Continuously declining pulp futures prices in China have sent a shock wave across the country’s pulp market, leading to customers taking a step back from buying pulp imports, while suppliers hold back on offering, especially bleached softwood kraft (BSK) pulp.
The price of BSK futures for the most traded January 2024 contract settled at RMB 5,412 per tonne on Thursday December 7, plunging by RMB 368 per tonne from a fortnight earlier on the Shanghai Futures Exchange (SHFE), following a drop of RMB 260 per tonne in the preceding two weeks. That level is equivalent to $655 per tonne, excluding 13% VAT and RMB 120 per tonne in logistics costs, and is far lower than what suppliers have offered for BSK imports.
Chinese buyers, including top paper and board producers, thus turned to domestic resale BSK, whose prices peg to BSK futures.
Resale pulp prices have declined proportionally with BSK futures, with northern BSK (NBSK) slipping RMB 295 per tonne from a fortnight earlier on December 7. Resale radiata pine is down RMB 260 per tonne in the same comparison.
Suppliers have held firm on prices for NBSK and radiata pine imports, declining to cave in to pressure from buyers to cut their prices in line with falling resale or futures levels.
With no available arbitraging opportunity on SHFE, most clients were reluctant to buy imports of those two grades except for regular customers, who are entitled to get annual rebates when they fulfill their 2023 contracts after closing December deals.
Sources indicated that the annual rebates amounted to 1.5-3% based on annual procured volumes and monthly list prices and are a strong incentive for regular buyers to sign off December deals, despite lofty prices.
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However, that is not the case for Russian BSK, which has been blamed by traders for weighing down resale BSK and futures. Resale Russian BSK has had the biggest drop among softwood grades, plummeting RMB 304 per tonne on December 7.
According to SHFE rules, pulp used as warranties after their deliveries are not allowed to be re-directed to the bourse for open interest by the end of this year. Sources reckon the expiring tonnage amount to 120,000 – 130,000 tonnes and most of them belong to Russian BSK.
In addition, contacts believed that most of the open interest for the December futures, amounting to 77,080 tonnes as of December 7, would be Russian BSK.
The December contract expired on December 15. Sources pointed out that the December contract price would reflect the level of resale Russian BSK corresponding to the grade’s expiring volumes.
“After December 15, the negative Russian BSK factor will be gone and the BSK futures market will begin a new cycle. That is why buyers have been pushing suppliers to cut prices for Russian BSK imports over the past two months, to provide fresh tonnages for futures, but sellers have resisted to the move,” a trader said.
“Moreover, short sellers have most likely already reaped handsome profits from the latest wave of BSK futures plunge, and they will probably reverse their position and push up futures prices after December 15. That explains why suppliers are waiting out the period, believing futures prices will go up soon,” he added.
Another sign contacts pointed to is that the availability of resale BSK, barring Russian BSK, has dwindled quickly after buyers snapped up volumes. That means clients will have to replenish their depleted tonnages in the short term.
With suppliers holding their ground, prices for NBSK imported from Canada and the Nordic region have been kept intact.
Sellers who have fewer long-term contract customers are struggling. Some reportedly reached out to customers offering NBSK at $720 per tonne but were countered with offers below $680 per tonne. That represented a sharp price drop and the sellers backed down. Prices for radiata pine imports have also stayed flat. NBSK and radiata pine are the most popular BSK grades clients seek to get.
The erosion in resale BSK and futures have apparently had a knock-on effect on the bleached hardwood kraft (BHK) segment.
Resale South American BHK prices have fallen as much as RMB 342 per tonne. That is lower than prices for the grade’s imports for December shipments.
Sources ascribed the erosion in resale BHK to tissue paper producers in Baoding, a major production hub in China, selling their BHK stocks, since their tissue jumbo roll sales stalled and mill operating rates dropped to 50-60%.
A Brazilian producer stressed that the downtick acted as an invisible hand moderating the market to rebalance its supply and demand.
“Just like the BSK market, buyers [who] snatched up those resale tonnages are end-users, not traders. That indicates the fundamental demand is still there, keeping the momentum ongoing. Mills’ BHK inventory levels are modest and need to get volumes consistently. We are not concerned about the resale price dip,” he indicated.
He also pointed out that suppliers are pushing for price hikes in North America and Europe, chiefly $50 per tonne for BSK and $80 per tonne for BHK, and the last thing they want to see is price drops in China.
A main driver behind the push is sellers’ aim to close the gap between prices for the grades in Europe, North America and China, which is higher.
“Suppliers will try to keep prices in China at current levels even at the cost of sacrificing volumes,” he stressed.
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With China setting the precedent, pulp prices have gone up in other Asian markets.
In South Korea, pulp prices for November orders increased across the board, with BSK and BHK spiking by $55 per tonne, unbleached softwood kraft pulp creeping up $40 per tonne, and bleached chemi-thermomechanical pulp rising $20 per tonne.
However, pulp import volumes have declined in the country because of price increases, which began in May and have climbed since then, driven by pricing in China. Customs data shows that total pulp imports during the first nine months of this year amounted to 1.46 million tonnes, dipping 10.6% from the same period last year.
A major South Korean buyer indicated that paper producers have opted to increase exports of finished products, mainly fine paper, to deal with rising pulp costs and poor paper demand in the home market.
“The profit margins from exports are low, but can maintain cash flow,” the buyer explained. The buyer said his company is ramping up paper production this month and the next, and have to purchase some spot BHK volumes to cover production needs.
Similarly in Japan, the aggregated pulp imports in the first three quarters plunged by 25.4% year on year to 840,000 tonnes, according to the Japan Paper Association.
A Japanese seller said customers slashed volumes substantially when pulp imports grew more expensive.
“Pulp imports account for just around 20% of pulp consumption in the country, and its price movement is not a big concern for domestic mills,” he added.
“Papermakers rely on domestic pulp production, particularly BHK, with producers importing woodchips as furnish to keep costs down and ensure steady pulp prices in the Japanese market,” he said.
Japanese mills have managed to pass increased pulp costs on to downstream customers by raising paper and board prices several times this year in the domestic market, and their balance sheets have seen great improvement as a result.
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