Renminbi appreciation and volatile futures spice up softwood pulp market in China

What will pulp demand look like after the quieter LNY period in a market with limited availability?

A sharp appreciation of the Chinese renminbi (RMB) against the US dollar and the volatile fluctuation of futures prices in China have spiced up the bleached softwood kraft (BSK) market in the country, with an increase in buying activity.

The US-China exchange rate saw the renminbi skyrocketing 7.4% from 1:7.30 in early November last year, to 1:6.76 as of January 12. With major suppliers holding firm on BSK pricing over the past three weeks, the RMB appreciation incentivized Chinese customers to get BSK volumes.

BSK future contracts fluctuated in opposite directions

Meanwhile, levels for two BSK futures contracts, the January and the May ones, fluctuated vehemently in opposite directions and grabbed market attention. The January contract, which expires in mid-January, opened at RMB 7,480 per tonne on January 3, and soared as much as RMB 7,986 per tonne before settling at RMB 7,144 per tonne on Thursday.

Conversely, the currently most popular May contract, opening at RMB 6,706 per tonne, plunged as low as RMB 6,304 per tonne and then settled on Thursday at RMB 6,366 per tonne. That level is equivalent to $818 per tonne after removing 13% VAT and RMB 120 per tonne in logistics costs, much lower than current levels for BSK imports and resale.

Contacts explained that the climb of January contract prices indicated investors were closing positions to avoid position squeeze, which had occurred for the September 2022 contract. The decline in the May contract showed investors’ lack of confidence for the market in the near-term amid the rampant spread of Covid-19 infections in the country.

Limited pulp availability

However, clients, including end-users and traders, have spotted an opportunity by taking long positions for the May one.

“China is entering the Lunar New Year (LNY) downtime period and pulp demand is projected to remain weak. But suppliers are likely to keep BSK levels intact this month and next due to limited availability,” said a trader.

The restriction in availability grew with Canfor Pulp Products’ announcement on January 11 that it would permanently close the pulp line at its Prince George Pulp and Paper Mill in British Columbia, Canada due to a woodchip shortage. This will result in a reduction of 280,000 tonnes of market kraft pulp annually.

“The BSK orders customers place now or next month will probably be received as cargo in March or April, close to mid-May when the May contract expires. Long-position buyers believe BSK prices for imports and resale are not likely to drop below the currently low May contract levels and are taking a chance.

“If the investors cannot make a profit before the May contract expires, they can pick up physical volume from futures deliveries in mid-May, whose prices could still be low.”

Prices for northern BSK (NBSK) imports from Canada have stayed flat over the past three weeks, at $890-910 per tonne.

Nordic NBSK is fetching $880-900 per tonne, though, creeping up $40/tonne at the low end of the spread. Spot tonnage of Nordic NBSK priced as low as $840 per tonne amounting to around 20,000 tonnes was reportedly snapped up last month and has since been unavailable. As a result, the mid-point for NBSK comes to $895 per tonne, up $10 per tonne.

Prices for radiata pine are steady at $870-910 per tonne.

Ilim BSK sold in RMB

Following the change of payment execution from the US dollar to RMB for Russian pulp products, clients complained about the rigidity in payment terms and the complete transparency in pricing, by which customers can easily compare it with that of resale and futures, leaving less room for traders to make profit. Most buyers of Russian pulp and paper are traders and have made payments with telegraphic transfers.

Sellers have sought a hike of $20 per tonne for Russian BSK in view of the RMB appreciation against the greenback. Talks are underway.

“We price Russian BSK using a basket of prices for BSK imports from elsewhere, resale and futures, and we have kept the pricing flexible as before by giving various discounts depending on the situation,” said a major supplier. “Our BSK business has run smoothly as previously, and volume has not been declining.”

BHK under pressure

Suppliers are hoping that the same bullish factors that have driven business for BSK will apply to the bleached hardwood kraft (BHK) pulp sector soon.

“Besides the RMB appreciation, more customers are getting positive about the paper and board market after the LNY holiday,” said a major Brazilian producer.

Pent-up demand, along with customer’s low BSK inventories, is driving the BSK market.

He pointed out customers have sought price cuts for BHK, slashing volumes substantially over the past four months, so their BHK stock levels must be very low.

Buyer’s pushes for cuts have not relented, though, even after suppliers reduced prices by $40 per tonne last month for South American BHK, which brought its list price from $860 per tonne to $820 per tonne.

The expected influx of additional BHK tonnage from South America has emboldened buyers. The influx includes Arauco’s 1.56 million tonne per year MAPA project in Chile and UPM’s 2.1 million tpy Toros BHK mill in Uruguay, both of which are slated to come online this quarter.

Arauco and UPM are said to have reached preliminary agreements, mainly with big-volume buyers, for their new tonnages. Contacts indicated that the buyers who signed up for the allotments from the new capacity, probably with letters of intent, are frustrated with the delays in both MAPA and UPM’s Uruguayan project, which customers believe have been the main driver for high BHK prices throughout last year.

As a result, to tackle the shortage of BHK imports from South America, Chinese mills found alternatives such as stepping up purchases of BHK manufactured domestically and imported from elsewhere, as well as building in-house BHK production lines.

South American BHK has clocked in this week at $760-780/tonne, down $20-40 per tonne. BHK imported from Indonesia and North America has gone for even less, at $720-750 per tonne. With approaching extensive P&B downtime in China during the LNY holiday, pressure is mounting on suppliers.

Uncover the price drivers risk factors in our global wood pulp market outlook for 2023

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