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End-users Pay the Price


February 1, 2012
By Pulp & Paper Canada

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embers of the Chemistry Industry Association of Canada are forecasting lower growth for their industry in 2012 compared to last year, according to the association’s 2011 year-end survey of business conditions.

embers of the Chemistry Industry Association of Canada are forecasting lower growth for their industry in 2012 compared to last year, according to the association’s 2011 year-end survey of business conditions.

John Margeson, CIAC manager of business and economics, and the author of the survey, says 2011 was a good year for the Canadian chemicals industry.

“Compared to 2010, which was a recovery year after 2008 and 2009, sales in 2011 were up 18% and profits up 61%,” Margeson explains. “But expect only single-digit growth in 2012.”

In 2011, the value of shipments rose by 18% to an estimated $25 billion. But, despite strong growth last year and in 2010, industry output remained about 6% below the 2008 pre-recession peak. Survey respondents said they expect sales to increase by only 2% in 2012.

Operating profits for Canadian operations rose by 61% in 2011, but survey respondents say they expect profits will be 11% lower in 2012 than 2011.

Higher value of shipments and profits in 2011 were the result of greater demand for industrial chemicals, as well as higher prices, which grew by an average of 7%. The price increases reflected the stronger economy and the resulting tightening of supply.

Many chemical producers which supply the Canadian pulp and paper industry announced price increases in 2011.

In June, Buckman Laboratories of Memphis, TN announced a global price increase of up to 20% on all products and programs, effective July 1, 2011. The announcement said the increase was the result of growing raw material, transportation, and energy costs.

Davor Mehes, vice-president of Buckman Canada in Vaudreuil, QC, says one of the reasons for the price increases was the tight supply of industrial chemicals in 2011.

“The overall market was snug during the first half of 2011, with periodic shortages of critical raw materials, such as acrylic acid, methylamines, bromines/bromides, ethyleneamines, natural oils and alcohols, silicones and some primary amines,” he states. “Strong demand coupled with stretched producer capacities continued to drive up raw material prices.”

In the second half of 2011, the market started moderating, as supply and demand achieved a better balance.

“At the same time, natural disasters, such as the Japanese tsunami and flooding on the Mississippi river, continued to disrupt both global and local supply chains,” says Mehes. “The global macroeconomic turmoil has also had significant impact on both the supply and demand sides of the equation.”

Mehes says the company’s customers have “generally been supportive” of its requests for price increases.

“But we continue to struggle with dropping gross margins. Many products have seen double-digit cost increases in recent years. Average feedstock prices used in the manufacture of the raw materials we purchase and in the manufacture of our finished goods continued to increase in 2011, with the exception of natural gas.”

Mehes says higher feedstock prices are a sign of things to come for Buckman, which makes about 1,000 chemistries and enzymatic products for the pulp and paper industry, because there are often delays in the supply chain between feedstock prices and the prices of downstream intermediate and finished products.

“Crude oil, ethylene, epichlorohydrin, and methanol costs are up 55-75% since 2009 and benzene and propylene costs are up 75-100% since 2009,” Mehes notes. “And speculation continues to affect most commodity prices, causing exaggerated movements beyond simple supply and demand factors.”

Looking ahead, Mehes says Buckman expects its global paper product demand to be up by about 10% in 2012.

“We expect overall raw material supply and demand to remain balanced in the first half of 2012,” he said. “We also think pricing behavior will be more moderated in 2012 compared to 2011, although we continue to play catch-up.”

All in all, Mehes says, the level of uncertainty remains high, due primarily to the macroeconomic situation and global political and social turmoil.

Chemicals demand may drop

Like Buckman and many others, Kemira Oyj of Helsinki, Finland announced price increases in 2011. In January 2011, the company announced price increases for its paper chemical products in all major markets. The increases ranged from 5-15%, depending on the product. In May, Kemira announced further price increases for its paper chemical products of from 5-20%. And in September, Kemira announced price increases for hydrogen peroxide of 15-25%.

Kari Savolainen, Kemira’s director of communications, interpreted these increases to mean that prices for the company’s products strengthened “to some extent” between January and September 2011.

“But since the January-September interim report, Kemira changed the outlook for the full-year 2011 and the group gave new guidance to the market,” she reports. “Kemira stated that, among other things, the demand of chemicals for the paper industry in Europe and North America is expected to be lower than estimated.”

Savolainen says the Finnish company provides the paper industry with products and applications for the wet end of the paper machine, for pulp making processes, and for the management of raw, process and waste water quality and quantity.

Kemira’s expectations for demand are echoed by Eka Chemicals of Marietta, GA, which makes bleaching and performance chemicals for the pulp and paper industry.

“The demand for industrial chemicals by the paper industry has probably decreased in North America during [2011], due to optimization, cost-cutting measures, and rationalization of paper machine output,” says Lee Sampson, Eka’s vice-president, sales and marketing, pulp and paper North America.

“In some cases, paper makers do not need the benefits of certain types of output-enhancing chemistries, because of temporary softness in their order books.”

Sampson says the situation for bleaching chemicals is different from paper chemicals, because the former trade on a global market.

“As a result, we have been experiencing a quite tight market for sodium chlorate, with strong export volumes in 2010 and 2011,” he explains. “We expect the trend to continue into 2012.”

Sampson says the escalating costs of raw materials and energy continue to impact Eka’s costs. “Product prices have risen as a consequence.”

Looking ahead to 2012, Sampson says the costs of Eka’s inputs will continue to be the main determinant of the prices of its products, but that new uses for wood fibre, which will affect the supplies and prices of some industrial chemicals, will also play a part.

“Many of our paper chemicals are focused on reducing fibre and energy consumption and increasing production efficiency,” he said. “We know that these are key to our customers’ long-term
sustainability.”

Sampson says alternative uses of wood are growing.

“Product innovations will see more wood fibre being used in new types of consumer goods, especially building and packaging products, as well as better usage of by-products of pulp production through bio-refineries,” he notes.

High operating rates for peroxide

In December 2011, Evonik Degussa purchased Kemira’s hydrogen peroxide facility in Maitland, Ontario. In a release, Evonik said the acquisition enabled the company to increase its capacity for hydrogen peroxide production in North America by 44,000 tonnes annually, making it one of the market leaders in the region. The company said the purchase is a step in Evonik’s growth strategy for hydrogen peroxide.

A spokesman in the Parsippany, NJ, office of Evonik says demand for the chemical, which is used as a bleaching agent in the pulp and paper industry, grew “at a healthy rate” in 2011.

“Total demand for hydrogen peroxide was driven by demand in the pulp and paper industry,” said the spokesman, who wished to remain anonymous. “Dem
and by other industries was strong as well.”

As a result, he said, the operating rates of North American manufacturers of hydrogen peroxide averaged greater than 90%.

The Evonik spokesman says that in 2012, demand for hydrogen peroxide will continue to grow, including demand from the pulp and paper industry.

The strong demand for hydrogen peroxide was reflected in May 2011, when Evonik announced price increases for the chemical of 4.5 cents per pound in the United States and Mexico and $100/tonne in Canada effective June 1, 2011. The company will continue instituting transportation and energy surcharges for hydrogen peroxide sold in North America based on a basket of leading U.S. energy indices.

KaMin LLC of Macon, GA, likewise announced price increases for its kaolin clay products in November and the continuation of energy surcharges.

Paper industry profitability set to improve

Whatever increases in the price of chemicals the pulp and paper industry is hit with in 2012, it has a limited ability to pass them on to customers through price increases, says Michael Burt, director of industrial economic trends for the Conference Board of Canada.

“So any unexpected increases in input prices generally detract from industry profitability,” he continues. “That said, it is important to keep things in perspective. Based on Statistics Canada data, we estimate that chemicals are about 3.5% of pulp and paper industry costs, so even large price changes would have only a modest impact on profits.”

According to the Conference Board’s recently released Autumn 2011 Canadian Industrial Outlook for Canada’s Paper Products Industry, “the number of new orders and shipments have remained at 2010 levels amid weak global economic prospects. Thus, the near-term production outlook remains weak.”

According to the report, higher fibre prices may increase production costs, especially in 2012, when production is expected to pick up.

“However, cost control will continue to be the key for the industry. When combined with the benefits of recent investments designed to improve the industry’s efficiency, the net result is that cost increases will not out-pace revenue growth, and industry profitability will gradually improve.”

Even with lower revenues, drastic industry cost-cutting over the past several years will enable the industry to post a pre-tax profit of $477.3 million in 2011.

“This marks a second consecutive year of gains and the best performance in terms of profitability since 2002 (when profits reached $646.8 million). The industry is expected to remain profitable for the rest of the forecast period, although margins will remain thin,” says the Conference Board report.

Tight margins and rising costs make for an uneasy balance. What’s worse is that uncertainty in the chemical industry remains high, with global supply chains influenced by macroeconomic forces, political whim, and natural disasters.

Chemical Supplier Ordered to Repay $1.8 Million to Domtar

The B.C. Supreme Court has decided in favor of Domtar in a dispute between the papermaker and chemicals distributor Univar Canada over the application of force majeure in a caustic soda contract.

The contract between Domtar and Univar Canada in 2008 capped the price of caustic soda at $545/dry tonne.

During 2008 the global price of caustic soda rose dramatically, and Univar chose to apply force majeure.

In her judgement, delivered Dec. 23, Madam Justice Fisher stated:

“Accordingly, I have concluded that the increased price of caustic soda in 2008 did not constitute an event of force majeure within the terms of clause 15A of the contract. Univar was not entitled to be excused from performance and it remained obligated to supply caustic soda to Domtar at the contract price until the contract expired on December 31, 2008.”

During the six-month period from the declaration of force majeure and the end of the contract on Dec. 31, 2008, Domtar paid the requested price, under protest, because the supply of caustic soda was vital to the operation of the mill. Prices charged by Univar during that period ranged from $730 to $860/dry tonne. The difference between the contractual maximum and the actual prices paid is $1.871 million plus GST, which Univar must repay to Domtar.

Domtar has since changed suppliers of caustic soda.

According to a story in KamloopsNews.ca, Justice Fisher found it astonishing Univar could consider its desire for profit to be a force majeure.

“Generally, force majeure is resorted to where an event beyond the control of a party makes performance of that party’s obligations under the contract impossible. It is not to be resorted to where such an event makes performance of that party’s obligations ‘commercially impractical’ unless the parties to the contract have expressly agreed to such a term,” the judge said.

Kamloops News reports that Domtar asked the judge to impose punitive damages against Univar. Domtar claimed Univar’s deliberate actions put it at financial risk.

“Domtar’s Kamloops Mill was losing money at the material time and Univar was aware that the mill was in tenuous financial circumstances,” Domtar’s lawyers argued in court.

Justice Fisher declined to impose punitive damages, however, noting such damages are especially rare in cases involving commercial contracts.

The full text of the judgment is available at http://www.courts.gov.bc.ca/jdb-txt/SC/11/17/2011BCSC1776.htm.