The supply side of the viscose pulp market continues to overwhelm demand side, despite the big increase in demand. Capacity expansion did post a relatively modest performance in the fourth quarter of 2012, with 160,000 tonnes per year being added. However, this was still sufficient to offset the annual rate of demand growth during this period, leaving the market extremely oversupplied. Our data indicate that world operating rates would be below 70% if all of the new wood pulp swing and cotton linter dissolving pulp capacity were completely in the market.
Therefore, viscose pulp prices have to remain sufficiently low to keep out this excess capacity.
Another burst of capacity expansion is set for the current year, which will maintain downward pressure on viscose pulp operating rates. In addition, new capacity will start to undermine the hi-alpha market, too.
Table 1 - Announced world viscose staple fiber capacity expansions (thousand tonnes)
|TangShan Sanyou||China||New line||160,000||2012|
|Birla (Grasim)||India||New mill||120,000||2013|
|Jiangxi Longda||China||New line||200,000||2013|
|Sateri Fujian||China||New mill||200,000||2013|
|Lenzing (Tencel)||Austria||New line||60,000||2014|
|Shandong Yamei||China||New line||80,000||2014|
|Lee & Man||China||New mill||100,000||2014|
Our latest estimate for world dissolving pulp demand in 2012 is virtually unchanged compared to the one in last quarter's monitor. Global usage is estimated at 5.8 million tonnes, 500,000 tonnes or 9% above the previous year's figure. Viscose pulp represented 4.3 million tonnes of the total, with the remainder being hi-alpha grades (acetate, ethers and other specialties). Virtually all of the growth was in the viscose pulp sector, where increases in overall textile fiber consumption were inflated by share gains versus both cotton and synthetics. China remained at the forefront of the demand side of the dissolving pulp market, accounting for three-quarters of world growth in 2012.
Viscose staple fiber (VSF) will continue to be the primary engine for dissolving pulp demand growth over the next two years. Global production of viscose staple is predicted to expand 11% annually in 2013-2014, which will boost the total to 5.3 million tonnes. Despite this stellar performance, VSF will represent just over 5% of the world textile fiber market in 2014. Cotton will remain five times bigger than VSF, with the potential for larger share gains against this competitor being the most important upside risk to our demand forecast. Share gains by VSF relative to synthetics could also be faster than we are currently projecting due to the potential for large increases in raw material costs for synthetics and the better environmental footprint of VSF.
China will remain at the epicenter of VSF production in the upcoming two years. Textiles will continue to be a growth sector for the Chinese economy, largely due to increasing domestic demand. VSF will become a more important source of textile fibers due to limitations on cotton availability and rising incomes which will allow consumers to trade up from synthetic materials. The Chinese share of growth in global VSF production will drop to 60% over the next two years, though, due to investments in new capacities in other parts of the world. India and Indonesia will stand out in this respect, as will Austria and a newcomer to the market, Turkey.
World usage of hi-alpha pulps is projected to rise 4%-5% per year in 2013-2014, reaching 1.66 million tonnes at the end of this period. This level will be 140,000 tonnes higher than our estimate for 2012. The ethers sector will represent the fastest-growing area, with 6%-7% annual gains predicted over the next two years. Stronger economic growth will pull up the plethora of end uses for cellulosic ethers, while they will gain share of these end uses, also. Acetate will remain the largest sector of hi-alpha pulps, but will post considerably lower growth rates due largely to declining cigarette usage in the developed world.
Combining our forecasts of viscose and hi-alpha pulps, we arrive at total dissolving pulp demand maintaining the strong annual growth of 9% registered last year over the 2013-2014 period, also. World dissolving pulp usage is projected at 6.9 million tonnes in 2014, up 1.1 million tonnes from the 2012 figure. These high rates of growth make the dissolving pulp market extremely attractive for investors, especially compared to most end uses for pulp; too attractive, actually.
Table 2 - Announced world dissoving pulp capacity expansions (thousand tonnes)
|Anqing Huatai||China||New mill||120,000||Q3/2012|
|Sun Paper||Laos||New Mill||200,000||Q3/2013|
|Lee & Man||China||New mill||100,000||2014|
|AV Terrace Bay||Canada||Conversion||280,000||2016|
Capacity expansion in the viscose pulp sector continued in the fourth quarter, with converted paper grade lines starting at two mills in Austria and Japan. The combined addition of these two lines was relatively modest compared to the rate of expansion in the second half of 2011 and first half of 2012, but still sufficient to keep up with the annual rate of growth in global viscose pulp demand. The most interesting development on the supply side of the dissolving pulp market over the past several months has been the share losses of domestic suppliers in China. Recent data indicate that the vast majority of the new wood pulp swing lines have remained in paper grade pulp and cotton linter lines are having difficulty competing at existing price levels. Of course, this capacity is still potentially available but is not viable at current prices.
The rate of dissolving pulp capacity expansion is set to accelerate again in 2013. We are now showing 1.25 million tonnes of new capacity scheduled to start this year. This figure is nearly 200,000 tonnes lower than the one that we showed in the last monitor because we have shifted the Sun Paper greenfield mill in Laos back to 2014 after they rather cryptically announced that projects of this sort take longer than anticipated. Partially offsetting this assumed delay is a larger increase at the Czech mill of Lenzing as they proceed through their conversion of this operation to viscose pulp production. The timing of the startup of one other mill, Paper Excellence in western Canada, is also open to some doubt but the company's latest statement still has the operation beginning to produce dissolving pulp in the second half of this year.
Two of the largest traditional suppliers to the dissolving pulp market will be adding substantial capacity in 2013 for the first time since the price explosion of 2010-2011 and sharp acceleration in world demand growth for viscose pulp. Sappi is looking to not only maintain its position as the largest supplier of dissolving pulp, but to even distance themselves further from the pack. The company is set to start producing viscose pulp after the conversion of two paper grade pulp lines in South Africa and the US. The two lines will have a combined capacity of 540,000 tonnes/yr and will be firmly in the bottom half of the world cost spectrum. Thus, Sappi is looking to secure one full year of viscose pulp demand growth on its own.
The other major player investing in new capacity this year is Rayonier at one of its two mills in the southeastern part of the US. It is converting a 260,000-tonne/yr fluff pulp line to 190,000 tonnes/yr of hi-alpha pulp. Some of the output of the converted line will be viscose pulp initially, but will be shifted to hi-alpha in a relatively short time. This will be the first significant expansion of hi-alpha pulp capacity on a worldwide basis since 2008 and will account for three years of average demand growth in this sector. In addition, Buckeye is incrementally expanding the hi-alpha capacity at its wood pulp mill in the US South, which will represent nearly another year of average hi-alpha demand growth.
Our latest figures show a sharp deceleration in dissolving pulp capacity expansion in 2014, although remaining close to average demand growth at 450,000 tonnes/yr. The Sun Paper greenfield mill in Laos will make up nearly half of this total. In addition, we have included the final increment of expansion at the Czech mill of Lenzing and a small expansion at Tembec's Canadian mill in the hi-alpha sector. The list is rounded out by two expansions in China; one is a greenfield mill by a newcomer, Lee & Man, and the other is an incremental expansion at the bamboo dissolving pulp mill of Sichuan Yibin. There is some doubt about the Lee & Man investment at this point.
The continuing onslaught of new capacity will keep downward pressure on world operating rates despite strong demand growth. Even hi-alpha capacity utilization will be impacted as new capacity enters the market, dropping from effectively 100% over the past three years to close to 90% by 2014. Viscose pulp operating rates will remain below 90% on a worldwide basis throughout the next two years, with the majority of the downtime focused on Chinese suppliers. It appears that Chinese capacity utilization will average below 80%, despite our assumption that most of the new swing wood pulp capacity will remain in paper grade pulp.
Even outside of China, viscose pulp producers will struggle to reach 90% operating rates in the upcoming two years. Some of the new lines that have started in the higher-cost regions of the world will find it difficult to place their tonnage into an oversupplied market. Also, there are still a number of relatively small operations that will be in jeopardy of closing, with two in Europe already in trouble. These high-cost, small lines will face even more pressure as the new lines start in low-cost regions of the world, forcing them further out at the end of the world cost curve.
Our analysis indicates that hi-alpha producers will not be able to hold onto the elevated prices they will probably continue to enjoy in the current year in 2014. There is just too much capacity starting up in the sector in 2013 and margins are too attractive for even the highest-cost producers.
Also, the differential with respect to viscose pulp prices will revert closer to the longer-term average, although remaining higher due to the severe oversupply in viscose. This gap needs to close to keep viscose pulp capacity from migrating rapidly toward hi-alpha production in an effort to capture higher margins. Only faster growth in hi-alpha pulp demand than we are currently expecting could delay this process.
This is an edited version of information that appeared in RISI's World Dissolving Pulp Monitor.
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