By David Fortin, Vice President, Fiber Economic Analysis
The global industry for market wood pulp has been lurching from one supply-side disruption to the next since the third quarter of last year. In a market with growing demand and tight inventories, similar to the current conditions in the global market pulp sector, any shock to the demand or supply side of the industry will be amplified and reverberate through the market quickly. The string of supply-side shocks began with the idling of the CMPC Guaíba mill in Brazil due to issues with the recovery boiler, followed by the slower than anticipated startup at the new APP OKI mill in Indonesia due to equipment issues, and most recently the curtailed production stemming from the unseasonably warm and wet winter experienced in the Nordic and North European countries. Just as the wave of newly reported large amounts of unexpected downtime seemed to have crested, news of a nationwide strike by truck drivers in Brazil broke on May 21. The strike began to wreak havoc on the domestic economy and eventually forced abbreviated production schedules at many pulp and paper producers in the country. As the largest supplier of papergrade market pulp in the world, any impediments to production capacity on a national scale in Brazil will have an outsized impact on the world market. This article will attempt to quantify the volume of supply and key markets that could potentially be impacted if the strike continues. If you are interested in more information on the strike and specifics on the companies that have been impacted, please read the article "Strike paralyzes operations of P&P mills in Brazil" in the latestPPI Latin America.
RISI estimates that total papergrade market pulp capacity in Brazil will reach 18.3 million tonnes in 2018, and account for 24% of world papergrade market pulp capacity. Nearly 97% of total papergrade market pulp capacity in Brazil is bleached hardwood kraft pulp (BHK), more specifically bleached eucalyptus kraft pulp, 2% is bleached softwood kraft (BSK) and the remaining 1% is largely mechanical pulp. BHK market pulp capacity in Brazil accounts for close to 45% of global BHK market pulp capacity, so any impediment to market pulp production in Brazil will have a large impact on global BHK market pulp supply. During the first quarter alone, Brazil exported 3.9 million tonnes of BHK (Table 1) with the majority of these exports directed to China and Western Europe. China is the world's largest consumer of market pulp and relies heavily on imported market pulp. China is estimated to have imported close to 1.5 million tonnes of BHK from Brazil during the first quarter, which accounted for 53% of BHK imports for the period. This helps define the aggregate volume of supply at risk and key markets that could be impacted.
As the strike extended into the weekend of May 25, reports began to surface indicating that many pulp mills in Brazil had been forced to curtail production. Pulp and paper mills began operating on a limited basis, either scaling back total production or shutting entire lines due to the lack of supply of inputs and inability to ship finished products. Assuming total market pulp capacity of 18.3 million tonnes, each day the Brazilian market pulp industry is idled would result in 51,500 tonnes of lost market pulp supply (Figure 1). The lion's share of the lost capacity would be BHK market pulp with 49,800 tonnes of lost production capacity per day and the remainder being largely BSK market pulp. Assuming on average that all mills have lost only 25% of production capacity since Monday, May 28, the total unexpected downtime would be a loss of 51,500 tonnes. While there have not been any official downtime volume estimates reported at this point, anecdotal evidence suggest many mills are struggling to operate even at curtailed levels under these conditions, so the 25% estimate of lost capacity may be too low. A more realistic estimate may be closer to 50% of capacity idled due to the strike, which would result in a total of 103,000 tonnes of unexpected downtime since Monday. This amount would be more than half of our estimate of total unexpected downtime experienced in the Nordic region during the entire first quarterin just four days.
The truck driver strike in Brazil is the latest in a long line of major unexpected supply-side disruptions that have kept the world papergrade market pulp industry exceedingly tight since late 2017. Inventories remain thin throughout the global supply chain, making the market more susceptible and sensitive to both demand- and supply-side shocks. Each day the strike continues, the worse the situation in Brazil is likely to become, resulting in a larger amount of idled capacity that will take longer to ramp back up to full capacity and restock the supply chain. Market pulp consumers have found it increasingly challenging to operate under these tight market conditions for this extended period, and the truck driver strike in Brazil dashed any hopes of the market easing, at least for the time being. We will continue to monitor the strike closely and send along updates as necessary.
David Fortin, Vice President, Fiber Economic Analysis, is the co-author of theWorldPulp and Recovered Paper 5-Year Forecast and theWorldPulp and Recovered Paper 15-Year Forecast., and the author of the World Pulp Monthly. He works out of RISI's Bedford office and can be reached at Tel: 781.734.8974 or Email:firstname.lastname@example.org.