With the backdrop of a pulp price recovery taking shape in China, leading pulp and paper industry participants met last week in London, with upside risk present in the market for the first time in over a year. The strong seasonal bump for demand in China in the second half of the year, combined with restocking-related purchases, has pushed pulp prices in China higher on a net basis than in Europe or North America. While few participants doubted that upward momentum was building in the Western Hemisphere in the short term, questions arose as to the longevity of the rally in China, as seasonal demand strength will likely wane through the end of the year.
Here is our summary of the three key discussion points from LPW and what it means for pulp markets heading into 2024:
Over the past year, pulp producers saw their inventories rise sharply, including a record high for bleached softwood kraft (BSK) producers and then fall during the second and third quarters to arrive back in a balanced state by September. Producers have relied on two market components to achieve this feat in just over six months. On the demand side, shipments to China have surged as domestic consumption has picked up and buyers have moved to restock while pulp is relatively inexpensive.
On the supply side, pulp producers have taken over 1.4 million tonnes of market-related downtime throughout the year. The boost in shipments combined with supply discipline has allowed producer inventories to decline relatively quickly and essentially remove the overhang from the market.
Permanent and indefinite capacity closures have also created waves on the supply side of softwood pulp markets throughout the year, including six market pulp lines in North America and a mill in Finland, which have trimmed a combined 1.6 million tonnes of market pulp capacity across the northern bleached softwood kraft (NBSK), southern bleached softwood kraft (SBSK), unbleached softwood kraft (UKP) and softwood fluff pulp markets.
The closures have largely been the result of long- and short-term stressors on wood fiber supply and the advanced technical age of pulp assets across North America colliding with the potent combination of high-interest rates and a five-quarter cyclical slump in the North American and European pulp and paper markets.
Most participants agreed that the risk for further closures remains elevated as long as these factors persist; however, a consequence of the closures is that the start-up of the new Metsä Fibre Kemi mill – which commenced production in Finland in September – has been effectively offset.
By comparison, bleached hardwood kraft (BHK) pulp markets have witnessed relatively few disruptions so far in 2023. A smaller volume of unexpected downtime has been taken on the BHK side of the market despite having a capacity base over 50% larger than the BSK market and so far, no permanent capacity closures have been announced for BHK in 2023. As global BHK shipments trend higher and BSK shipments trend lower, the pattern of substitution continues to play out across global average furnish shares, demonstrating that paper and board producers are increasingly looking for ways to use more of the less-expensive and lower-cost BHK.
Looking forward to 2024, global pulp markets appear to be entering the new year on a healthier footing. The excess inventory that overhung the market in 2023 has been cleared, exposing the supply side to the potential for unexpected disruptions from labor strikes, natural disasters and/or mechanical failures. The current investment cycle in new market pulp capacity is also winding down, with one major project planned for next year and just one more in 2025.
High-interest rates pose a risk for further closures among distressed assets while also remaining a barrier to the development of new projects. Despite the successful management of supply in 2023 and the upside risks for tighter conditions in 2024, pulp producers are still unable to manufacture the essential missing component: demand.
With near-term demand waning seasonally in China, and indicators remaining lackluster in Europe and North America, the industry is now looking later in 2024 for an occurrence not witnessed since the start of the pandemic – synchronized demand growth across Europe, North America and East Asia.
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