2005: Expect more market tightness

Pulp & Paper, Feb 2005 by Ferguson, Kelly

THE CURRENT TIGHT MARKET FOR PULP and paper chemicals is evidenced by a series of rapid price increases announced during 2004, with some companies announcing increases in the second quarter followed by another increase in the fourth quarter. Virtually no chemical was unaffected. Announcements ranged from pulping and wastewater treatment to specialty and coating chemicals, including hydrogen peroxide, latex, sodium chlorate, titanium dioxide, coating kaolins and pigments, and papermaking process aids.

The reason for what most suppliers and observers call "unprecedented" market conditions is the high cost of chemical feedstocks combined with higher energy and transportation costs. Almost all of the price increase notices included wording such as, "The price increase will help off-set recurring additional costs due to continued industry raw material rate increases and shortages, freight expenses, and energy."

The ripple effect

Shane Cyr, director of global materials procurement at Hercules Inc., says, "There has been visibly more price increase activity from suppliers to the pulp and paper industry in recent months. But, in fact, price increase pressure has been present through the last 18 months or so.

"Unprecedented cost increases due to higher energy and feedstock prices coupled with increased demand for commodities and derivatives-particularly from China-has resulted in a very strong hand for our suppliers," Cyr says. "In addition-particularly in the U.S.-below reinvestment returns and permanent closure of high-cost assets during the last several years has resulted in very tight supply of many of the raw materials used ia our products."

Robert Keller, senior vice president at specialty chemical supplier Kemira, echoes Cyr's comments. "We're like a lot of specialty chemical companies that buy-as raw materials-commodities that are manufactured and sold by a small group of global leaders," he says. "These companies are diverting a lot of their supply toward Asia, and especially China, because the demand is there, the growth is there, and the price is there. Not only is the North American market overall not as attractive because of those things, but a lot of those suppliers have said that the paper industry is particularly less appealing in terms of the efforts they put into supplying us."

Keller adds, "This situation has been created over a long period of time due to the severe pricing pressure that has been put on our customers, that they put on us, that we put on our suppliers. It's a ripple effect."

For paper chemical suppliers, just like their customers, these price increases are unprecedented. "Our single-largest raw material is going to more than double in price, and we've been put on allocation," Keller says. "And while some chemicals are affected more than others, almost all of them are affected to some degree."

Cyr says, "For a number of key raw materials, we have experienced increases in excess of 20% during the last year or so. Materials based on propylene, chlorine, benzene, ethylene, and phosphorus in particular have been most problematic. Fuel costs are higher and transportation capacity is tight, so rates go up. High crude, high natural gas, and high coal prices are common, so energy costs go up."

What's the outlook?

Some sources contacted who wanted to remain unidentified said that while price increases have been announced, implementation has been spotty. This is similar to announcements made by paper and paperboard producers. But one result of a continued tight market may be further consolidation of paper chemical suppliers, sources said, adding that one of the primary reasons raw material suppliers have been able to demand their price is due to the consolidation among feedstock suppliers.

When asked about the next 12 to 18 months, Cyr responded, "I think people who watch the feedstock and derivatives markets for a living would be gun shy oil this question. If you look back to 2003 and see what benzene forecasts were for 2004 you would understand why. My expectation is that there are some materials that will continue to have supply/demand balance in their favor, and producers will continue a drive for margin expansion. Others segments are moderating somewhat from late 2004 highs."

Keller added, "I don't see any changes, unless the bubble breaks in China. If that happens, things could turn around almost overnight. But barring that, the major fundamentals don't appear to be changing in the short term."

KELLY FERGUSON is v.p., editorial for Pulp & Paper.