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Pulp producers are in a stronger position than ever to push up prices, but self-restraint could provide a better pay-off in the end
by Jim Kenny
Blind greed is bad business
No matter what distractions the financial pages might throw up in terms of mergers, divestments and trade disputes, the fact of the matter is that the pulp price remains one of the most crucial elements in calculating the fortunes of the pulp and paper industry. On the face of it, the sector looks as though it is doing rather well purely on that measure. But there are enough worrying signs elsewhere to force even the most optimistic of market forecasters to temper their comments with a note of caution.
Indeed, some of the less optimistic forecasters have already been trying out a few statistical tricks to assess the similarities between today's bull market and the pulp bubble of 1995. That bubble burst so spectacularly when prices climbed to almost $1,000/ton for NBSK (northern bleached softwood kraft) before crashing to well under half that level in just a few short months.
According to one pundit, if you overlay the pulp price development curve of the previous boom on top of the current rises there is a fairly close match. And if you believe in such things, the charts indicate that we are all due another crash fairly soon.
Clearly, a simple chart in itself is a bit too crude to describe the complexities of a global commodity market and there are a number of differences in the current situation versus that of 1995, especially in relation to global inventory levels. But even if prices are not headed for a full-blooded crash, it is apparent that many commentators believe a more cautious approach may be advisable in relation to pulp prices.
For example, despite the tight, apparently healthy pulp market, there has been a marked "stickiness" on the paper price front. Suppliers have found it harder to force through price increases and the differential has widened between raw materials costs and selling prices. This lag is by no means terminal for producers, but it does indicate that there is the potential for something of a backlash if fiber suppliers go for too much, too soon.
For the moment though, the news headlines indicate that the fiber providers have a lot of elements working in their favor. The Norscan report for March indicated that pulp buyers were finding it difficult to build inventories during the month as stocks slipped by 89,000 tons to 1.19 million tons - just 19 days of supply. The eucalyptus market was even tighter if anything. Brazilian stocks fell by 15,000 tons to 228,000 tons in the same month, taking inventories to their lowest level since October 1997.
On top of that, the Finnish forest industry workers strike that got under way in mid-April dealt another blow to anyone hoping build up stocks and circumvent the effects of price increases. Certainly, there is no doubt that many people in the industry were worried about securing pulp throughout April as reports came in of at least two PMs in Europe taking downtime due to a lack of pulp and a machine in China being forced to close following softwood shortages.
Last month, snippets such as these and other news were enough to push the Pulpex pulp price over $880/ton for June, indicating just how desperate some buyers were for pulp.
Going up
On a more positive note, the dispute in Finland also gave rise to speculation that paper price rises could be forced along if enough people started to get worried about supplies. Papermakers are going for rises in many parts of the world, but it is far from clear how quickly they will be able push them through, and if they do, just how much of the rise will be lost to the growing price differential between fiber and paper prices.
Going forward, the key simply has to be caution. The temptation for pulp suppliers to go for as much as they can get in a tight market is easy to understand. But it will not serve the long term interests of the company or the forest products industry as a whole if, to put it crudely, they get too greedy. Call it enlightened self-interest if nothing else. After all, if you get them on the way up, they'll get you on the way down. In the end though, neither side wins.
Price stability and a mature, responsible approach to the increases that are justified will enhance the somewhat tarnished image of the pulp and paper industry. It's not a strategy that will reap a massive spike in profits and give the CEO a whacking bonus at the end of the year. But after the shine wears off the dot.com internet share frenzy of recent years, investors will be casting around for solid, dependable growth and forest products companies could be well-positioned to take advantage of that switch.
Obviously, we'll all find out more after PPI's Market Pulp conference in Brussels this month. But with luck, the pulp price commitments made by the Scandinavian and Brazilian producers for the second quarter will provide a steadying influence. And if the market can remain fair, focused and steady, everyone in the pulp and paper industry will be able to enjoy a healthy financial future.
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