Pulp Industry Perspective 4th Quarter 2014

The failure of dissolving pulp conversions

By Jesse Marzouk

Pulp Perspectives Graph Q4 2014While the impact on the hardwood pulp market from the large-scale South American eucalyptus pulp mills took longer than expected, the writing has been on the wall for a number of years. South American eucalyptus mills have the advantage of a cheap source of fiber in the form of eucalyptus trees that grow extremely fast. It was inevitable that they were going to take away market share from the higher-cost Northern Hemisphere mills, which must rely on slow-growing northern species. These capacity additions have placed downward pressure over the last year on all hardwood pulp prices. South American mills have not felt the full effect of declining prices because they have benefited from weakening currencies against the U.S. dollar, as market pulp sales are based on U.S. dollar prices.

The large increase in eucalyptus pulp capacity has led to a number of mill conversions from northern bleached hardwood kraft (NBHK) pulp to viscose dissolving pulp. On the surface, this appeared to be a good idea, as viscose dissolving pulp, which is primarily used to produce rayon, has seen strong demand growth.

Unfortunately many of these mills assumed much higher prices for viscose dissolving pulp. There was a short, but sharp, spike in the price of viscose dissolving pulp in 2011 that sent prices on a parabolic move to approximately $2,500 per tonne. This increase was relatively short-lived, but attract-ed enough interest from NBHK mills that were facing increased competition from South American eucalyptus pulp mills. Prices for viscose dissolving pulp are currently not much higher than NBHK pulp primarily because too many mills had the same idea and converted to viscose dissolving pulp, thereby oversupplying the market.

A number of these mill conversions have been nothing short of a disaster. Both Fortress Paper and Sappi North America spent more than $150 million to convert mills over the last few years. Both of these mills are now back to producing NBHK for at least a portion of their capacity. Fortress recently took downtime because of low prices, while Sappi began selling NBHK again less than 18 months post-conversion. The hope is that other management teams now are conscious of the outcome of these conversions when considering conversions of their own.

Jesse MarzoukJesse 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.