Corrugating medium market slows down because of weak box demand

Chemical paper grade market pulp includes pulp sold on the open market and excludes pulp consumed internally or at affiliated mills. Pulp grades are based on origin (Canadian or U.S. production being northern or southern), wood type (from softwood or hardwood fiber), and pulping methods (kraft sulfate or sulfite processing). Fluff pulp, which is produced in roll form and shipped to manufacturers for diapers and related sanitary products, are included in the U.S. Northern bleached softwood kraft (NBSK) and is the benchmark grade because its strong and long fibers provide a premium to consumers. Canadian market pulp capacity statistics include mechanical pulp, while U.S. statistics exclude mechanical pulps because they have not been tracked on a market basis since 1989.

Production/Capacity. Canadian market pulp will rise by 222,000 mtons by the end of 2003, mostly due to the ramp-up of modernization projects. The increase in-volves creep capacity—in which producers can run at more than 100% capacity during market upcycles—and conversions from one grade to another. But the total Canadian market pulp capacity increase represents a growth of only 1.9%, rising 222,000 mtons from 11.83 million mtons/yr to 12.05 million mtons/yr. Those figures include chemithermomechanical pulp (CTMP), which will see the largest rise, up from 2.1 million mtons/yr to 2.25 million mtons/yr.

Following recent capacity growth in the U.S. of 4.0% in both 2000 and 2001, U.S. capacity is expected to drop through 2003. Part of the recent rises are due to producers shifting from integrated to market pulp, the restart of Willamette's Port Wentworth, Ga., mill and when Mead converted its Rumford, Maine, mill to produce pulp in 2000. For 2001, the U.S. cap-acity rises by 240,000 mtons, to 8.465 million mtons. In 2002 there is a decrease of 60,000 mtons. The drop continues in 2003 by another 50,000 mtons when U.S. capacity reaches 8.355 million mtons.

Market fundamentals. Producers have battled poor fundamentals driven by rising inventories, which has resulted from overproduction and weak demand from pulp consumers both in the U.S. and Europe. In the first six months of this year, prices for benchmark NBSK slipped by about 24%, down from $710/mtons at the end of 2000 to $540/mton in June of 2001. Several North American pulp producers tried taking downtime to counter soft order books, but various foreign producers hadn't moved as aggressively to align their supplies with orders. At the end of May, North American and Nordic producers still faced high inventories of 1.843 million mtons, representing 33 days of supply. The figure was lower than February's high of 2.006 million mtons but remained well above the 1.5 million mark that usually represents a balanced market.

Global inventories were substantially worse, with May figures showing inventories at 3.718 million mtons, or 42 days of supply. Offshore pulp producers, particularly in South America and Asia, took advantage of their low cost of production by shipping hardwoods into U.S. and export markets. But shipments grew year-over-year from North American/Nordic producers in May as many chose to offload supplies at lower costs.

Outlook. With the global economy ex-cepted to grow slowly, few market observ-ers expected pulp prices to rebound until the end of this year. Still, there were some positive developments late in the second quarter that could signal a middle-term improvement. List prices continue to slip but spot prices at the end of June appeared to stabilize. Meanwhile, U.S. domestic shipments compared favorably year-over-year. According to the American Forest & Paper Assn. (AF&PA), shipments in April had improved by 4% compared to year-prior results. Various market participants expected that after making it through the slow summer season, the fall would see an inventory correction. If North American/Nordic inventories are brought close to the 1.5 million mton level, prices could likely rebound.