Bulls roam the streets of Shanghai as supply-side factors compound

A bullish consensus formed last week in Shanghai as leading market participants met for the annual CPICC conference and Shanghai Pulp Week. Meetings were held against the backdrop of growing concerns around market pulp and woodchip supply, while questions remained around the strength of underlying demand. Heading into the week, the rally in pulp prices that spanned the second half of 2023 had lost momentum in China, with BEK prices remaining flat for the past three months, and NBSK prices declining $40 per tonne over the same period. By the end of the week, however, it was clear that pulp prices in China, the world’s largest consumer of market pulp, were on the rise again and likely to carry further implications for the global market.

Supply-side constraints:

• Global softwood market pulp capacity has contracted sharply over the past year, with permanent and indefinite capacity closures amounting to over 2.7 million tonnes of supply trimmed from NBSK, SBSK, UKP and fluff pulp markets. These closures represented over 8% of global softwood market pulp capacity in 2022.

• The Finnish Transport Workers’ Union announced a one-week extension to strikes that have shuttered port traffic and caused widespread pulp and paper mill downtimes across Finland since March 11. Each week the strike continues represents an estimated 115,000 tonnes of market pulp supply, including 88,000 tonnes of NBSK, that is prevented from reaching global markets. The strikes are tentatively scheduled to end on April 1.

• Force majeure was declared at the Metsä Fibre Kemi mill on March 26 following a gas explosion that occurred on March 21 in the evaporation plant at the 1.5-million-tonne pulp mill in Finland. Repairs are currently estimated to take 10-12 weeks. The mill, the largest in Finland, was still ramping up production after starting up in the third quarter of 2023 and represented the only source of new NBSK market pulp capacity globally this year. The repairs will set back the ramp-up of this asset and further tighten supply to NBSK markets, which were already negatively impacted by the Red Sea crisis that has extended delivery times for European pulp shipments destined for Asian markets by 1-2 weeks, while also boosting transportation costs for European pulp producers.

• Fourth-quarter BHK producer inventory statistics were revised down sharply by the PPPC in early March. The revisions, which are mostly attributed to lower production volumes, placed BHK producers on firmer ground heading into pulp week. Increased shipment volumes to European and North American markets were also cited as reasons for tighter near-term availability of BHK in East Asian markets.

While supply-side concerns pushed sentiment at the conclusion of Shanghai Pulp Week squarely to the upside, we also highlight some remaining unknowns in today’s market, especially with respect to the other side of the equation: demand.

Prices in Europe and North America have increased for seven consecutive months, but closures and demand destruction have also reduced the size and influence of these markets with respect to how they can move the much larger Chinese market. In China, overcapacity in tissue, fine paper and ivory board markets and the resulting low operating rates have created a barrier for paper mills to easily pass on further increases to pulp prices, especially in the seasonally weak summer months ahead.

Headwinds to economic growth in 2024 also persist across East Asian, North American and European economies alike, representing a potential limit to the supply-driven rally. Despite these concerns, today’s market continues to draw parallels to the lead up to the 2017-18 bull market, which saw a pause in the early months of the rally before an unexpected outage at a large pulp mill helped to propel prices to multi-year highs.

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