Discovering Asia's hidden numbers
by Peter Cardellichio
Every month, the pulp market carefully waits and watches for changes in Norscan and Utipulp stocks, but movements in pulp inventories in other parts of the world go unmeasured.
In 2000, RISI estimates that Norscan shipments of bleached kraft market pulp accounted for approximately 60% of the world total. It may be argued that the measurement of producer inventories elsewhere is not so important because their behavior is highly correlated with the Norscan region. But the critical nature regarding the volumes of pulp stocks held by traders, merchants and paper mills across Asia can no longer afford to be ignored.
Contrary to popular belief, Asia's problems in the pulp and paper sector did not stop with the end of the region's financial and economic crisis. One aftershock that is still sweeping through the industry is what is being called the Asian 'inventory crisis'.
There are two aspects to this problem. One is an enormous inventory swing that was felt throughout the world's markets. The second was a crisis of information, which made it nearly impossible to assess the extent and magnitude of the inventory situation in the region. The inventory crisis has been most disruptive to the wood pulp markets, but it has also been responsible for wreaking havoc in the woodfree paper sector.
From the start
The Asian inventory crisis has its roots in 1997-1998. At the time, most Asian pulp buyers - which were facing a collapse in paper demand and a severe cash crunch - cut back on their purchases and used up surplus pulp inventories instead. This destocking was an important factor for the industry since it helped to drive pulp prices down to rock-bottom levels.
The eventual combination of low inventory levels and low prices set the stage for a sustained build-up in stocks once more. The accumulation began for real in 1998 and as the rebuilding effort was met by rising prices, buyers amassed larger pulp inventories in an attempt to hedge against further price increases in the future.
The upward spiral continued with the knock-on effect of causing pulp prices to climb swiftly from early 1999 into the second quarter of 2000.
Unsurprisingly, Asia's pulp inventories became bloated at this point. When China's buyers made the first attempt to reduce their stock levels in June 2000, many pulp merchants rushed to jump on the bandwagon in an effort to unload some tonnage and secure a tidy profit. As a result, spot prices in Asia tumbled sharply over the following months.
Lack of information
The effect of such a huge swing in inventories was felt around the globe as it had a substantial impact on the availability and price of pulp worldwide. However, in spite of this widespread awareness, the extent of the see-saw action could not be measured. The lack of information on the magnitude of the inventory change made it very difficult to understand the potential fallout.
Based on some simplifying assumptions, including the idea that imports and consumption were balanced in 1997, available data suggests that China's pulp inventories jumped to 350,000 tonnes in June 1998 and then fell to 250,000 tonnes in October 1998. At that stage, the country’s inventories then climbed fairly steadily to a peak of about 750,000 tonnes in March 2000.
Inventories seemed to hover at that level until June 2000 and subsequently dropped sharply to 500,000 tonnes in November. The importance of these changes is obvious when compared with the reaction that would be generated from similar size changes in Norscan stock levels.
What goes up, must come down
The worry now is over how much more destocking will take place in China. Given that further inventory liquidation occurred in December 2000 and January 2001, the level of inventories is probably closer to 400,000 tonnes. If these numbers are correct, inventories could fall another 100,000-200,000 tonnes before some anxiety sets in for Chinese paper and board producers. With spot prices at a low ebb and the Chinese New Year well behind, there is likely to be another push toward rebuilding stocks levels soon enough.
During the last cycle, while prices were responding to a downward draft in Norscan stocks, inventories were already ballooning in the Asian pipeline. This inventory crisis may soon be a thing of the past, but the information crisis is certainly here to stay.
As China's role in the world pulp market gains more and more importance over the years, the lack of information on the region's pulp inventories will become more obvious and even critical, making it increasingly difficult to anticipate important market shifts.
Peter Cardellichio is vice president, Asian Pulp and Paper Service, RISI, and is currently based in Singapore
|
