Clear or cloudy horizon?

Pulp & Paper, Aug 2005 by Cook, Chris, Mies, Will, Rudder, Greg, Smith, Bryan, Vasconcellos, Sandra

Having enjoyed some sunnier days with better prices, North American producers are now closely watching the gathering clouds of higher costs and a slower economy

After a rebound in 2004 and relatively healthy start for 2005, it is now summertime, and just when producers were hoping for a sunny horizon, economic clouds invaded. U.S. real GDP growth began slowing in the first half of this year from recent highs in 2004, and rising raw material, chemical, energy, and transportation costs bit into the price increases implemented last year on pulp, paper, and board in the U.S.

In the first half of the year, average pricing rose almost 10% for uncoated freesheet 20-lb repro bond paper and 19% for the No. 5 40-lb coated offset rolls, when compared with first half 2004 levels. Newsprint also increased almost 10% year-over-year, but a strong loonie hampered profits for Canadian newsprint makers. The 42-lb unbleached kraft linerboard transaction level (before volume discount) in the U.S. East was up 15%, but dropped $15/ton in May due to soft box demand. Northern bleached softwood kraft market pulp declined $50/tonne in May and June.

The only benchmark grades increasing in price from January through June were No. 5 coated 40-lb and 30-lb newsprint. All others (42-lb kraft linerboard, NBSK, OCC, and repro bond) declined or stayed flat in price during the first half.

RISI expected U.S. real GDP growth this year - after 4% growth in several quarters last year - would calm to 3.0% in the second quarter, 3.3% in the third quarter, and 2.4% in the fourth quarter. The high oil prices, rising interest rates, and softer manufacturing affected the U.S. growth, RISI said.

The slower demand affected U.S. paper and board output, which was down an estimated 1.6% or 350,000 tons in the first quarter and totaled 22 million tons, based on American Forest & Paper Assn. figures. But paper/board output rose in April and totaled 30.1 million tons, up 0.2%.

However, company profits in the first quarter totaled $980 million for 20 publicly-traded firms, up almost 58% from first quarter 2004's total. Weyerhaeuser, Temple-Inland, and Georgia-Pacific reported the strongest gains in net income in the first quarter.

But company executives and Wall Street analysts expected earnings to be hard hit by ongoing rising costs and some further price decline.

Raw material costs rose 10% on market pulp and almost 20% on OCC in June 2005 compared with levels two years ago.

Oil and natural gas prices also continued surging this year. Spot West Texas Intermediate crude hit $54.31/barrel in March and $49.83 in May, up 24% yearover-year. Natural gas wellhead pricing jumped to 7.20 per million BTU in April, from 6.13 per million BTU in February.

Shutdowns and sales of mills in North America continued in the first half. UPM shut a kraft pulp line last year in Miramichi, N.B., that led to a strike at the Miramichi's 450,000-mtpy lightweight coated machine in January.

For the first time, two Chinese companies purchased North American market pulp mills - and planned to ship pulp to their mills in China. Lee & Man Paper, China's second largest containerboard maker, bought Stockton Enterprises' 210,000-mtpy mill in Samoa, Calif. Sun Wave Forest Products purchased the closed 350,000-mtpy mill in Prince Rupert, B.C.

MeadWestvaco sold its coated papers unit for $2.3 billion to Cerberus Capital Management LP, a New York investment company, and MW reset itself as a packaging-focused firm. Rock-Tenn purchased Gulf States Paper for $540 million and became the second largest U.S. folding carton producer.

The bankrupt Bay State Paper's 108,000-tpy recycled containerboard mill in Hyde Park, Mass., was permanently shut and sold to industrial auctioneer Koster Industries. Menasha said it would either sell or shut by Aug. 9 its only mill, the 306,000-tpy corrugating medium operation in Otsego, Mich.

North American newsprint capacity was to decline 1.01 million metric tons this year and total 13.4 million metric tons because of declining consumption by U.S. daily newspapers. Some of the shut newsprint capacity will be converted into uncoated mechanical and specialty papers.

The chief grade in the U.S. showing ongoing capacity growth is tissue. Two machines are to start this year adding 34,000 tpy of capacity. Five or six tissue machines are set to start in 2006.

MARKET PULP

Prices fluctuate; fall pickup likely

North American market pulp prices jumped in the first several months of 2005 on strong U.S. demand. Producers raised prices in successive months (depending on grade) during the first quarter to increase levels to three-year highs.

Benchmark northern bleached softwood kraft (NBSK) rose to $680/tonne, the highest price since the end of the last peak in January 2001 ($710/tonne). Hardwood kraft saw lower producer inventories globally and a $100/tonne premium that buyers paid for softwood kraft in July 2004 was wiped out.

In June, the top price for northern bleached hardwood kraft (NBHK) equaled the effective list price for NBSK at $630/tonne, which declined beginning in May.