Outlook for the paper industry from Thirdpoint

An outlook for the paper industry was published from the investment adviser Thirdpoint. The firm commented factors like the black liquor tax credit, recycled vs Virgin fiber, softwood vs hardwood pulp and the industry consoldiation in their latest newsletter.

1. The Black Liquor tax credit ended on December 31st, 2009, but left behind inventory channels stuffed from over production, which in turn depressed paper pricing and delayed many mill closures. The combination of over production due to the tax credit and the economic downturn of 2008‐2009 was according to Thirdpoint a perfect pricing storm for the paper industry. The expiration of the tax credit caused the closure of many marginal paper plants and led to much higher paper pricing for the survivors in 2010‐11.

2. Recycled (OCC) vs. Virgin Fiber: A wide range of new paper plants (and nearly all of those in Asia, the strongest growth market) use OCC, which is recycled paper. Powerful growth trends in those markets have led to much higher OCC prices, giving an advantage for producers that can produce virgin fibers.

3. Softwood vs. Hardwood Pulp: Much of the new pulp capacity in the world has been developed in South America, which grows hard wood. Hardwood pulp has shorter fibers and is lower quality than softwood pulp. Most pulp manufacturers can use a blend of softwood and hardwood, but many have reached the limits of their ability to blend hardwood pulp. As a result, softwood pulp producers or those who are vertically integrated with their own softwood pulp enjoy a substantial cost advantage.

4. Industry Consolidation and Capacity Rationalization. The combination of industry consolidation and capacity reduction has led to many paper grades currently running at +90% utilization, a level that gives them the flexibility to raise prices.

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Original source: http://www.insidermonkey.com/blog/wp-content/uploads/2011/02/Third-Point...