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Pulp and paper mills, especially in Canada, strained more than ever by costs and currency issues

Canadian producers in particular are desperate to boost prices in order to cover rising production costs and compensate for their currency disadvantage as exporters (the Canadian dollar continues to s…

Canadian producers in particular are desperate to boost prices in order to cover rising production costs and compensate for their currency disadvantage as exporters (the Canadian dollar continues to strengthen, closing at U.S.$0.8597 on Sept. 30). There is more talk about likely mill closures in Eastern Canada.

Some Canadian pulp mills’ financial circumstances are as precarious as they have ever been, said a Canadian market pulp consultant. “A lot of Canadians are losing lots of money,” he said. “If prices don’t continue to go up, there’s no question about it, we will see some closures of hardwood, softwood and BCTMP mills… and there’s plenty of low-cost capacity to replace it.” He said the next 15 years would see “managed decline” in the industry. He said growth is out of the question, and that Canadians should instead focus on making the best of what they have and leaving as many survivors as possible.

A North American pulp supplier sales executive said many buyers understand their plight. Having seen North American mill closures in the past year, they don’t want so many to shut that they would have to import pulp, he said.

Though Buckeye Technologies Inc. recently announced that it is implementing fourth quarter surcharges of up to 5% in response to “unprecedented energy related cost increases which have been exacerbated by the impact of Hurricane Katrina,” other pulp producers are shying away from the notion.

“A pulp surcharge? I’d like to see the look on buyers’ faces if I said that,” said one of the pulp sales executives, adding that his customers are also facing their own higher production costs. But because his company is struggling with higher energy and wood cost increases and the Canadian currency disadvantage, he has told some customers that he couldn’t afford to broaden their discounts. “It’s not a question of profit, but of surviving at the pulp mill level,” he said. He added that some other suppliers have nevertheless lowered their prices because they are desperate to generate cash.

In addition, he said, rail service interruptions and rates, including surcharges, are becoming increasingly burdensome, with rail transport costs now eating up as much as 16% of the delivered pulp price.

Another North American pulp producer sales executive said some of his papermaker customers have told him that they might have to limit production in the coming months if energy costs continue to spiral and raw material shortages don’t cease. He said some are also talking about limiting their production to specialty grades and turning away orders for lower value products, in order to increase their returns.

He said pulp as well as paper makers could face downtime this winter, which is not a good time to stop operations.