Chile earthquake boosts pulp prices

The Feb. 27 Chilean earthquake did enough damage to that country's forest products industry to spark global shortages that are pushing prices higher in Canada.

Damage to Chile's pulp mills appears to be particularly severe, knocking many mills out for months while damage is assessed and repaired, according to Equity Research Associates analyst Kevin Mason.

The heart of the Chilean forest industry was near the quake's epicentre off the coast of the Maule region. The power boiler at one pulp mill shifted position and a sawmill's inventory was swept out to sea in a tsunami, according to news reports from Chile.

The damage reports have been slow to trickle out, Mason said, but as it becomes apparent mills will be out of service for a long time, buyers are scrambling to find supplies elsewhere,

That's an unexpected boon for Canadian producers like Canfor Pulp, West Fraser Timber and Domtar, which could see their margins jump 15 to 20 per cent, Mason said.

Chile produces eight per cent of the world's pulp and the loss of its mills has had a global impact, Mason said. Added to the shortages caused by the Chilean quake is a dock workers strike in Finland that has halted pulp shipments from that country.

"Prices are going to be substantially higher over the next quarter and they are going to hold into the third quarter," Mason predicted.

North American producers have announced a $40-a-tonne price increase from $910 US a tonne to $950 as a direct response to the earthquake, and Mason said he expects to see another increase in April. European prices are also going up by $40 US a tonne.

"When you get a surprise move like this, the weakest players get the biggest bang for their buck. And right now the Canadians, financially, are generally the weakest players on the world stage. They are the biggest beneficiaries from this run on pulp. It's going to buy them time to repair their balance sheets and generate a huge amount of cash."

Mason said he's hearing tales from brokers that buyers are phoning and asking how much more they have to pay to outbid other customers. "A lot of people are scrambling and they are willing to pay more than the current price."

Keta Kosman, of Madison's Lumber Reporter, said sawmill damage, while severe, will not affect markets to the degree that pulp mill damage will.

"My perception is that what's happening [in lumber] is the same thing that happens whenever we have a fire in B.C. Everybody tries to get what they can out of it, but it's short-lived."

She said pulp mills cannot be re-started as easily as a sawmill can.

"There are issues of chemical containment. One guy told me you can't just flip a switch and start up a pulp mill."

The damage to sawmills has pushed prices up for products made from Chilean radiata pine, specifically mouldings.

Kosman said she expects the solid wood shortage to work itself out within 90 days, as producers, particularly pine mills in the U.S. South, increase their production.