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PULP MARKETS SOFTEN ALONGSIDE AN INVENTORY CORRECTION IN ASIA

In early 2001, prices for northern bleached softwood kraft pulp have started to retreat in the United States and northern Europe from the lucrative contract levels of US$710/tonne reached in the secon…

In early 2001, prices for northern bleached softwood kraft pulp have started to retreat in the United States and northern Europe from the lucrative contract levels of US$710/tonne reached in the second half of last year. Recent pulp orders have been hurt by an inventory correction in both pulp and paper in China and South Korea, a high ratio of pulp-to-paper prices in Europe and prospects for a slower pace of global growth in 2001 — largely the result of the downshift in the United States. While prices could decline sharply in the first half of the year, the overall correction should be more limited than in 1996. However, prospects depend heavily on whether Norscan producers will follow through on their announcements of substantial mill downtime and a determination not to produce for inventory.

In China and South Korea, large volumes of pulp were purchased in late 1999 and early 2000 to supply working inventories for new freesheet paper machines and ahead of expected pulp price increases. However, Chinese paper consumption has not kept pace with the huge mill expansion of recent years and large stocks of both pulp and paper have built up, accounting for little Chinese buying since last May. While estimates suggest that China has worked off about 400 000 of the 600 000 tonnes of pulp, China has not yet substantially stepped up its purchases from traditional softwood kraft suppliers such as Canada and Chile. Steep price discounting by Russian softwood kraft and Indonesian hardwood producers has expanded their share of the Chinese market at the expense of competing sources. Russian mills have been selling NBSK for as low as US$520/t.

European buyers also appear to be holding back on pulp purchases, anticipating lower prices ahead. The ratio of pulp-to-uncoated freesheet paper prices in Germany climbed to 96% in October 2000 — well above 90% in January 2000 and only 62% in early 1999 — when pulp prices were unusually weak. Nordic papermakers, integrated with their own sources of pulp, have been relatively slow to raise paper prices — attempting to expand their share of fine paper markets on the Continent. In contrast, the 30% decline in the euro against the US dollar from its inception in early 1999 to the low on October 25, 2000, has magnified the impact of rising dollar pulp prices for non-integrated papermakers.

In addition, concern over prospects for global economic growth has added to market uncertainty. World GDP (gross domestic product) growth will likely slip to no more than 3% in 2001 — from last year’s stellar 4 3/4%. The pace of US expansion will likely be halved this year as consumer spending on big ticket items such as autos and, to a lesser extent, homes takes a breather from the rapid gains of recent years. An exhaustion of pent-up demand for new motor vehicles lies behind the 20% year-over-year plunge in first-quarter US vehicle assemblies — with a large ripple effect on other sectors of the economy such as steel. A slower pace of consumer spending is taking a toll on print-media advertising. A global inventory correction in semi-conductors — linked partly to relatively weak US personal computer sales — is also hurting growth in several Asian economies — especially South Korea — a major pulp customer of mills in Western Canada.

The net result — Norscan “market” pulp shipments fell sharply in December and mill inventories rose from a seasonally adjusted 29 days’ supply in November to 33 days — a level not seen since the Asian currency crisis in 1998. Days’ supply were as low as 16.7 in late 1999.

On a more positive note, prospects for a further easing in US monetary policy and personal income tax cuts pledged by the Bush Administration point to some recovery in US growth later this year. European papermakers will soon have to step up their orders because underlying pulp consumption is higher than recent orders suggest. Utipulp consumer pulp stocks fell sharply in December. The growth of advertising spending relative to GDP was more rapid in Europe than in the United States last year — pointing to robust demand for communication papers.

The euro has also rebounded by almost 12% from its low in October, reducing the local currency price of pulp in Europe and providing some cost relief to non-integrated papermakers. Signs point to a further easing in the US dollar/euro rate in the coming year, a development that should help to underpin dollar pulp prices.

Patricia M. Mohr is Vice-President, Economics, The Bank of Nova Scotia, Toronto, ON.