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Market outlook: Pulp perspectives 2021

No one could have predicted a global pandemic, and, if someone had, no one would have believed them. The effects of the coronavirus have permeated every market from gold to agriculture, and the pulp and paper market is no exception.

When COVID-19 hit North America in early spring 2020, the pulp and paper market was already uncertain, says David Fortin, vice-president, fibre economic analysis at Fastmarkets RISI.

“We had an increase in nationalism spreading throughout the world leading into 2020. We had the trade war between the U.S. and China, and that was impacting markets and affecting exchange rates – and that matters because pulp prices are traded in U.S. dollars.”

Despite the challenges, Hakan Ekstrom, president of Wood Resources International, says the NBSK pulp market has managed to stay at “a normal historical average price.”

The crosscurrents in play in early 2020 have settled lower heading into 2021, says Fortin. Tissue demand remains strong and the worst of the decline in graphic papers seems to be behind us.

“China is very strong, the U.S. appears to be turning a corner and Europe is less weak than it was in Q2 and Q3,” he says. “We will have to see what happens with the rapid rise in COVID-19 cases in late 2020. That’s the X factor. But it does seem we are on a path for recovery.”

The pandemic’s effect on pulp

With the spread of COVID-19, many economists thought the pulp market was headed for a deep and severe recession.

However, that didn’t quite happen, says Fortin: “The tissue market was red hot. It’s by far the largest end-use market for pulp – more than 40 per cent of total demand for market pulp. Early on, there was panic buying and hoarding, and more at-home tissue usage. All of this supported virgin-pulp consumption.”

Glen O’Kelly is a senior forest-products and packaging expert with McKinsey & Company. He says the pandemic is impacting pulp mills in two ways: production adjustments due to health concerns and changing demand related to consumer habits.

“Production impacts have been relatively limited because producers have adapted their procedures and modern pulp mills are highly automated,” he says. “But demand changes can be profound and long-lasting. Two trends we see continue are the sharp decline in demand for graphic papers and higher demand for tissue and hygiene products.”

China’s search for fibre

In an effort to focus on managing its own waste, China is banning the import of materials it considers solid waste in 2021, including unsorted mixed papers. While the U.S. had been shipping much of its excess cardboard to China, Fortin and O’Kelly suggest that Canada may not be greatly affected by the change.

“China’s restrictions on the import of recovered paper will likely have a modest positive impact on the needs for pulp imports,” O’Kelly says.

One reason, Fortin says, is that China has a recycling program within its borders that is already efficient in high-yield and there’s not much further it can go into the recovered paper stream. It means China must find fibre elsewhere.

He says several U.S. pulp mills are taking OCC and mixed paper, pulping it, drying it on-site and then shipping the cleaned, recycled pulp to China.

“I think China is still the engine of growth for pulp demand in the medium to longer-term,” says Fortin.

The housing-market boom

In early 2020, Fortin says the focus of many industry conversations was the peril that British Columbia mills were in. Over 50 per cent of the total fibre used to produce pulp comes from residual chips in that region.

Yet, mills had difficulty sourcing fibre at economically feasible prices. Rolling downturns were occurring. But by mid-year, that had changed as the pandemic spurred home renovations and new home builds south of the border.

“Lumber production sky-rocketed in B.C. The housing market lit on fire in the U.S.,” says Fortin. “Lumber production in B.C. increased enough that there’s more residual chip supply available and those mills now have greater availability of lower-cost fibre.

“I’m not sure that this a longer-term trend for B.C. mills. Unfortunately, I think it’s going to come back and rear its ugly head because of the annual allowable cut continuing to be lowered medium term.” The provincial government has been adjusting the AAC to reflect the impact of beetle infestations and fires on B.C.’s timber supply areas.

“I’m not sure that this a longer-term trend for B.C. mills. Unfortunately, I think it’s going to come back and rear its ugly head because of the annual allowable cut continuing to be lowered medium term,” says Fortin.

Some notable lumber companies, such as Canfor, have invested heavily in southern U.S. lumber-production assets, says Fortin. He says that over time, “they’re going to utilize those lower-cost assets and not so much the mills in B.C. I think it’s a short-term phenomenon where we have this influx of available fibre in B.C.”

Wood Resources International’s Hakan Ekstrom says the lumber market is booming “from the perspective that they can sell lumber at high prices to the U.S. market, but it’s not booming if we’re only talking about the volume they can produce.”

An eye on biorefineries

O’Kelly says pulp mills offer opportunities to produce biochemicals and biomaterials. There is some movement towards biorefineries – but for now, they’re just “add-ons” to existing assets.

“They are capable of producing not just pulp for paper, but a range of products from all wood components – cellulose, lignin, hemicellulose/sugars and extractives,” he says. “This is driven by technological development and increasing demand for renewable, climate-friendly materials.”

Ekstrom sees biorefineries as the future for mills. “A country like Canada should try to get away from commodity products as much as possible because the fibre is just too good to waste on paper boxes,” he says.

New opportunities for pulp

The long-term survival of an industry is often determined by its ability to adapt to changing market demands. The demand for pulp is increasingly more than just cellulose for paper.

“Fluff pulp for hygiene products, such as diapers and feminine hygiene products, is one of the fastest-growing applications, as more consumers globally start using such products,” says O’ Kelly.

“Dissolving pulp for viscose has also seen strong growth in the last decade as an attractive alternative to cotton and synthetic fibres. And beyond cellulose products, the opportunities to make biochemicals at pulp mills are almost endless – almost anything one can make with oil can be made with wood.”

“A country like Canada should try to get away from commodity products as much as possible because the fibre is just too good to waste on paper boxes,” says Ekstrom.

With more countries banning the use of many single-use plastics – including Canada, which has committed to banning several single-use plastic items such as grocery bags, straws and cutlery by the end of 2021 – Fortin says the forest industry as a whole is in a position to be part of the story of sustainability.

He notes the pulp and paper industry is finding inroads in paper and board packaging. “Whether that’s recycled or it’s virgin, that’s a separate story, but I think that there’s potential there for further use in virgin fibre as well.”

Fortin is cautiously optimistic for 2021 and, overall, O’Kelly expects 2021 to be a dynamic year for the pulp market. “The landscape will be changing in many important ways,” says O’Kelly, “including shifts in consumer demand, [the] continued impact the pandemic has on production and supply chains, and evolving trade flows.”

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Silvia Cademartori is a freelance writer based in Montreal.

This article appears in the Winter 2021 issue of Pulp & Paper Canada.