Mercs is a highly leveraged play on pulp (eg the Rosenthal Mill). Fortunatly Rosenthal is comming on at the right time
BTW they've been capitalizing their interest cost up to start up.
Here's a discussion on pulp, as the two issues for MERCS are what are the costs (I estimate fixed incl cost of finnancing at around $215-250/tonne of capacity....they can kick it up with another digester to 350 tonne/year from 280 tonne per year) and what is the market:
BTW UPM-Kymmene and IP are fighting over Champion.
mad2
Pulp & Paper International
January 1, 2000
SECTION: No. 1, Vol. 42; Pg. 31 ; 0033-409X
IAC-ACC-NO: 59495355
LENGTH: 2209 words
HEADLINE: Keeping a lid on as prices heat up; Statistical Data Included
BYLINE: Bingham, John
AUTHOR-ABSTRACT:
BODY:
As the price of pulp shoots up, fears of another boom-bust cycle are also increasing. But the situation is different from the infamous 1996 crash
There is no doubt that the pulp market is starting the new millennium in an upbeat mood. For the first time since 1995, pulp producers have reasonable cause for optimism. Prices have risen by around $ 120/ton during the past year and are heading higher in January. Added to that, supplier inventories have shrunk by about one million tons worldwide and the industry's supply/demand outlook is unquestionably pointing toward a tighter market over the medium term. The attitude of producers is not yet euphoric. But the dominant view is that the slump in prices, which has plagued the industry throughout the second half of the 1990s, is about to be replaced by a period of consistently stronger market conditions.
The question that keeps cropping up, though, is whether we are about to witness a repeat of the pulp market's 1994-1996 boom and bust cycle. During that period, northern softwood prices climbed to $ 1,000/ton in late 1995, before spectacularly crashing to $ 510/ton in early 1996. The simple answer to this question is that we might well see this pattern re-emerge. But if it does happen, it will be for different reasons to those that pushed the market skyward in the mid-1990s.
Going back to late 1993 just before pulp prices last took off, the pulp and paper pipeline was empty from the forest through to the paper merchants' warehouses. So when prices did begin to move upward led by the pulp market, the re-stocking of the distribution system exerted tremendous leverage on demand.
This is not the case today. Inventories at most points along the manufacturing and distribution pipeline are adequate and buyers seem generally comfortable with the stocks that they are holding. Indeed there is anecdotal evidence that some areas may have become slightly overstocked as buyers have sought to build inventories as security against any Y2K disruption to delivery systems. There is one area where stocks are low that has grabbed the headlines though - in the pulp producers' warehouses. Despite low producer inventories, the leverage that any further stockbuildng could exert on demand next year is much less than it was in 1994.
TOO MUCH, TOO SOON
Pulp producers are still conscious of the damage that the 1995 boom inflicted on the industry. The $ 1,000/ton level was good for the egos of a few marketing departments, but it came at a heavy price in the form of a dramatic slump in the pulp market. In fact, the industry has only just finished paying the bill. As a result, there is a degree of caution being exercised by leading pulp producers, particularly (but not exclusively) by those in Europe. The flip side of a strong pulp market is that input costs are bound to rise for papermakers. Although most printing and writing paper prices are linked to the price of pulp to a greater or lesser extent, the time lag between a change in pulp prices and paper price movements can vary significantly. The lag has been comparatively long during this up-cycle. Paper prices only started rising in the latter part of 1999 and, so far at least, they have climbed by much less than the rise in the cost of pulp.
In euro terms, the price of pulp rose by 46% in 1999. But woodfree paper prices in Europe increased by just 8%, and then only in the last third of the year. As a result, converting margins for non-integrated printing and writing papermakers (ie the difference between the input cost of pulp and the output price of paper) are being severely squeezed, particularly in the uncoated woodfree sector.
The present situation is in sharp contrast to 1994, when woodfree papermakers managed to raise prices more-or-less in step with pulp, steadily widening their margins. It was only as pulp prices approached $ 1,000/ton and paper prices had ceased to rise, that margins began to shrink for papermakers, contributing to the price collapse that followed shortly afterward. Market pulp producers are right to be aware that pulp will become unaffordable if prices are pushed too far, too fast. On top of that, it would force their customers - the non-integrated papermakers - to give away market share to the integrated mills. This is something that is definitely not in the long term interests of any market pulp producer and most of them realize this danger. As far as pulp producers are concerned, another undesirable consequence of over-ambitious pulp price increases is that it could hasten the next wave of capacity expansions and bring forward the resulting slump that will doubtless follow.
Given the possible dangers outlined above, pulp producers have raised prices relatively slowly in recent months. This is despite the signals coming from a pulp market, which is tighter than at any time since 1989, depending on which measures are used. The $ 120/ton price increase for northern bleached softwood kraft (NBSK) in 1999 contrasts with a $ 250/ton price increase in 1994, the first year of the last up-cycle.
A third area where this cycle differs from the last concerns production costs. These have a direct influence on price levels, particularly over the longer term. During the early part of the 1994-1995 boom, pulp production costs were rising fast. Costs were driven up by higher wood prices across Iberia and the Nordic countries, but particularly in British Columbia where chip prices jumped by 200%. This added a considerable cost-push to pulp prices. Today, the situation is very different. Wood costs have remained low almost everywhere and the average cash production costs in the main market pulp producing countries in 1999 are about $ 1 15-120/ton lower than they were in early 1995. The main reason for this decline has been the persistent strength of the US dollar, allied to the depreciation of currencies in Asia (Indonesia) and Latin America (Brazil and Chile).
Production costs have even fallen in the USA, where producers' dollar-denominated costs are almost completely unaffected by exchange rates. Here, the reason is principally the closure of certain high cost mills, combined with improved productivity. There is nothing as effective as a strong currency to drive inefficiencies out of a country's manufacturing systems.
STUNTED GROWTH
The outlook for market pulp supply, demand and prices in 2000-2001 will be affected by a number of factors, but supply movements will be at the top of the list. In 1999, world market pulp capacity stood at some 41.6 million tons/yr. This was 560,000 tons/yr, or 1.3%, less than in 1998. The decline in capacity resulted from mill closures and forward integration. Closures were principally seen in North America where mills such as Bowater's Gold River plant in British Colombia were affected, while integration played its part in Asia in mills such as lndah Kiat and Riaupulp in Indonesia. The capacity actually taken off the market was considerably higher if mills temporarily or indefinitely shut are included. Examples here include Georgia Pacific's Port Hudson mill and Smurfit-Stone's Savannah River mill, both in the USA.
For the next couple of years at least, the growth of market capacity will be seriously constrained. For the first time in years, there is currently not a single greenfield pulp mill under construction anywhere in the world. This is not to say that there will be no growth at all. Market pulp capacity is expected to expand by 890,000 tons/yr in 2000, or just over 2%. This excludes any growth resulting from higher production efficiencies or the reopening of presently idled mills, although at least one in the USA is likely to restart during the next few months. The additional supplies will mainly come from:
* Europe - Sodra completed a 200,000 ton/yr expansion of its Monsteras mill in Sweden in the fourth quarter of 1999 and Mercer International has converted its Rosenthal mill in Germany from sulfite to softwood sulfate, adding 120,000 tons/yr of capacity
* USA - Mead will have an additional 100,000 tons/yr of hardwood kraft market pulp available from its Rumford mill in Maine, while Potlatch is adding approximately 200,000 tons/yr of capacity (mostly hardwood kraft) at its Cloquet mill in Minnesota
* Indonesia - APP plans to increase production by about 180,000 tons/yr, mainly through debottlenecking at Perawang, while APRIL will increase capacity on line #1 at Riaupulp by 100,000 tons/yr. Work is now underway on the first stage of APRIL's line #2, which will add 450,000 tons/yr starting in 2001. lndorayon may restart and produce 200,000 tons/yr of bleached hardwood kraft pulp or 160,000 tons/yr of dissolving pulp, which are not included in our calculations. Added to that, Kiani Kertas may produce about 320,000 tons in 2000, up from 200,000 tons in 1999, while PT TEL's mill at Musi in Sumatra is due to offer commercial supplies early in the second quarter of 2000. PT TEL's pulp is based on 100% acacia plantations and the estimated output for 2000 will be 300,000 tons.
Turning to demand, shipments of bleached chemical market pulp are forecast to exceed 35 million tons in 1999. This represents an increase of 1.9 million tons, or 5.5%, on 1998 levels. Taking into account the 1.3% decline in the industry's capacity, it becomes obvious why the pulp market was so much tighter in 1999. Demand growth in 2000 is unlikely to be as rapid as last year, if only because of supply limitations. We are forecasting that global demand will grow by 1.2%. Given that capacity is expected to rise by 2%, this implies a slight loosening of the supply/demand balance, but not by much.
EYES ON ASIA
Developments in Asia will have the greatest influence on the pulp market. The region accounted for 60% of last year's estimated growth in world market pulp demand. Shipments to Asia in 1999 were around 1.2 million tons, or 20% higher than in 1998. Much of this Asian growth - perhaps as much as one million tons - can be attributed to buyers restocking after the region's financial crisis and ahead of pre-announced price increases.
The creation of buffer stocks to feed several new paper machines that came on stream in Asia during 1999 has also had an impact. Most of these PMs came on stream in the final quarter and with stockbuilding now coming to an end, Asian pulp demand in 2000 will more accurately reflect actual consumption. Going forward, the new supplies of printing and writing paper in Asia will exceed the growth in regional demand. As a result, China, Indonesia, Korea and Thailand will become significant net exporters of woodfree papers. The growing availability of Asian papers is likely to have an impact on producers in Japan, North America and even western Europe, particularly non-integrated mills. At some point in the future, the major Asian markets will absorb the new supplies of printing and writing paper, but the timing depends on the speed of Asia's economic recovery. Market pulp suppliers experienced the benefits of the new Asian paper capacity in 1999, reflected in increased pulp demand. But in 2000, other nonintegrated paper producers in the region and elsewhere will start to feel the impact of the new paper supplies. In 2000, APP and APRIL plan to produce over two million tons more woodfree paper in total than they did 1998.
To date, the new paper mills have had little or no impact on non-Asian paper markets. In fact, there was a decline in Indonesian exports to Europe and the USA in 1999 and prices have increased in all regions, including Asia. If this pattern can be extended through next year, there is good reason to believe that the price recovery can be sustained. However, it is difficult to accept that the introduction of new paper supplies on such a scale will not have an effect on global markets, possibly restricting the ability of wood-free papermakers to push prices very much higher, particularly for uncoated grades.
IN SHORT
Turning to the short term outlook, we believe that a post-millennium slowdown in pulp demand during the first quarter of 2000 is probable. However, as long as it is not too severe and not too prolonged, a lower level of shipments would come as something of a relief to many pulp producers, allowing them to rebuild the working inventories needed to run efficient delivery schedules.
As a result, the price increase taking NBSK to $ 630-640/ton in the first quarter is almost certainly secure. Only if demand falls far further than expected will there be an immediate threat to prices.
The bigger challenge for the market will come later in the year. The key factor that will determine pulp prices in 2000 will be the ability of papermakers to raise woodfree prices to a higher level and to keep them there, restoring the shattered margins of the non-integrated papermakers. This will be difficult, although not impossible, in today's non-inflationary environment. But unless it can be achieved, the eventual ceiling on paper prices will ultimately determine how much further pulp prices have left to run.
John Bingham is research director at Hawkins Wright and editor of the 'Pulpwatch' newsletter.
LANGUAGE: ENGLISH
IAC-CREATE-DATE: February 21, 2000 |
