F2M Market Watch
Posted on July 11, 2011 by Sam Houston
Pulp prices have rebounded significantly over the last 24 months. From June of 2009 through June of 2011, ForestWeb’s North American Pulp Index jumped almost 65%, obviously outpacing other pricing gains in the US economy (most notably, gasoline which has increased a paltry 49% over the same time frame). During the first week of July, NBSK prices were just north of USD 1,000/tonne while SBSK were just south of the USD 1,000/tonne.
Using the Pulp Index data shown below, we see that pulp prices have been above the trendline since February 2010. We can also see the significant dip below trendline from October 2008 through January 2010.
How long can we expect prices to remain above the trendline? (A disclaimer before the answer, courtesy of a professor of statistics and forecasting: “Every forecast is a lie.”)
Here, however, we have a more significant principle of economics at work: commodity prices generally return to the trendline, barring any material changes in the fundamental economics or business environment related to the product.
First, let’s look at the basic business environment for wood pulp and whether there have been any significant changes in the fundamentals of pulp.
Are the demand drivers changing for pulp? Paper consumption per capita, worldwide, appears to be flattening out. Industry reports show that after having more than doubled in the 40 years prior to 2000 (an annual growth rate of 1.9% annual rate), consumption increased at a rate of only 0.2% between 2000 and 2009 (World Resources Institute, Swedish Forest Industries Federation). Over the time horizon of the trendline shown in the figure above, demand is essentially unchanged for Paper and Paperboard based pulp demand.
Are there new sources of demand for pulp? Because of a recent cotton shortage, cotton prices have increased signficantly, leading many manufacturers to substitute rayon. Historically, these types of demand streams have tended to be temporary. USDA crop data indicates that cotton planting has increased from the 2007 low and is in line with levels of 2002 – 2004. Will rayon remain a fabric of choice as cotton production ramps back up? I’d bet against it.
What about supply side dynamics? Over the past several months, quite a few announcements about capacity increases for pulp have surfaced. West Fraser is increasing NBSK capacity by nearly 100,000 tons, International Paper is repurposing the shuttered Franklin, VA mill to produce fluff pulp, Buckeye is studying an expansion of its Florida mill, and there have been other announcements and rumored pending announcements in the industry – and not just North American based. The real question is this, can the industry manage to add capacity in such a way that operating rates do not drop precipitously? My experience with adding capacity during the Containerboard capacity additions of the mid 1990’s suggests that the industry has gotten better at this. But the jury is still out.
Now, for the answer to the question, how long will prices remain above the trendline? I do not believe we have seen any fundamental changes in the pulp environment … yet. With per capita paper consumption flattening (at best), future increases in demand will be driven by population growth. If history is any measure, capacity additions come online in groups or clusters, trailing high prices and high operating rates by some months. That said, I would suggest that we will see prices back to the trendline in the next 12 to 15 months. As announced capacity additions come online, we are likely to see some shift below trendline, though the depth of the trough will depend upon the rate at which capacity comes online.
In this situation, I'm betting that the principle that "all things being equal, all prices return to trendline" will be stronger than the observation “every forecast is a lie."
