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Higher Energy Prices Fuel Increases as Chemical Costs Take Off

Prices for pulping, bleaching and papermaking chemicals were driven higher by tight supply/ demand balances last year. Chloralkali and sodium chlorate suppliers were zapped by higher electricity costs, forcing them to pass along price increases to pulp mills. Higher crude oil costs also helped fuel the rapid increase in chemical prices.

With little relief expected in energy costs this year and no significant capacity coming on stream, supply/demand balances will remain tight. As a result, pulp and paper mills will have to brace for further price hikes in 2005. Mills can expect record prices for some of their key pulping, bleaching and papermaking chemicals this year.

Availability will be another key issue in 2005. Many chemical plants ran well above 90% of capacity last year to meet the demand from pulp and paper mills. Plants will have to run hard again this year to prevent shortages.

Pulping chemicals

Higher chemical costs were compounded with challenging market conditions, forcing pulp and paper producers to take action. Domtar will close indefinitely its pulp mill, a paper machine and a sheeter at Cornwall, ON. The shutdown, to take effect on March 8, 2005, will last until market conditions allow the assets to operate profitably.

Domtar is eliminating 150,000 tons/y of pulp capacity, 85,000 tons/y of paper capacity and eliminating 400 jobs across its Canadian and U.S. operations by the end of 2005. The closure will impact markets for lime and caustic soda, as well as sodium chlorate.

Cascades’ FjordCell pulp mill in Jonquire, QC will remain closed at least until the end of this winter. Given the continuing deterioration in labour relations that led to the closing of the FjordCell mill, including multiple violations of court orders and injunctions, senior management said it had no other choice but to close Cascades FjordCell. The situation will be reassessed at the end of the cold weather. Cascades FjordCell produces 82 kilotonnes/y of bleached pulp. Part of its production is sold to Cascades Boxboard Group – Jonquire, the boxboard mill adjacent to the pulp mill. The lockout at Cascades FjordCell should not affect the operations of the boxboard mill, which can obtain pulp from other sources should the lockout persist.

Mercer International will purchase the Celgar pulp mill for $210 million. Located in Castlegar, BC, the facility has capacity to produce 430 kilotonnes/y of northern bleached softwood kraft pulp.

The acquisition will position Mercer as the largest publicly-traded market producer of NBSK pulp in the world, with a capacity of about 1.3 million tonnes/y. The mill has been operating under receivership for several years, but Mercer believes there are a number of areas where it can improve financial operating performance and increase NBSK pulp production.

The federal government, meanwhile, is helping the pulp and paper sector by investing $8.7 million to help develop environmentally-friendly pulp and paper manufacturing technologies. This Technology Partnerships Canada (TPC) investment is part of a $29-million research and development project being undertaken by Honeywell ASCa to produce technologies that will result in reduced production costs for the pulp and paper industry and fewer negative environmental impacts.

The investment will support the research, development and refinement of technologies to help reduce the amount of materials required in the production of pulp and paper. These technologies will allow pulp and paper mills to convert trees more efficiently to pulp and, in turn, more efficiently convert pulp to paper.

Sodium sulphate prices went up by about 4-5% in 2004 as producers tried to recoup higher transportation and natural gas costs. Prices will likely go up by a similar amount in the first half of 2005 and then stabilize in the second half. Sodium sulphate capacity will remain steady this year, but with ample supplies and low demand growth, markets will remain balanced.

Sulphur prices have been flat over the past year. Little change is expected in 2005 as sulphur supplies remain plentiful.

In contrast, caustic soda prices skyrocketed in 2004. Prices began rising in the spring and continued to climb for the remainder of the year. In some U.S. markets prices doubled, but the strengthening Canadian dollar helped dampen domestic price increases. In total, pulp mills had their caustic costs go up by as much as 60-65% in 2004.

The main driving forces behind the rapid climb in caustic costs are the tight supply/demand balance and higher energy costs. Canadian and U.S. producers have rationalized over the last few years. Last spring, Pioneer decided not to resume chloralkali production at its Tacoma, plant, which was idled in March 2002. The company will continue to use the Tacoma plant site as a terminal to serve its customers in the Pacific Northwest.

The rationalization has eliminated about 15% of total North American capacity and tightened the supply/demand balance. Caustic plants ran at nearly 100% of capacity throughout the year as producers struggled to meet demand. Some North American suppliers were forced to institute order controls.

The supply/demand fundamentals point toward higher caustic prices in 2005. Overall consumption is projected to grow 1-2% in North American this year. With no new capacity coming on stream, chloralkali plants will be hard pressed to meet demand, putting upward pressure on prices. Pulp mills can expect an increase of 8-10% in the first quarter. Prices will continue to climb, reaching an all-time high by mid-year.

Bleaching chemicals

Prices for co-product chlorine have gone up in step with caustic prices, driven by an extremely tight supply/demand balance. U.S. customers had to cope with price hikes of more than 100%, but Canadian customers saw more moderate increases. With demand expected to grow 1-2% this year, double-digit price increases are likely.

Containing chemical costs became a serious concern for pulp mills last year, as significant price increases occurred for every bleaching agent. Sodium chlorate prices went up each quarter, with the total increase amounting to 5-8%. Higher energy and electrical costs were to blame, but a tight supply/demand balance and low inventory levels also put upward pressure on prices last year. Chlorate plants ran well above 90% of capacity to meet demand from pulp mill bleacheries.

Chlorate suppliers will be just as aggressive in trying to push through price increases in 2005. While prices rose in 2004, producers say they were unable to recoup higher electrical energy costs, which went up by as much as 10% in some areas. As well, supplies will remain tight this year. An increase of 3-4% will occur in the first quarter, followed by additional price hikes later in the year. Barring an unexpected downturn in energy costs, pulp mills can expect their sodium chlorate costs to rise by a total of 5-8% this year.

Compounding the problem will be availability of sodium chlorate. No new chlorate capacity will come on stream this year. Nexen completed the expansion of its sodium chlorate plant in Brandon, MB last fall, but production was relocated from the Taft, LA site. Capacity at Brandon is now 260 kt/y, making it the largest sodium chlorate plant in the world.

CAW Local 219 members who work at the St. Anne Nackawic pulp mill in Nackawic, NB were left reeling after management announced its decision to close the mill. CAW Canada forwarded a letter to New Brunswick Premier Bernard Lord requesting that his government intervene to make every effort to keep the mill open. The CAW is urging Premier Lord to provide the money needed to complete construction of Nackawic’s paper mill to ready it for production. St. Anne also produces sodium chlorate and chloralkali for internal use.

The excess hydrogen peroxide capacity of the 1990’s has long since dried up, creating a tight supply/demand balance. Domestic plants ran flat out last year and will continue to r
un at capacity in 2005 to prevent shortages.

Peroxide margins have not been high enough to justify reinvestment in grassroots facilities over the past few years, leading to the current tightness in the supply/demand balance. Producers are attempting to bolster margins and recover higher energy and transportation costs. Peroxide prices went up by about 5% in the second half of last year and pulp mill bleacheries will likely be faced with an additional increase of 4-5% by mid-year.

Arkema, the world’s third-largest producer of hydrogen peroxide, was launched last fall as part of the reorganization of Total’s chemicals business. In Canada, ATOFINA Canada is now Arkema Canada.

The supply of sulphuric acid improved late last year. Domestic production was adversely affected in 2003 by a lengthy strike at Inco’s Ontario division. Although unionized workers at Falconbridge’s Sudbury nickel operations went on strike in early 2004, the two sides quickly reached an agreement. The strike had minimal impact on sulphuric acid markets.

Energy costs had the greatest impact on oxygen prices last year. Diesel fuel is at a level not seen in decades and crude oil reached new record levels last year. Bulk oxygen prices went up by 5-10% in both the first half and the second half. Prices are forecast to rise by another 5-8% in 2005.

Papermaking chemicals

Suppliers of papermaking chemicals have not been immune to the effects of rising energy costs. Paper mills had to cope with higher titanium dioxide, latex and calcium carbonate costs.

Difficult market conditions forced Canada’s forestry sector to take action last year. Early last year, Domtar decided to shut down a paper machine at its Vancouver mill and restructure the activities of the second machine. This rationalization will result in a 45,000-ton/y reduction in capacity. The site produces approximately 120,000 tons/y of Domtar Luna coated paper on paper machine No 2. In addition, various products like business reply cards are manufactured on paper machine No 1. However, the machine lacks flexibility. Domtar will transfer some products to other mills, while other products will be discontinued.

Tembec shut down one of the paper machines at its newsprint facility in Kapuskasing, ON last year, removing an estimated 75,000 tonnes/y of capacity from the market. Company officials noted that historically-low newsprint prices, combined with the strengthening Canadian dollar and high energy and fiber costs in the province of Ontario, led to the decision.

On the bright side, Kruger and Societ gnrale de financement du Quebec have officially inaugurated a new coated paper machine at the Kruger Wayagamack mill. The $500-million modernization project involved the acquisition and installation of a high-performance coated paper machine, as well as the modernization of two existing paper machines. The addition of the new machine increased the mill’s total capacity to 334 kt/y from 134 kt/y. The partners say this is the only entirely new coated production unit to be installed in North America in the past 15 years. In addition to a complete range of coated products, Kruger Wayagamack manufactures directory and supercalendered grades.

Last year’s impact on printing and writing paper had a positive impact on titanium dioxide demand. The recovery in markets was also supported by stronger U.S. economic performance and very strong global pigment demand. North American demand last year was at its highest level since 2000.

The improved market conditions, combined with escalating raw material costs, prompted suppliers to boost pigment prices last year. Paper mills were hit with titanium dioxide price increases in the spring, summer and again in the fall. The increases were between 3% and 5%, for a total increase of 10-12% in 2004.

Demand for titanium dioxide will remain strong in 2005 in all end use markets. The projected demand growth of 3-4% this year will push plant operating rates well above the 90% mark, creating a tight supply/demand balance, which will put further upward pressure on prices. Paper mills will likely pay an additional 3-4% to purchase titanium dioxide in the first quarter, with another similar price hike expected in the second half.

Although no new titanium dioxide capacity came on stream last year, a number of changes took place. Kerr-McGee Chemical started up a new high productivity oxidation line (HiPOL) at its Savannah, GA chloride process titanium dioxide pigment plant. The company also shut down titanium dioxide pigment sulphate production at Savannah. The company cites a decline for sulphate anatase pigments in the North American paper market as the reason for the closure. Kerr-McGee expects to fill North American sulphate paper customer commitments with its current inventory. After the inventory is depleted, the company will no longer provide sulphate-process pigment to the North American paper market.

Lyondell Chemical recently completed its acquisition of Millennium Chemicals, a major supplier of titanium dioxide. The company will operate as Lyondell Chemical with headquarters in Houston, TX. Lyondell, Equistar and Millennium each will remain separate legal entities.

Altair Nanotechnologies and Western Oil Sands have signed an agreement to use the Altair Hydrochloride Pigment Process (AHPP) to extract heavy minerals and produce titanium dioxide pigment. Under the terms of the agreement, Western Oil Sands will initially evaluate the AHPP to recover titanium and zirconium from oil sands tailings taken from various oil sand operations in the Athabasca region in Alberta. Altair’s proprietary AHHP technology can produce white titanium dioxide pigment from a variety of feedstock, including hard rock ilmenite ore. It includes a combination of processes that extract, purify and form high-quality white titanium dioxide pigment.

The titanium dioxide price increases were small when compared with the styrene-butadiene latex price hikes. Several price increases took place throughout the year, fueled by higher raw material, energy and fuel costs. Raw materials had the largest impact on SB latex prices as higher crude oil costs pushed up prices for styrene to an all-time high. Latex producers were also forced to compete for styrene monomer with other end use markets such as polystyrene and rubber. The cost of producing SB latex went up by as much as 75%. Selling prices also went up, although not as much as the cost increases.

There will continue to be price pressures on SB latex in 2005, although not as much as last year because the North American economy is forecast to cool down. There will be some spot tightness, but overall markets should remain balanced for the year.

Specialties

SB latex represents about 70% of the coatings binders sold in North America. Other binders, such as styrene acrylic latex and multi-monomer products, have also been affected by the rise in energy and raw material costs. Paper mills will likely experience further increases in binder prices in 2005.

Kemira increased its presence in the North American paper chemicals market by acquiring E.QU.I.P. International, a paper chemicals company based in Baie D’Urf, QC. The deal brings Kemira new niche technologies in process chemicals and boosts the company’s turnover by $13 million.

Kemira’s pulp and paper chemicals business focuses on retention, sizing, deposit control, defoaming, water treatment, deinking and pulping applications. The company currently operates a hydrogen peroxide plant in Maitland, ON.