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Energy and exchange rates set the agenda for chemical prices

As we headed into 2007, those of us involved with the Canadian paper industry had good reason to believe it had started to turn the corner. The closure of inefficient mills had brought markets into be…

As we headed into 2007, those of us involved with the Canadian paper industry had good reason to believe it had started to turn the corner. The closure of inefficient mills had brought markets into better balance and input costs — especially energy and chemicals — appeared to have stabilized.

In May, the Conference Board of Canada poured cold water on that idea. In its spring outlook, the board said the industry could expect to collectively lose $800 million in 2007, but pointed out that this would be an improvement over the two previous years. It also predicted a return to profitability in 2008, based on another year of cost reductions flowing from restructuring and corporate consolidation.

The Conference Board hedged its bets, though, with the reminder that the paper industry’s sensitivity to oil prices, currency exchange rates and the emergence of efficient, super-sized, offshore mills left its financial health in a “precarious” state. In subsequent months, the industry was battered by all three factors. First, the price of crude oil kept creeping into the $90/barrel range, some 50% higher than could be justified by market conditions. The upward pressure on prices for oil-based chemicals and on transportation rates was relentless. Second, the US dollar went into freefall, losing roughly 15% of its value during the year. This squeezed margins for all paper products, which are generally priced in US funds. Third, the expansion of papermaking capacity in the developing world limited export opportunities in the fastest-growing regions.

Pulping chemicals

Market pulp was one of the industry’s brighter spots in 2007. After a strong third quarter, global shipments of northern bleached softwood kraft pulp were up 2.7% from the year-to-date level established in 2006. Producers were able to implement price increases through the year, raising the average benchmark by US$100/tonne — or 14% — compared with the third quarter of 2006. These gains had been negated by the depreciation of the US dollar, but demand remained strong and further price increases were being implemented at year-end.

Canfor noted that new hardwood pulp capacity in the southern hemisphere was entering the market during the 2007-2008 period. “This could cause some price slippage in hardwood pulp markets, which could also put pressure on substitution of hardwood pulp for softwood pulp,” the company warned.

There were several notable lineup changes among suppliers of pulping chemicals. Dow Chemical Canada, which exited the manufacture of chloralkali in Canada at the end of 2006, agreed to sell its caustic soda distribution business in Western Canada to Univar Canada during 2007. The companies did not disclose the purchase price for the business. The sale includes Dow’s west coast distribution centre. The terminal consists of marine, rail and truck facilities in North Vancouver, BC, as well as miscellaneous equipment. Dow, the largest global marketer of caustic soda, is maintaining its caustic soda business in the rest of the world, including Eastern Canada.

“Since we shut down chloralkali production at Fort Saskatchewan in 2006, Dow’s role in the Western Canada chloralkali business has been one of distribution. This does not fit with our established business model in which raw material supply, manufacturing and distribution are fully integrated to maximize competitive advantage,” said Philippe Raynaud de Fitte, vice-president of Dow’s chlor-vinyl business.

“Univar is ideally suited to take over this business,” he continued. “We anticipate little to no disruption to our customers as they transition to their new supplier.” At the moment, it is more practical — logistically and economically — to source caustic supplies to western Canada from Asia and from the northwest US.

According to Dow, the predominant use of caustic soda in western Canada is in pulp production. The west coast distribution centre was built in 1980 to be Dow Canada’s transfer facility for the growing quantities of products manufactured at its Fort Saskatchewan, AB, site. Dow will continue to supply caustic customers east of the Manitoba-Ontario border from its production facilities on the US Gulf Coast at Plaquemine, LA, and Freeport, TX. Supplies are distributed through a number of terminals the company has in this area. The Sarnia terminal, which until recently was marine-fed, is now supplied by tank and railcar from a terminal in Concord, ON. Declining demand for caustic soda in the Thunder Bay, ON, region was likely the reason Dow closed its terminal there.

With its purchase of Pioneer in 2007, Olin acquired two Canadian facilities, a chloralkali plant at Becancour, QC, and a chloralkali/sodium chlorate plant at Dalhousie, NB. Both will be operated as before, so the transaction should have a neutral effect on markets.

Partly as a result of the Fort Saskatchewan closure, caustic soda markets tightened in North America in 2007. Selling prices, which started the year at US$300-315/tonne, had climbed to over US$400/tonne by the fourth quarter. Two major petrochemical projects in the US will likely have an impact on merchant caustic supply over the next two years. Shintech, a wholly-owned subsidiary of Shin-Etsu Group (the largest player in the global polyvinyl chloride business), is about to commission a new vinyl chloride plant at Plaquemine, LA. That plant will produce about 500 kilotonnes/y of byproduct caustic. Westlake Chemical will expand annual capacity of the chloralkali plant at it vinyl chloride/polyvinyl chloride complex at Calvert City, KY, by 50,000 electrochemical units by the first half of 2009. That project will add 55 kilotonnes/y to the merchant supply of caustic.

Meanwhile, Canexus continued to make progress on the technology conversion project at its North Vancouver, BC, chloralkali plant. During the second quarter, a lease extension and permit for the project were granted by the Vancouver Port Authority. The $180 million project will significantly reduce fixed costs, while reducing per-unit consumption of natural gas and electricity by 75% and 12%, respectively. The project was expected to be considered for final approval by the Canexus board of directors in December.

Lime production in Canada has been on a downward trend since 2004, owing to lackluster growth in the steel sector and pulp mill closures. Supplies remain plentiful, however, even with the growing demand for scrubber lime. High energy costs continue to put upward pressure on prices.

The supply of sodium sulphate for kraft pulping remained more than adequate through 2007. Demand for salt cake is expected to grow, albeit slowly, in the near term after declining steadily through the 1990s. Prices are currently said to be in the range of US$100-105/ton, near historical highs. Even at that level, margins are fairly narrow, as production is sensitive to energy costs. Saskatchewan Minerals is the largest producer of sodium sulphate in Canada, supplying the pulp and paper industry as well as detergent, glass, textile and deodorizer markets. At the beginning of 2006, the company introduced an energy surcharge, based on the benchmark price of natural gas in Alberta. The surcharge was $3/ton in the first quarter of 2007, increased to $6/ton in the second quarter, and fell back to $3/ton for the third quarter. When the three-month average benchmark price for Alberta gas fell below $6.00/gigajoule during the July-September period, the surcharge was reduced to zero for the fourth quarter.

Sulphur prices were relatively weak (lower than US$60/tonne) as 2007 opened. Deliveries were interrupted by the CN Rail strike during the first quarter and customer inventories were depleted. Mid-year contract negotiations with customers in high-growth regions, particularly China, boosted export prices over the US$100/tonne mark. Prices in North America followed suit to some extent, but the gap between domestic and overseas prices had widened to reflect sharp increases in ocean freight charges. As the year drew to a c
lose, the next round of negotiations had taken the overseas export price higher than US$150/tonne, though it was reported that some phosphate fertilizer producers were paying US$100/tonne less than that under long-term contracts. Sulphur supplies were said to be good during the fourth quarter, but producers had no intention of reducing prices.

Sulphur dioxide is recovered from base metal smelters, which continued to operate at high levels to meet strong demand, especially from growing economies in Asia. Since environmental regulations require smelters to reduce their sulphur dioxide emissions, recovery rates will increase and supplies of liquid SO2 will likely remain high over the near term.

Bleaching chemicals

Canadian sodium chlorate producers responded quickly to the downturn in demand, shuttering three plants between July 2005 and October 2006. This had the desired effect of firming up the market to the point where two price increases were announced during 2007: C$25/tonne in May and C$30/tonne in September. Chlorate suppliers noted that pulp producers were running harder to meet robust demand for market pulp and that a number of mills had undertaken productivity improvement projects or grade changes from hardwood to softwood that further pressured chlorate production capabilities. Erco Worldwide stated that chlorate consumption in 2007 was approximately 5% higher than anticipated. This increased demand forced producers to operate during periods of peak electrical pricing to meet market demand and contractual commitments. Chlorate supplies are expected to remain tight for the foreseeable future.

Price increases for US customers were considerably higher: US$50/ton in May and US$55/ton in September. The continued weakness of the US dollar is the reason for this discrepancy. The US can only produce approximately 50% of its sodium chlorate requirements; the remainder is supplied by Canadian production

Market fundamentals for sulfuric acid have changed in the past two years. North America is now dealing with tight and even limited supply. A number of factors have come together to create the current market. Significant among these are diminishing supply from some sources, higher production of phosphate fertilizers and metals, and significant growth in demand for processing by ethanol plants, which are proliferating with the burgeoning biofuels industry.

NorFalco — the largest merchant marketer of sulphuric acid in the continent — found itself in an oversold position throughout the first half of 2007. In its efforts to alleviate its short position — possibly created by inventory management tactics — NorFalco was looking to secure third-party acid in the second half of the year. Given the current supply/demand picture, there will be a lag before the industry can adjust to the high demand and low supply that currently exists in North America. Consequently, NorFalco expects to see continued tightness in the market for the foreseeable future. Upward pricing pressure is expected to continue to be a factor in future contract settlements.

North American markets for hydrogen peroxide are still described as tight. An $80/tonne price increase was implemented in October. Energy and transportation fuel charges remain in effect. According to FMC Corp., hydrogen peroxide is undervalued at current price levels, considering its versatility and environmental advantages. Producers agree that margins are being squeezed by persistently high energy, raw material and freight costs.

Chemtrade Logistics took another step in the restructuring of its sodium hydrosulfite (SHS) operations in 2007 with the US$7.3-million purchase of Olin’s liquid SHS business. The acquisition does not include manufacturing assets, but Olin will produce liquid SHS for Chemtrade at its plants in Charleston, TN, and Augusta, GA. The deal gives Chemtrade a significantly larger customer base and complements the supply and marketing arrangement it set up for powder SHS the previous year with ZhongCheng Chemicals.

Industrial gas producers reported that Canadian merchant demand softened from the high level of 2006. Capacity utilization remained high, however, and producers announced 10-15% price increases for oxygen during the year to recover rising energy costs.

Papermaking chemicals

Despite their efforts at consolidation and rationalization, papermakers have yet to move far from the bottom of the current cycle. The new Domtar — comprising its own paper operations and the fine papers business acquired from Weyerhaeuser — reported some improvement in earnings during the year, but it was difficult to determine how much was attributable to the merger. As the year ended, the jury was still out on AbitibiBowater, which completed its combination at the end of October.

The weakest segment of the market was again newsprint. US consumption was down by approximately 10% in 2007, as newspapers struggled with declining circulation and reduced advertising. Several companies curtailed newsprint production at one time or another, but there were also a few major announcements. Catalyst Paper indefinitely shut down the A4 machine at its Port Alberni, BC, mill, taking 134 kilotonnes/y of newsprint capacity out of the market. Kruger shut down the 80-kilotonnes/y No 1 paper machine at its mill in Corner Brook, NL for an indefinite period in November. At the end of the third quarter, the operating rate of the North American newsprint industry was estimated to be 92%, down from 94% a year earlier.

Demand for printing and writing papers was flat or down slightly for the year. Coated mechanical grades saw a modest increase, while coated grades and uncoated woodfree grades saw declines of similar magnitude. Supply in the coated mechanical market tightened during the year as a result of significant mill closures in North America. Abitibi indefinitely idled its Fort William, ON, mill (145 kilotonnes/y) late in February. UPM closed its Miramichi, NB, mill (450 kilotonnes/y) for nine-12 months in August, noting that demand for magazine papers in North America was stable, but continuing global overcapacity was suppressing prices. Kruger announced indefinite shutdowns for three of the paper machines at its two mills at Trois-Rivieres, QC, idling 215 kilotonnes/y of capacity.

Kraft paper markets were relatively flat in 2007, as the slowdown in North American housing was offset by strong global demand. It is estimated the some 170 kilotonnes/y of global capacity has been shut, primarily because of high fibre costs.

The general weakness in the paper industry has led to softer demand for several of the fillers used in the papermaking process. On the other hand, rising energy costs have had a large impact on the mining, processing and transportation of these products.

Kaolin producers implemented global price increases in the range of 10-12% during the year. The increases varied according to grade, but applied to all types of kaolin, including calcined products. One of the leading producers, Imerys, is proceeding with the reorganization of its operations to produce kaolin for the paper industry. During the fourth quarter of 2007, the company started to transfer production to Brazil.

Price increases for calcium carbonate were announced late in the year, to take effect at the beginning of 2008. On average, the increase was 8% for ground calcium carbonate grades used in papermaking. In March, Omya concluded the acquisition of the J M Huber precipitated calcium carbonate (PCC) business. The deal included 11 on-site plants: one in Saskatchewan, three in the US, five in the European Union and one each in South America and Russia, bringing its worldwide total to 17.

Titanium dioxide selling prices declined by about 3% during the first three quarters of 2007 and were expected to remain stable despite attempts by producers to put through increases in the fourth quarter. TiO2 is a key component in paint, so US demand has been hurt by the imploding housing market. US producers responded by s
hipping more product offshore, contributing to a fall in European prices.

Pricing for papercoating binders was on an upward trend all year. Suppliers of styrene-butadiene latex and styrene-butadiene acrylate products hiked prices in June and December. The combined increase was nearly 12%. The cost of feedstock was the overriding factor, as styrene, butadiene and acrylonitrile are all petroleum-based.

Aluminum sulphate production rebounded in 2007 after a decline the previous year, but indications are that demand growth has occurred in municipal water treatment markets, rather than the paper industry. A C$35/tonne (dry basis) price increase was put through on all grades of liquid and dry alum in September.

Specialties

Numerous specialty chemical products saw price increases during 2007. Nalco raised prices for specialty products sold to its paper industry customers by 7% in July. Nalco proprietary technology is used to optimize the delivery of retention aids and other process chemicals to the paper machine, to activate optical brightening agents, to improve roll treatment and to enhance control of microbial growth and deposit formation in papermaking systems.

BASF introduced a 10% price increase for all of its papercoating additives in July. The increase applied to thickeners, insolubilizers, defoamers and dispersants.

Early in the year, Quadra Chemicals increased all prices in Canada for Roquette’s Hi-Cat line of specialty paper machine starches by C$100/tonne. In September, Western Polymer raised prices for wet-end and specialty starches by 10-15%. In November, National Starch and Chemical instituted double-digit price increases across its papermaking line of specialty starches in North America. The company cited several reasons, including strong volatility and structural changes in the corn market, increased ethanol demand, increased export activity, escalating premiums required to attract farmers to grow specialty grains and higher costs for producing and importing tapioca starches into North America.

Bob Douglas is publisher of Camford Chemical Report, a weekly newsletter on Canada’s chemical processing industries, and CPI Product Profiles, a series of 200 data sheets on markets for individual chemical products. Bob has more than 25 years of experience tracking developments in pulp and paper technologies and analyzing trends in chemical and energy supply, demand and prices.