Oversupply, downtime, fire sales—no happy holidays for reeling pulp industry

By Bryan Smith, Senior News Editor, Pulp & Paper Week, RISI

SAN FRANCISCO, Dec. 24, 2008 - All market pulp producers want for the holidays is this enormous wall of pulp to disappear, but it won’t happen anytime soon now that the industry was greeted with more bad news. Global inventories have now risen six consecutive months and mills ended November like Santa’s bag of toys on Christmas Eve: overstuffed.

The Pulp and Paper Products Council (PPPC) reported that global market pulp inventories spiked yet again in November, closing at a whopping 50 days-of-supply, up two days from the prior month. The statistics, which correspond to more than 5 million tonnes of pulp, surely dampened producers’ holiday cheer as they began leaving their offices to take holiday vacations.

With the arrival of Christmas Eve, pulp sales executives from Montreal to Helsinki to Sao Paulo are now settling into their holiday martinis—a producer contact once showed me that Tanqueray 10 gin is surely among the finest you’ll ever find, but at a Christmas cigar dinner I recently discovered that Broker’s gin is quite possibly the world’s best—and when they return after New Years they’ll be greeting with essentially the same dour market conditions they left behind.

Anticipating poor demand, this year it’s not just pulp sales executives who are taking some much needed time off. Mill workers were told to go home at many producers here in North America because there’s little need for more pulp in a market reeling from oversupply and not enough demand.

According to a poll I did over the last several months, from September through December producers in North America took more than 800,000 tonnes of downtime, with curtailments happening at 19 different companies. Everyone expects that more downtime will come after New Years, as producers attempt to reverse the ongoing trend of oversupply.

Don’t break out the champagne, though. Despite all the downtime and expectations of more permanent or indefinite closures that will clip tonnage from what industry contacts say are now at all-time highs, today’s bulge in pulp is so enormous that it’ll likely take several months to work off.

“We are taking market-related downtime,” said one contact at a North American producer, who nevertheless added that the curtailments were not reducing supplies—rather, they’re preventing an even larger increase in available pulp because weak demand has reduced the tonnage going out the door. “Even at that we are not gaining ground on inventories (rising), we’re losing ground.”

Faced with paltry order books, producers around the globe have turned to shipping scattershot deals into spot markets. China recently had a temporary rise in deliveries but Western Europe is still weak and producers don’t care. They’re sending tonnes anyhow, resulting in a buildup of pulp in ports across the continent.

Meanwhile, the USA has entered its traditional yearend fire sale, where producers compete for business in spot markets by outbidding each other in a race to bottom. It’s easy to picture Santa on Christmas Eve, riding a sleigh that’s bulging at the seams with pulp, his elves frantically tossing bales into the night as households below board their chimneys shut.

US spot prices are now so low that many market pulp mills are already shipping at cash delivered costs. But some consumers aren’t taking tonnage at any price because they want to reduce the cash they’re holding in inventory before the calendar year closes, and they believe cheap tonnage will still be available in the New Year.

The market’s gotten so oversupplied that when a recent fire at a New England warehouse burned about 20,000 tonnes—something that would normally result in a temporary jump in Northeast spot prices—it hardly registered at all in the marketplace. The biweekly US spot prices I’ve posted have slipped every cycle since mid August. One contact warned of off-grade pulp moving as a result of the fire.

“There’s a whole lot of pulp from that New England public warehouse,” said the tongue-in-cheek contact. “If you hear any wacky numbers in the Northeast it’s probably fire damaged pulp. It’s a new grade. You can call it Northern smoked pulp.”

See you all in 2009, when we can expect more unusual happenings in this wild pulp market.

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Bryan Smith Pulp and Paper Week
Anticipating poor demand, this year it’s not just pulp sales executives who are taking some much needed time off. Mill workers were told to go home at many producers here in North America because there’s little need for more pulp in a market reeling from oversupply and not enough demand.