Pulp Supply in Crisis – Paper Supply Reduced

Coated Groundwood Price Increase- We have been projecting a second quarter price reversal in coated grades since early last fall. It has been our contention that a market turnaround could occur without additional capacity withdrawals – if producers would maintain a disciplined approach. In other words, producers should continue producing uncoated grades on coated equipment well into the future, rather than switching back to more profitable coated grades as soon as possible.

Market discipline is difficult in the competitive world, however, so it was a long shot. Hopes for a price reversal, without capacity reductions, were stunted when NewPage re-started two coated paper machines. This action did not provide the leadership needed.

As an aside, I later had an opportunity to speak with NewPage about its decision to re-start these two machines. The company pointed out that the two machines were indefinitely idled last fall with the primary objective of making sure that inventories could be worked down by year end. Closing these machines helped the company accomplish its inventory objectives, so that NewPage ended 2009 with lower inventories than in recent years.

Then, in early 2010, with NewPage inventories in line, and order entry improving, the company chose to re-start the two machines. The point was that the company had a short term goal in mind when the machines were shut down, and when that goal was accomplished, the plan was to re-start the two machines.

The explanation is logical and reasonable. As it was explained to me, the re-start can be justified. Nevertheless, I still don’t think it was good strategy. A successful price increase is worth about $13 million/month to NewPage. If they had not re-started the two machines, and followed AbitibiBowater with an April price increase, I think it the chances would have been better than 50% that it would have stuck.

That brings up another point. Pricing was not a topic that NewPage would discuss with me, but isn’t it interesting that NewPage and Verso did not support the AbitibiBowater price increase – at least not yet. The three companies together control over 60% of the coated groundwood market. They could have made it happen.

Recent Market Developments – In the 10 days since the last monthly Reel Time was written, the paper world has changed considerably.

All the paper machines in Finland are shut down. This probably won’t be a long strike, but it has already had some impact on the U.S. If it goes on for a month, it will be important to the U.S. market.

St. Marys paper has closed down its last SC paper machine (140,000 tons). On March 8^th a closure was announced for Friday the 12th, but for whatever reason it shut down early on the 9^th.

The Commerce Department has imposed tariffs on coated sheets coming from China and Indonesia. It is very likely that punitive anti-dumping duties will be imposed in April. Imports of coated grades from China will decline sharply in the coming months

Pulp Supply in Crisis?- Sometimes, fear is an appropriate response. Pulp buyers should be in fear right now. Pulp supply in the U.S. south has been slowed dramatically due to wet weather conditions. Now, we hear that eastern Canada also has weather problems (with warmer and wetter weather than usual) that will significantly reduce pulp production. In British Columbia, Canfor is losing an additional 11,000 tonnes at its Prince George mill.

The huge problem, of course, is the devastating earthquake in Chile that took out 8% of global pulp capacity! This capacity is expected to be off-line for at least 30 days (most of it anyway). But how long might it be before the majority of this capacity is back in the market? Except in China, customer pulp inventories around the world are very low. Pulp prices, however, are already very high. We show the U.S. pulp price going to $910 in March. If pulp production in Chile stays off line for a few months, we will hit $1,000/tonne pulp. If this capacity is down for 6 months…I don’t even want to think about it.

Cost Impacts on Paper Capacity and Paper Prices – As we preach so often, high costs do not push paper prices up! However, when prices fall to variable costs, then capacity is eliminated, and prices rise.

Energy and fiber costs have been rising, but prices of coated grades have been mostly flat, although there have some reductions in 2010. So costs and pricing have been going in opposite directions. That trend will end soon. Prices for some mills (other than St Marys) are near variable costs.

Paper supply, however, is also declining. The strike, the trade action, and the St Marys closure all have an impact. In addition, the price of pulp is so high that integrated mills with the capability of selling pulp rather than paper will be able to consider that option.

So the point is that we continue to look for a price reversal sometime over the next few months – by July. It might be due to capacity removal or it might be due to an improving supply/demand picture.

In the meantime, the NewPage coated free sheet price increase (sheets only) will likely go through. The AbitibiBowater increase in coated groundwood will not, of course, unless others follow – then it has a chance.