Global wood pulp market outlook for 2023: what are the price drivers and risk factors?

Look ahead with our senior economist Patrick Cavanagh at supply trends, demand drivers, capacity changes and risk factors in the pulp market

What direction is the pulp market heading? Patrick Cavanagh, senior economist at Fastmarkets, shares his insights on the state of pulp prices, how supply and demand trends have been changing, the impact of new capacity and the risks factors that could change the market in 2023 and beyond.

Pulp prices have reached record highs due to supply-side challenges

Both NBSK and BEK stood at record highs in July 2022, not just in prices delivered to China, but also in US and Europe.

The record prices are mostly supply-side driven, including:

  1. Record-setting levels of unexpected downtime
    Unexpected downtime began to reaccelerate in the fourth quarter of 2021, which coincided with the most recent run-up in pulp prices. The largest impact was due to a labor strike in Finland, while transportation constraints limited supply from North American mills. Over 1.5 million tonnes of market pulp had been slashed from supplies by the end of September 2022.
  2. Supply chain constraints and challenges
    Supply chain woes have impacted the pulp markets in several ways. Delays, congestion, low container availability, labor shortages and competition for transportation capacity from other commodities have resulted in higher transportation costs for pulp producers and longer delivery times for pulp buyers. This added to the supply crunch and further contributed to lean customer inventories.
  3. Project delays, closures and conversions
    Two large scale pulp capacity expansion projects have encountered significant delays over the past 18 months, namely a seven-quarter delay at Arauco’s MAPA project, representing 1.56 million tonnes of new bleached eucalyptus kraft (BEK) supply, along with a two-quarter delay at UPM’s Paso de Los Toros 2.1 million tonne greenfield BHK mill project in Uruguay. In addition, grade switches, conversion investments and permanent capacity closures have removed another 1.7 million tonnes of bleached kraft pulp supply from the market.

Watch or read Patrick’s interview for a more detailed breakdown of the pulp price drivers here.

Pulp demand is now facing downside risks

Leading up to the current bull market, demand for market pulp was relatively strong. Growth in world paper and paperboard production is expected to carry into next year, but downside risks for the global economy are increasing.

China, the world’s largest consumer of market pulp, is seeing its economy slowdown in face of a persistent zero-covid policy and a slump in the property sector. Looking at the manufacturing purchasing manager indices (PMI) focused on China, both the Official NBS and Caixin PMIs have contracted due to lockdowns and growing weakness in the manufacturing sector, which is a downward indicator for market pulp demand.

The global economy is facing substantial headwinds from inflation, rising interest rates, the war in Ukraine and changes in consumer behavior related to the pandemic. These are reflected in the steady downward trend witnessed in the JPM Global PMI since the first quarter of 2021.

Pulp capacity is expected to grow in the near future

Lack of planned projects, continued conversions to specialty grades and forward integration resulted in limited capacity gains in 2019-21. However, this is due to change as a new wave of investment in capacity expansion is scheduled to enter the market.

Following the ramp-up of the Bracell Star (2.8 million tonnes) BEK project in Brazil this year, Arauco’s MAPA (1.56 million tonnes) BEK line is projected to start in Chile during the fourth quarter of 2022. This will be followed closely by UPM Paso de los Toros (2.1 million tonnes) BEK mill in Uruguay in the first quarter of 2023 and Metsä Fibre’s Kemi (880,000 tonnes) BKP mill in Finland during the third quarter. Most investment continues to be focused on low cost BEK capacity in Latin America, with the Suzano Cerrado (2.55 million tonnes) BEK mill expected to start in Brazil in 2024 and the Paracel (1.8 million tonnes) BEK mill possible in Paraguay in 2025.

Softening prices, new supply growth to outpace demand growth

We can already see signs of prices softening in both softwood and hardwood markets. NBSK net import prices in China have declined under pressure from a lower priced BSK futures contract, weakening domestic resale prices and a stronger US dollar. On the other hand, hardwood prices are still sitting at record highs, but are now facing similar downward pressures from the domestic resale market.

With global demand for paper and board under threat and large volumes of new capacity ahead, we expect new supply growth for market pulp to outpace demand growth in 2023 and for market conditions to be looser extending into 2024.

Market risks: Russia’s war in Ukraine, energy crisis and more

The import ban on Russian pulp and woodfiber will increase the demand for imported pulp in Western Europe, especially with respect to eucalyptus needed to displace birch fiber. In Russia, more unbleached kraft pulp (UKP) and bleached hardwood kraft (BHK) production is expected going forward. An abundance of wood fiber, especially birch, is predicted to lead to more BHK production, while lingering bleaching chemical shortages will motivate more production runs in UKP. With the leading equipment suppliers in the pulp and paper industry no longer willing or able to do business in Russia, new capacity expansion has been cast into doubt. Read Patrick’s analysis on the impacts of Russia’s war in Ukraine on global pulp markets here.

On the other hand, higher energy prices and volatility have rippled across the global economy since the Russian invasion of Ukraine. Many European paper and board and chemical producers are especially vulnerable to volatile natural gas pricing, which has forced some capacity to idle, representing a downside risk for pulp demand and an upside risk for cost inflation. Additional risks lay around a global recession, more capacity expansion delays or unexpected downtime and any further escalation of war in Europe.

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