Pulp trends point to dramatic changes to come.

Rapid growth in China and India, as well as low cost fiber sources in Latin America and Russia are set to shift the global production base across the pulp and paper industry.

The global pulp market is seeing some interesting developments these days as the Finnish strikes leave a depleted supply stream and new capacity ramps up around the globe. In the short term, however, producers are more focused on whether the host of pulp price increases announced recently are going to hold up over the weeks to come.

According to one industry insider, the mood remains somewhat uncertain after a period of weakening prices over the summer, but there are at least signs that buyers are in for a good fight in this round. "At present, it's sort of a toss-up whether the new capacity will hold things up or whether demand and the Finnish strikes are going to make the crucial difference. In terms of new capacity, you have the Valdivia restart, Hainan in China and the first pulp coming out from Veracel. But on the other side the Finnish strikes did do a lot to empty the pipeline both on the consumer side and at the ports so stock overall are at a low-ish level."

Indeed, the latest figures from Utipulp show inventory levels in Europe in June at their lowest for a couple of years, with just 28 days of supply in the system--a figure that would normally serve as a prompt for producers to seek price gains. But with the Finnish strike now resolved and production ratcheted back up to "normal" levels, there is a real fear that producers could still hold out against the increases, especially if the traditionally robust demand seen in the third quarter is not quite strong enough to leave buyers worried about securing supplies.

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As Dries Van Wing at Canfor explains, "The Finnish strike undoubtedly has an impact, but if you look at it in the context of the global pulp market, seven weeks lost production is still a relatively small amount."

Nevertheless, as Van Wing points out, prices probably can't go too much lower unless certain producers are willing to deliver at a loss and an opportunity appears to have presented itself for producers in terms of the depleted inventories.

Taking advantage of the situation, Canfor was one of the first producers to announce a price rise for NBSK (northern bleached softwood kraft). The group told customers that it planned a US$ 20/metric ton increase throughout Asia for September shipments to bring its Chinese price to $510-$520/metric ton. Interestingly, the company also noted that "quality" grades would be priced $10/metric ton above the "commodity" grades--a differentiation that has traditionally been reflected in the discount offered rather than the price itself.

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And, as the team at FOEX noted, "BSKP prices stabilized in China after the Yuan strengthened by 2% and now at least one major producer has announced a price increase from $490/metric ton (net) to $510-520/metric ton."

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Canfor's move was quickly followed by Pope & Talbot, Mercer International and Western, where increases of US$ 20/metric ton were also proposed, and that lead on long fiber pulp was subsequently followed by the likes of Metsa-Botnia and Arauco. But even with demand appearing to be quite strong in key markets, such as Southeast Asia, several commentators believe that the increase is far from guaranteed to go through in full.

Whatever happens, though, industry commentators believe that the softwood producers are seeing better prospects than their colleagues promoting increases in the hardwood market. That view appeared to be backed up by FOEX as the group went on to explain, "BHKP supply increases and the softness of the woodfree paper markets in Europe and the U.S. add to the hardwood price pressures, especially in Asia, where the reverse price gap to softwood has been the largest. Some consumers had began to make changes in their furnishes in favor of softwood. Also, in Europe BHKP continues to be priced at or above the level of NBSKP and last week the reverse price gap widened again, although only modestly."

Of course, exchange rates are also playing their part in the United States in addition to supply-demand pressures, and the combination saw some declines in North America as August got under way. Weyerhaeuser underpinned NBSK at the US$ 620-$630/metric ton mark and SBSK weakened as well along with short fiber pulp prices, although eucalyptus just about held out.

As August progressed, though, there were just a few signs that the market may have bottomed out as demand started to strengthen again ahead of the traditionally busy period in the third quarter.

CHANGING GEARS

Clearly then, producers are still some way away from being entirely optimistic about market trends, but in the longer term the reality for companies in certain geographic locations is that things can still get a lot worse as lower and lower cost pulp appears from new sources.

For example, Stora Enso's joint venture project with Aracruz--the Veracel mill in Brazil--is now up and running and it is rumored that the delivered cost per metric ton could be as low as US$ 250. (See article on the Veracel project in this issue.) Stora Enso is staying tight-lipped about the precise cost structure at the $1.2 billion mill at Eunapolis in Bahia state, but it is quite clear that the 900,000 metric ton/yr capacity plant will be a source of downward pressure on hardwood pulp prices for some time. This is undoubtedly a very efficient, low-cost plant, whether it is as low as $250/metric ton or slightly above.

The first shipment of eucalyptus short-fiber pulp reached the Nordic group's Oulu Mill in Finland in the summer, almost two months ahead of schedule, and further shipments will serve Stora-Enso's Chinese and Finnish paper mills in the months and years to come. But that is far from being the only source of new capacity in the market this year.

More downward pressure on prices came from Arauco's Valdivia plant in Chile, which restarted production in mid-August after a protracted row over the alleged breaching of environmental permits. The ruckus forced the closure of the plant and the resignation of the CEO, Alejandro Perez Rodriguez, on June 9, 2005. He was replaced by Matias Domeyko Casse, Arauco's former CFO. After a series of technical investigations and negotiations with governmental authorities, the 550,000 metric ton/yr capacity mill is now back on track.

On top of that, China now has a new 3000 metric ton/day BHKP (bleached hardwood kraft pulp) at Hainan Jinhai (one of the largest single fiberlines in the world), as APP looks to rebalance the region's fiber deficit. And even in Europe, Mercer's 550,000 metric ton/yr Stendal mill is well on its way to producing NBSK at full capacity as the project startup curve nears completion.

NOT BAD

As a result of all these increases, producers everywhere will be hoping for a strong global economy to ensure that there is ample demand to soak up the new supplies. At present, that does seem to be the case as forecasters are predicting fairly robust demand. Plus, as one analyst pointed out, BHKP demand has risen by 900,000 metric tons/yr on average over the past five years. But of course there are other major step changes in capacity to come in the near future as well.

For example, Arauco is already well on its way to getting the Itata plant in operation as Kvaerner Pulping supplies two medium-sized parallel fiberlines, one for eucalyptus and the other for pine. The design capacity of both lines is identical and the total capacity of the mill will be 856,000 metric tons/yr of bleached kraft pulp when Itata is up and running in the middle of 2006. When the mill is completed, Arauco's total capacity will rise to over 3 million tons.

In addition, CMPC has its sights set on getting the Santa Fe project into operation. This is the largest project undertaken by CMPC in its history and involves a US$ 745 million investment. The capacity of the new line will be 780,000 metric tons/yr of short fiber ECF (elemental chlorine free) bleached pulp when the mill comes on stream in the second half of 2006.

There are, of course, a whole host of upgrade and refurbishments that will add even more capacity, such as the imminent restart of the Kiani Kertas pulp mill in East Kalimantan, Indonesia. But looking even further at other likely (and less likely) potentially huge projects that have been proposed, there is no shortage of contenders:

* 1 million metric ton/yr bleached eucalyptus pulp mill being built by Metsa-Botnia at Fray Bentos in Uruguay and scheduled for startup in the third quarter of 2007

* International Paper is reportedly investigating the possibility of a greenfield eucalyptus mill in Brazil

* greenfield pulp and paper mill has been mooted for Borneo

* BCTMP pulp mill in Estonia

* greenfield pulp mill in Russia that could possibly be built by Stora Enso

* second fiber line at Stora's Veracel facility.

And of course, these are just a few of the projects on the drawing board.

BIG CHANGES

For market observers, all this activity points to one undeniable fact, and that is that the pulp and paper globe is set to change fundamentally over the course of the coming decades.

Jaakko Poyry illustrated the trend in two graphics that underline the shifts taking place in the global pulp and paper industry.

According to one analyst, this means that many of the higher production cost outfits--particularly those in North America--will no longer be viable. "Of course, a lot depends on the exchange rate, but over time I think there are some vulnerable mills out there that will face some tough choices in the years ahead," he said. "The higher cost U.S. and Canadian mills are definitely at risk, but so too are some of the French, German and even Iberian mills that don't have the scale to compete. Oddly enough, the high energy prices are actually helping the Nordic mills as they tend to be net exporters of power rather than the smaller, less efficient mills in the U.S., for example, that are net users. Personally, I'd say that rapid growth in China and India are really going to shift the global supply balance in the next few years."

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Obviously, there is still a long way to go, but there are clearly some global trends under way that will prove irresistible. The economics of the industry will have to adjust to take these new realities into account.

        Population, mill.     Paper and board
                           consumption, kg/capita

         2000     2015E        2000   2015E

                           Almost double in 15 years

China    1 282    1 418        29,8    51,4

                               Increase 30%

Brazil    167      198         42,8    59,4

                             More than double

Russia    145      133         22,9    52,7

Demand growth in emerging markets. Source: Stora Enso/Jaakko Poyry
Consulting.

Note: Table made from bar graph.

WHAT YOU WILL LEARN

* Market prospects for pulp following the end of the Finnish strike.

* The effects on the pulp market of large new capacity additions in South America and elsewhere.

* How new capacity will affect high cost producers in other regions.

ADDITIONAL RESOURCES

* "Biotechnology sparks an industrial revolution," Solutions!, October 2004. To access this article, type the following Product Code in the search field on www.tappi.org: 04OCTSO40. Or call TAPPI Member Connection at 1 800 332-8686 (US); 1 800 446-9431 (Canada); [phone] (International).

* "Beyond the Cluster Rule: New bleaching challenges," by Alan Rooks, Solutions!, November 2003. Product Code: 03NOVSO33.

* "Fine tuning pulping technology: A Solutions! Roundtable," by Alan Rooks, Solutions!, September 2002. Product Code: 02SEPSO39.

JIM KENNY, INTERNATIONAL EDITOR

ABOUT THE AUTHOR

Jim Kenny is contributing editor/Europe for Solutions! magazine, and is based in Brussels, Belgium. He is the former vice president of editorial for Paperloop and today heads his own company, DSI. Contact him by phone at [phone], or by email at [e-mail].