What follows is a summarized review of RISI forecasts of a sampling of various pulp grades. In Part II, we look at a sampling of various paper grades, categorized by region.
Price erosion that began in China trickled down to North America in a cycle that increasingly looks like a mirror held to the summer of 2010. The broad decrease in bleached softwood kraft (BSK) marked an end to a strong pricing first half of the year for producers when NBSK increased in three out of the first six months on the back of a massive pull from China.
Those days are now over, and with Chinese buyers taking as little tonnage as possible while awaiting further pricing drops, US buyers expect to drive down levels over the next few months or so.
Northern bleached hardwood kraft (NBHK) held as the differential between grades narrowed. While NBHK producer sources noted the average $40 delta vs BEK was still well above historical trends, by August it's likely all BHK grades could topple if supplies don't shrink, contacts said.
The aggressive pricing approach by BEK producers led global buyers to snap up more NBHK and SBHK "from around the world and that's left us in a decent spot right now. With eucalyptus guys going backwards they're just catching up to historical norms."
An historical anomaly is underway in market deinked pulp (MDIP), which continues to see prices rise even as kraft pulp markets decline around the globe. Some contracts are tied to recovered paper prices, so producers didn't have much of a fight with US buyers even as they began anticipating an end to kraft pulp's bull run. Some papermakers are a captive audience to MDIP and cannot switch grades based on price fluctuations because MDIP is needed to make recycled content papers branded to consumers as environmentally friendly.
NBSK producers haven't been able to sell their full monthly allocations because buyers widely anticipate a continued drop in international prices as Chinese traders and papermakers slowly work off stocks at mills, trading houses, and ports. One contact in China said there are Chinese papermakers facing financial difficulties that could exacerbate the market, along with large supplies of pulp and much-lower local prices for NBSK vs international levels.
RISI believes that China's demand will remain tepid over the next few months. Demand for market pulp in the P&W sector in Western Europe and North America is expected to be negative through 2012. US shipments of P&W paper is expected to drop 2.4% in 2011. In Western Europe, expect 2011 demand to fall by 2.1%.
In China a combination of aggressive expansion, high fiber prices and trade sanctions being applied in the US and Europe has made life difficult for woodfree P&W producers. Expansion is set to continue worsening the situation over the next year or two. Demand is affected by the slowdown in the Chinese economy and trade sanctions have put a damper on the export market, leaving producers between a rock and a hard place.
Tight market conditions for dissolving pulp are now over for the foreseeable future. Reduced demand as a result of inventory destocking has undermined the market balance over the past couple of months. The beginning of a huge wave of capacity expansion will then take over as the major factor keeping downward pressure on operating rates in the latter part of this year. Our latest listing of announced capacity expansions now shows that 1.4 million tonnes of new capacity will start by the end of 2011, which is 200,000 tonnes more than what we had calculated in last quarter's monitor. More than half of this new capacity will be in China, mostly through conversions of existing paper grade pulp lines.
We expect to see world dissolving pulp capacity increase by 350,000 tonnes in 2011, well below the total amount that will actually be started during the year, due to the vast majority being ramped up in the latter part of 2011.
Still, this increase will be sufficient, along with our assumption of comparatively weak demand, to pull down world operating rates to a 90% average for the full year. Given the high operating rates in the first half of 2011, it is obvious where we think capacity utilization is going in the second half to arrive at a 90% average. It looks like world operating rates will be in the mid-80% range by the last quarter of this year.
RISI's general outlook for the global recovered paper market through 2012 is that it will remain tight although there could be a mixed picture in the near-term. We continue to believe the tight recovered paper market conditions for bulk grades will persist in North America during the second half of 2011. Slowing collection in the summer holiday season will run against strong domestic demand and constrict not only the domestic North American market but also limit volumes for Asian buyers. For example, demand from the paper packaging sector is expected to remain strong during the third quarter and grow more in late 2011 and early 2012 according to our projections.
Chinese demand for bulk grades of recovered paper, on the other hand, is expected to pick up a little in the summer before accelerating more in late 2011. On one hand, demand growth for recovered paper, especially ONP and mixed paper, will be constrained in the summer when some paper mills are forced to take downtime due to the decreased power supply. On the other hand, although we have been seeing the Purchasing Managers' Index (PMI) softening in China in the past few months, the higher-than-50% number still indicates slow but positive growth. In addition, the new machines that will come out in the second half of this year will still need fiber even though the mills may struggle with the high cost.
In the second half of 2011, we look forward to a tight but more stable European market. On the supply side, European collection will also be at a seasonal low level in the summer, the holiday season. But the total European collection volume is predicted to expand somewhat as the Eastern European countries improve their paper recycling systems. On the demand side, we probably won't see much growth in domestic European demand according to our outlook for the packaging paper and graphic paper market. Asian buyers may again return to the European market when North American grades become much more expensive than European grades, but in general export demand to Asia is likely to be only close to or at the levels of the first two quarters.