American demand for caustic soda has prevented markets from becoming tight. Plant operating rates are barely above 80% and barring a major economic upturn this year, caustic plants will continue to run at less than 90% of capacity.

Although not technically a price hike, some caustic suppliers decided to introduce an energy surcharge. This additional cost component kicks in whenever natural gas prices rise above a certain level. Similar surcharges have been introduced for paper chemicals and pigments.

Bleaching

The increase in bleached pulp production last year caused tight supply/demand balances for many bleaching chemicals to become even tighter. Output of bleached softwood kraft pulp was on pace to record growth of 1%. Production of bleached hardwood kraft was about 2% higher than in 2002. Bleached sulphite pulp output grew by more than 10% last year.

With little new capacity coming on stream for sodium chlorate, pulp mill bleacheries can expect continued tight supplies and shortages throughout 2004. Nexen Chemicals is expanding its sodium chlorate plant in Brandon, MB, by 33% to 260 kt/y, with completion scheduled for the fourth quarter of 2004. But North American supply will remain essentially unchanged as the company closed the remaining 68-kt/y unit at Taft, LA, in 2003. The company was unable to secure a suitable power agreement at that site, making the Taft facility uneconomical in today’s market.

In addition, the Asia Pacific market will continue to be supplied from North America, further straining the tight supply/demand balance. ERCO Worldwide’s proposed 70-kt/yr sodium chlorate plant in Australia, which would have provided the company with another source of supply for the Asian market, has been delayed.

The tight supply/demand balance, combined with higher energy costs, were largely responsible for driving up the price of chlorate in 2003. Suppliers did not have the luxury of reducing production at their highest-cost facilities and responded by raising prices in the spring, followed by smaller increases in the latter part of the year. In total, prices went up by about 5% in 2003.

Mills can expect additional increases in chlorate prices in 2004 because of higher costs and snug supplies, with the first price hike taking place early in the year. Another price increase is likely before the end of the year. Pulp mills could be paying 5-10% more for sodium chlorate before the year is over.

Key changes also took place in the sodium chlorate market last year. ERCO Worldwide purchased Albchem Holdings, boosting its share of the North American market. Albchem’s chlorate plants in Bruderheim, AB, and Hargrave, MB, have a capacity of 120 kt/y. ERCO’s plants in Buckingham, QC, Thunder Bay, ON, Grande Prairie, AB, North Vancouver, BC, Saskatoon, SK, and Valdosta, GA, can produce up to 460 kt/y of chlorate. The addition of Albchem raises ERCO’s share of North American capacity from 23% to 29%.

Chemtrade Logistics Income Fund purchased BC Chemicals (BCC) from Canadian Forest Products (Canfor). BCC has capacity to produce 66 kt/y of sodium chlorate at Prince George, BC and is the exclusive supplier of chlorate to Canfor’s Prince George pulp and paper mills, as well as a supplier to third parties. The acquisition is structured to include 10-year exclusive contracts under which Canfor will purchase the majority of BCC’s chlorate production. In addition, Canfor will pay a fee to have its soap skimmings processed into crude tall oil.

The hydrogen peroxide picture wasn’t much brighter last year. Strong demand put a strain on supply, forcing plants to run flat out to meet mill requirements. When higher energy, transportation and insurance costs are added into the mix, the result was a 6% jump in peroxide prices.

Pulp mills can expect more of the same for in 2004. Good demand for peroxide will ensure that plants will continue to operate flat out. With little new capacity coming on stream, the supply/demand balance will remain tight.

On the pricing side, pulp mills can expect an increase of about 3-4% in early 2004. Another increase of about the same amount
is likely before the end of the year.

While not as tight as chlorate or hydrogen peroxide, the supply of sulphuric acid was also snug last year. The startup of Inco’s Ontario facilities following a deal with striking workers helped alleviate the supply shortage.

Acid markets will likely remain snug in 2004. Strong demand in Asia, combined with the closure of smelters worldwide because of low metal prices, has created a tight supply/demand balance.

The Inco strike, good demand and higher sulphur raw material costs drove up sulphuric acid prices last year, with some spiking occurring during the summer months. Price increases averaged 5-10% in 2003. The continued tight supply/demand balance will drive up prices again in 2004, but increases this year will be a more modest 3-5%.

Last year, North American suppliers of sulphuric acid were under investigation for price fixing by antitrust authorities in Canada and the U.S. Investigators allege that certain producers agreed to cut supply, fix prices and exchange customer lists.

Oxygen prices went up by 7% early last year in response to several extraordinary events. Producers say energy costs have been rapidly increasing since 1999 and 2003 brought the highest costs yet. Insurance costs have skyrocketed since early 2001 and costs for health care and other benefits are undergoing significant increases as well.

Prices will continue to climb in 2004 as producers address production, feedstock and distribution cost increases. Prices are projected to rise by about 6% early in the year.

As part of its continuing rationalization in domestic markets, Air Products Canada sold its western Canadian bulk gas business to Praxair. The latter company assumed supply of bulk gases to approximately 60 locations through bulk-gas truck deliveries and a small number of on-site plants in British Columbia, Alberta, Manitoba and Northwest Territories. Air Products continues to operate in eastern Canada.

Paper

Last year’s growth in paper production was led by printing and writing papers, which grew by nearly 4%. Newsprint output grew by an estimated 2%. Production of kraft paper, tissue and specialty papers, containerboard and boxboard declined last year.

Abitibi-Consolidated will convert its newsprint mill in Alma, QC, to produce Equal Offset paper. The company currently produces more than 375 kilotonnes/yr of Alternative Offset and Equal Offset grades at Beaupre, QC and Fort Frances, ON. The company says it will invest $175 million over the next two years to convert the Alma machine to produce 230 kt/yr of Equal Offset. The product competes with uncoated freesheet and is used in instruction manuals, trade and tour books, business directories, educational workbooks and maps.

Calcium carbonate markets are balanced, but higher costs are driving up prices. Mills were faced with a jump of about 5% early in the year and will likely have to cope with another increase of 3-5% early this year.

Ressources d’Arianne has begun micronization tests of two different pulverization technologies have begun. Calcite samples from Calcites du Nord in Lac St-Jean were sent to two laboratories. The resulting technologies were used to micronize a few tons of ground calcium carbonate (GCC). The product served as filler in paper made at the Centre Spcialis en Ptes et Papiers (CSPP) du Cgep de Trois-Rivires.

The purpose of the tests at the CSPP is the gradual replacement of kaolin by GCC during the pilot periods. Whiteness and opacity measures were determined throughout the pilot trials. Abitibi-Consolidated supplied a commercial paste that was used in these trials.

Overall North American consumption of titanium dioxide declined in 2003, although markets were starting to rebound late in the year. Softer demand created a more balanced market for titanium dioxide.

Despite sluggish demand for titanium dioxide in most end use applications, prices have been on the rise as producers attempt to bolster profit margins. Prices went up by nearly 4% in the first half and a similar increase is expected early in 2004.

National Starch and Chemical will close its Collingwood, ON, starch facility as part of a plan to rationalize its global specialty starch supply chain. The company will also close a plant in Europe, complete a new starch modification facility in Shanghai and invest in three specialty starch plants through 2004.

The company says it will enhance production by modernizing its Indianapolis, IN, North Kansas City, MI and Hamburg, Germany sites. The Shanghai operation should become operational in 2004 to service the emerging Asian market. These plants will supply both food and industrial starch customers.

Prices for paper-grade starch are poised to go up early this year, with increases varying between 5% and 8%, depending on the starch base and chemical modification. In some unique cases, price increases may be higher.

Aluminum sulphate prices and demand have been relatively stable. Suppliers hiked prices by $10/tonne (dry basis) early last year because of higher costs for sulphuric acid feedstock. Another increase in the $10-15/tonne range will take place early in 2004. Supply will not be a problem as plants are currently running well below capacity and can easily meet demand even if consumption picks up considerably this year.

Paper mills are also shelling out more for styrene-butadiene latex. Prices went up by about 5 cents/lb in the spring, with another increase of nearly 3 cents/lb planned for early 2004.

Kaolin prices rose by 2-7%, depending on product grade, in the first quarter of 2003 and then remained stable for the rest of the year. An additional increase of 3-8% will take place in the first quarter of 2004, followed by stable pricing in the second half.

Specialties

Callaway Chemical, a subsidiary of Vulcan Materials, sold its industrial water treatment and pulp and paper businesses to Kemira Oy in 2003. Callaway operates under the name Vulcan Performance Chemicals.

The sale includes a plant and research and development facility in Columbus, GA, a plant in Vancouver and a facility in Shreveport, LA. The product lines manufactured at the plants include emulsion polymers, defoamers, wet and dry strength resins and a variety of custom manufactured products. Kemira sees the acquisition as a significant step in growing its pulp and paper chemicals business, reinforcing its position as one of the top three in paper chemicals in North America. The company will have a broader geographic coverage and an expanded product range. Following the deal, Kemira will have nine sites in North America, including facilities in Vancouver, Prince George, BC, Maitland, ON and St. Catharines, ON.

Kemira says the global pulp and paper industry consumes about 13.5 billion euros worth of chemicals each year. Annual consumption of functional chemicals is about 7.2 billion euros, followed by bleaching chemicals at 3 billion euros, process chemicals at 2.8 billion euros and basic chemicals at 0.5 billion euros.

Canada Colors and Chemicals has signed an agreement with Dynatec to distribute the latter’s Canada Talc product line, including Cantal, Talcor and Dolfil. Cantal talcs are asbestos-free, platy functional fillers/extenders developed for diverse industrial applications. Target markets include coatings, pulp and paper, rubber and plastics. Dolfil is a micronized dolomite suitable for sealants, putties, adhesives, paints, plastics and other industrial applications.

Joe Piccione is the vice-president of Camford Information Services in Toronto, ON.

MARKETS FOR MAJOR PULP AND PAPER CHEMICALS IN CANADA

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