What Goes Up Must Come Down
February 1, 2009 By Pulp & Paper Canada
Canadian manufacturers of pulp and paper probably wouldn’t mind if they were living in less interesting times. Already straining to climb out of their own downturn – which was partly cyclical, partly …
Canadian manufacturers of pulp and paper probably wouldn’t mind if they were living in less interesting times. Already straining to climb out of their own downturn – which was partly cyclical, partly structural and greatly exacerbated by the sudden appreciation of the Canadian dollar – papermakers were battered by rapid cost escalation through the first three quarters of 2008. Then in the fourth quarter, when energy and chemical prices declined, a rapid downturn in the global economy turned their attention to swelling inventories, forcing plant closures and production curtailments.
In its fall outlook, the Conference Board of Canada predicted the paper products industry would lose money for the fourth consecutive year, with losses totaling $435 million in 2008.
“The entire Canadian paper products industry is struggling as a result of stagnating North American demand and, more recently, because of the global economic slowdown,” said economist Valerie Poulin. “Although the weaker Canadian dollar and lower energy prices will bring some relief, the industry is not expected to turn a profit again until 2010 at the earliest.”
Pulp and paper production in Canada has been declining for the past five years, and is expected to drop further as demand wanes and plant closures continue. The Conference Board estimated that production declined by 6.6% in 2008 and expects to see it slip again in 2009, resulting in further losses totaling $329 million. The board held out some hope, suggesting that a better balance between demand and supply, combined with new product development, should improve the industry’s finances starting in 2010.
Numerous production cutbacks were already in place before the Conference Board report was released in December. A quick tally of announcements from Canadian firms during the fourth quarter lists at least 16 curtailments. Three permanent closures scratched 300 kt/ yr of pulp, 205 kt/yr of newsprint and 151 kt/yr of uncoated freesheet paper from Canadian capacity, while temporary downtime eliminated a further 220 kt of pulp and 77 kt of newsprint from the market.
Most commodity prices peaked around the end of the third quarter in 2008, but caustic soda prices kept climbing to the end of the year, cracking the $1,000 US/tonne barrier in December. Caustic prices had showed a modest increase from about $315 US/tonne to nearly $450 US/ tonne during 2007. The rate of increase picked up somewhat in the first half of 2008, then accelerated further during the summer, especially after precautionary shutdowns by several facilities on the U. S. Gulf Coast prior to the arrival of hurricanes Gustav and Ike. None of the plants suffered serious damage, but supplies – which were already tight following industry-wide rationalization in previous years – got very short.
Strong caustic demand was a key factor in the decision by the Canexus board of directors to proceed with the technology conversion project at the company’s North Vancouver, B. C. chloralkali plant. Canexus will replace the existing 50-year-old diaphragm technology and assets at North Vancouver with more cost efficient and environmentally friendly membrane technology. The $208-million project is scheduled for completion in 2010. The increase from previous estimates reflects scope changes and cost escalations.
Annual production capacity will increase by about 35%, to about 210 kt of chlorine and 230 kt of caustic soda.
“When complete, this project will confirm our long-term position as a reliable, low-cost chloralkali producer in the western North America market. The cornerstone benefit is a significantly reduced cost structure which will position us as the lowest-cost supplier to the region and enable us to support higher sales volumes from our expanded production capacity,” said Canexus president and CEO Gary Kubera.
The project will include the following:
• upgrade of the brine treatment process area;
• construction of a new cell building to house seven independent cell circuits;
• purchase of five rectifier-transformers and relocation of an existing unit;
• upgrade of chlorine processing equipment;
• upgrade to storage tanks to ensure higher caustic soda quality;
• additional rail car storage track to manage the higher shipment volume.
Construction plans will minimize interruption to current plant production. Using a parallel plant concept with limited physical interfaces with the existing facility, startup of the new facilities will occur during a scheduled four-week turnaround during the first quarter of 2010.
Olin shuttered the Dalhousie, N. B. plant acquired with the 2007 purchase of Pioneer. The chlorine, caustic soda, and sodium hypochlorite operations were shut down by early June. The chloralkali facility was based on older mercury technology and had capacity to make 30 kt/yr of chlorine and 34 kt/yr of sodium hydroxide. The sodium hypochlorite unit had capacity to produce 0.6 kt/yr. The company will continue to supply its chloralkali customers from other Olin locations. A caustic soda storage and distribution terminal began operating in June at the Dalhousie site.
While caustic prices were on the rise, chlorine markets continued to languish, with prices sliding from $300 US/tonne to $215 US/tonne. Difficulty in selling chlorine had an indirect effect on caustic supply: Canexus noted that its North Vancouver plant was forced to reduce its operating rate to 93% during the third quarter to manage chlorine inventory levels.
Canadian lime production, which had declined steadily for three years, showed small gains in each of the first nine months of 2008, then a decline of more than 16% for the month of October, leaving year-to-date production less than 1% ahead of 2007. Upward pressure on prices intensified as energy costs escalated, but this situation eased as crude oil prices fell in the fourth quarter.
Markets for sodium sulphate – used in kraft pulping – remained balanced through 2008. Saskatchewan Minerals continued to adjust its energy surcharge according to the benchmark price of natural gas in Alberta. The surcharge was zero in the first quarter of 2008, $3/tonne in the second quarter and $9/tonne for the third and fourth quarters. Natural gas prices fell sharply in the latter months of 2008, resulting in a reduction in the surcharge.
Sulphur dioxide (SO2) is captured from the stack gases at base metal smelting operations and converted into sulphuric acid and liquid SO2. Base metal production in Canada was higher through most of last year than the already elevated levels reached in 2007. A decline seems inevitable in 2009, given the spreading economic slowdown, but the supply of liquid SO2 will likely remain more than adequate.
Chemtrade Logistics Income Fund and Vale Inco have renewed their agreement for the marketing of all sulphur byproducts produced by the Inco smelter in Sudbury, Ont. The new 10-year contract, similar to the previous agreement, took effect on Jan. 1, 2008. This continues an exclusive relationship for the marketing of sulphur byproducts that has been in place between Chemtrade and Vale Inco (and their respective predecessor companies) for more than 75 years.
Spurred by a run-up in electricity rates, Canadian sodium chlorate producers took steps to match capacity to demand in 2005 and 2006. As a result, the market has been tight and capacity utilization has been high through 2007 and 2008. According to Canexus, price increases implemented in 2007 and in January 2008 almost entirely offset the 16% appreciation in the Canadian dollar between quarters. Healthy fundamentals led to increased sales volumes and higher realized prices during the first three quarters of 2008.
Canexus brought the most recent expansion of its Brandon, Man. sodium chlorate facility on-stream in February. The expansion quickly exceeded the 33 kt/yr project target and the company has identified de-bottle-nec
king opportunities that could boost annual capacity by an additional 40 kt over the next two to five years. The $53-million project expanded plant capacity by approximately 12% to 295 kt/yr. Brandon is the lowest-cost sodium chlorate plant in North America and the largest in the world.
In August, Olin closed the Dalhousie, N. B. sodium chlorate operation and withdrew from the chlorate business. The sodium chlorate unit was relatively new, but its capacity (22 kt/yr) was small. Canexus acquired the customer contracts from Olin.
According to NorFalco, the notable development in the sulphuric acid market during 2008 was the apparent globalization of tight supply and demand conditions beyond the waterborne international trade into many more local markets. Strong commodity demand and prices convinced buyers in the copper and fertilizer markets to offer increasingly higher prices in order to attract acid away from other markets, which in turn were forced to either compete on price or face reduced supplies.
Annual sulphuric acid demand in North America has reached about 42,700 kt. Fertilizer production accounts for 59%, while the non-fertilizer merchant market accounts for 24%, and regeneration of spent acid from oil refineries and other chemical processors (regen) accounts for 7%. Almost all of the remainder is captive industrial use.
Very strong fertilizer demand drove acid prices to record levels during 2008, but other segments of the market were also strong. In particular, Chemtrade said the regen industry was running at very high utilization rates during the year. Regen is used by refineries to produce alkylate, a key gasoline blendstock. Announced and anticipated refining capacity growth over the next three years would boost regen demand by 3% annually, equal to roughly 90 kt/yr across the continent.
Approximately 73% of the North American supply of acid is made directly from sulphur, while 19% is recovered from smelter operations and 7% is regen. This explains the strong correlation between elemental sulphur prices and sulphuric acid prices. After rising slowly in 2007, sulphur prices climbed rapidly from $150 US/tonne in January to a peak of nearly $700 US/tonne in September. By yearend, they were below $200 US/tonne and still falling. The acid market remained buoyant during the period of high prices and was expected to remain so through 2009, but the rapid economic downturn will undoubtedly have a negative impact.
Hydrogen peroxide supply was relatively tight at the beginning of 2008 and capacity utilization in North American plants was high. Canadian production was running about 5% ahead of the 2007 rate for most of the year. Curtailments in pulp and newsprint production are expected to help balance the market somewhat, though plant utilization in North America should remain high, as capacity expansion in the near term will be limited to offshore facilities.
Two price increases were announced during the year for Canadian peroxide customers: $135/tonne in June and $95/tonne in September. Producers were also levying surcharges to recover high input energy and transportation fuel costs. FMC said its energy surcharge, based on the Henry Hub gas price listed on NYMEX, would be held constant at $0.25 US/lb through the first quarter of 2009. The company’s transportation fuel surcharge took the form of an additional per-shipment fee calculated each month. The fee for truck shipments is based on the weekly average diesel fuel price published by the U. S. Department of Energy, while the fee for rail shipments is based on the DOE’s average daily price for West Texas Intermediate crude oil.
Akzo Nobel Chemicals International BV has been fined $3.15 million by the federal court after pleading guilty to criminal charges for fixing the price of hydrogen peroxide sold in Canada. The company supplies hydrogen peroxide in Canada through its subsidiary, Eka Chemicals. The bureau’s investigation concluded that, between October 1998 and June 2001, Akzo Nobel and its coconspirators (FMC and Solvay) agreed to fix the price of hydrogen peroxide sold in Canada. The offence involved list price announcements by various manufacturers (suppliers) of hydrogen peroxide in Canada and the U. S. from time to time. Based upon facts obtained by the commissioner, the total value of hydrogen peroxide sales in Canada during the relevant period amounted to approximately $470 million.
Each of the leading suppliers of industrial gases raised merchant prices two or three times during the year, as energy and distribution costs soared. The price changes for oxygen were generally in the 10-15% range, but these often were accompanied by increased facility charges. The major industrial gas producers (Air Liquide, Praxair, Air Products) also commented on record backlogs for onsite projects, some of which involve the pulp and paper industry.
Before the latest global economic downturn hit, the paper industry was anticipating a significant increase in its chemical consumption. Chemical usage worldwide was forecast to increase from 3,600 kt in 2000 to over 6,000 kt in 2020. This prediction was based on the growth of coating binders and other coating additives (lubricants, thickeners) resulting from the anticipated increase in production of coated grades. A predicted increase in internal and surface sizing applications reflects the expected need for improved printability and runability of uncoated, wood-free grades. Strength additives growth is expected to result from the need to assist the trends of basis weight reduction and filler level increase.
On April 1, IMin Partners – a private equity capital fund dedicated to investing in specialty minerals and chemicals businesses – purchased the kaolin business of Huber Engineered Materials and renamed it KaMin LLC. Headquartered in Macon, Georgia, the business produces a wide range of engineered kaolin grades at three plants in the state. These materials continue to be sold under the numerous trade names acquired with the business. During the summer, some of these trade names were revised by replacing Huber with KaMin.
KaMin announced a 10-15% price increase for all kaolin products in June, shortly after the paper pigments business of Imerys announced a 10% increase in its North American prices for ground calcium carbonate. The price increases for these minerals were driven by significant escalation in chemical, fuel, power and mining costs.
KaMin, Imerys and BASF had already introduced energy surcharges on kaolin and calcium carbonate products earlier in the year. The surcharges were linked to natural gas and/or crude oil prices, and most were significantly reduced or eliminated when energy prices tumbled in the fourth quarter.
The leading producers of titanium dioxide – Kronos Worldwide, DuPont Titanium Technologies, Tronox, Huntsman and Cristal Global – announced numerous price increases during the year. All of the companies cited the rapid rise in energy, raw material and distribution costs.
Kronos stated the case most bluntly early in June: “Prior efforts to implement increases to cover these higher costs have not been successful, and currently almost all of the industry producers of TiO2 are operating at a loss. The first of what could be a number of plant shutdowns in the industry has recently occurred, and Kronos believes this situation, which if continued, could lead to significant reductions in industry-wide production capacity, [and] should be of concern for both producers and consumers of TiO2.”
By the end of 2008, titanium dioxide prices had apparently recovered to just over $1.10 US/lb, roughly where they had stood at the end of 2006. In between, they had bottomed at $0.99 US/lb late in 2007. Even while demand remained strong, producers were adamant that the current price would not be sufficient to justify reinvestment.
Rising petrochemical raw material and transportation costs prompted several price hikes for emulsion polymers during the spring and summer months. In tota
l, the increases exceeded $0.20 US/lb. These polymers, which include several latex products, are used in the production of coated paper, where they bind clay and pigments to the surface.
Dow Emulsion Polymers decided in December to close its Varennes, Que. manufacturing facility, which was the last surviving styrene-butadiene (SB) latex plant in Canada. The Varennes unit had been indefinitely idled during the second quarter because of insufficient demand and rising costs. Dow customers are served by a multiple manufacturing grid system, so a significant portion of the Varennes production was exported to the United States, while imports of SB latex from the U. S. supplied a major portion of the Canadian market.
Dow’s cost-benefit analysis considered the facility’s position in the latex business -including the competitiveness of its raw material position, the small scale of the operation and the age of the units -as well as the outlook for the global latex business, which is facing rapidly changing market conditions. With 14 production facilities worldwide, Dow intends to remain a global leader in the latex industry.
After going up by 21% in 2007, aluminum sulphate production in Canada was on track for another 16% increase in 2008. This growth kept the market in balance during a period of rising demand for water treatment applications, especially in the U. S. At the beginning of the second quarter, General Chemical Performance Products raised both schedule and sub-schedule prices on all grades of liquid and dry alum by $82 US/tonne (dry basis).
Specialty chemical products used in pulp and paper operations continued to experience price increases in 2008. Many of these products are proprietary and are sold as part of a comprehensive service agreement, making them less subject to the price volatility associated with commodities.
The paper technologies and ventures group of Hercules raised prices for the majority of its polymers, sizing agents and strength additives early in January. Five months later, the company announced price increases of up to 30% in North America on all of its paper technologies products, with particular focus on functional chemistries, such as sizing agents, wet strength additives and retention/ drainage aids.
Nalco increased prices to the paper industry in Canada and the U. S. on July 1. Prices for most products rose by 20% or less, but select programs, including the use of defoamers, glutaraldehyde, phosphates and polyphosphates, antiscalants and pulp mill and pitch control surfactants, saw 30% increases.
There was a handful of blockbuster mergers and acquisitions in the chemical industry during 2008. The most significant deal for the pulp and paper sector was Ashland’s $3.3 billion US-purchase of Hercules, one of the world’s leading suppliers of specialty chemicals to the pulp and paper industry.
“We will combine the paper and water businesses of each company to create one global paper and water technologies business with annual revenue of $2 billion,” said Ashland chairman and CEO James O’Brien. “In particular, Hercules’ leadership position in pulp and paper technologies bolsters our participation in one of the world’s largest water treatment markets. The combined businesses will provide the scale to leverage opportunities in other key water treatment markets including municipal, industrial and marine.”
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. He 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.
Canadian manufacturers of pulp and paper probably wouldn’t mind if they were living in less interesting times.
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