Pulp Industry Perspective
1st Quarter 2014
China’s Impact on Pulp
By Jesse Marzouk
North American paper grade
pulp prices increased slightly in
the first quarter of 2014. Prices
for NBHK in the U.S. increased
$15 per tonne to $875. NBSK
list prices increased $40 per
tonne, however, from $990 to
$1,030. Actual transaction prices (for contracts) did not increase as much as average
discounts are trending higher in
2014 than 2013.
With the current ongoing
economic slowdown in China,
Hilco will analyze China’s impact
on the market. China is the
world’s largest purchaser of market pulp, importing 16.9 million
tonnes in 2013. This accounts
for more than 25% of worldwide
market pulp demand and was an
increase of 2.4% over 2012 imports. Much of the pulp is imported from North America, Europe and South America. China
is fiber deficient and must import
a large percentage of its pulp
needs.
Thus far, China’s economic
slowdown has yet to affect market pulp prices, which have been
on a steady march higher since
the middle of 2012. Market list
prices in North America for
NBSK have increased from $900
per tonne to $1,030 per tonne
over the last 24 months. This
came at a time when little softwood pulp capacity was added
to global production. Market list
prices for NBHK in North America have increased from $760 to
$875 over the same period.
Interestingly enough, the hardwood price increase came during
a time of large South American
capacity additions of eucalyptus
pulp, which competes with
NBHK.
Over the last few years, the
Chinese government has ordered older less efficient paper
machines shut. The cuts have
been modest, however, and
have been dwarfed by the building of new paper machines,
mostly producing containerboard
and tissue products.
As has been widely reported,
the government in China more
recently is trying to balance economic growth with environmental
concerns. One of the environmental issues that China struggles with is the lack of clean
water. Producing paper and
board products is an extremely
water intensive process, although the majority of the water
can be treated and reused. Another issue that China has recently been struggling with is
lending to unprofitable industries.
China’s competitive advantage
has historically been its cheap
cost of labor. Labor is a small
percentage of the overall costs
of producing paper, with the
majority of costs coming from
fiber, electricity, and chemicals.
As a result, China is a relatively
high cost producer of paper
products, especially because it
imports a substantial portion of
its fiber. While Hilco has no
inside knowledge of the Chinese
government’s plans, it seems to
make sense that the paper industry would be a target of more
aggressive closures of older
machines as they are likely not
profitable and consume a significant amount of a scarce resource. If this were to happen, it
is likely that pulp prices would
decline.
Jesse Marzouk is a vice president and forestry products specialist. He has
appraised numerous U.S. and Canadian pulp, paper, and lumber-related companies
involved in manufacturing and distribution. Jesse received his MBA in finance from
Kellogg School of Management at Northwestern University, and has a degree in
finance and accounting from Indiana University.