How will this eventful year end?
There are now several events within the pulp and paper business that are influencing the softwood pulp market both globally and in Europe specifically.
Firstly, we have the situation in China where political decisions have greatly influenced the market balance for all pulps both in China and Europe, secondly a rather unusual tight supply situation for softwood pulps in Europe, and thirdly there is a lot of announced new capacity, expansions and conversions within the pulp and paper industry in Europe that are all offering jigsaw pieces to the bigger European picture for softwood market pulp.
Politics, politics and even more politics
China’s decision 2017 to ban all imports of recycled paper graded “waste paper” is making itself felt. So far this year imports of recovered paper to China have been reduced by the equivalent of a yearly fibre volume of 10-15 Million tons. There has also been a clear reduction in the number of licenses issued permitting the importation of all types of recovered paper and many of China’s smaller paper and board mills have been locked out from these allocations. At the same time, the government is enforcing much more stringent rules on the quality and purity of imported paper. “You could say that China is setting a new quality standard for the worldwide trade of recovered paper,” says Knut Omholt, Södra’s Market Research Manager, “and other countries may well follow China’s example further on.”
Then in recent weeks the ongoing trade conflict between the USA and China escalated further to also include pulp and paper products: The USA announced tariffs of 25% on all Chinese pulp and paper products. Subsequently, China retaliated with duties of its own, including 25% on recovered paper, while duties of U.S. softwood and hardwood pulps were set at a mere 5%.
While most mills for both technical and economic reasons cannot simply switch from recovered paper to bleached virgin fibre, Omholt adds, there has been a light degree of substitution nonetheless and the latest figures show an increase in imports of bleached virgin pulp to China.
Overall, there are indications that some 100,000 tonnes of softwood kraft pulp has been redirected from European markets to China last twelve months. That may not sound a lot in a European softwood pulp market of 6.5 Mt, but at a time when Europe’s markets are exceptionally tight, it has an impact.
Another possible scenario that has emerged during the last weeks is the possible effects of the Chinese 5% import tariff on US market pulp. Whether this will encourage US producers to redirect their market pulps to Europe or not remains to be seen. But if so the volumes of US pulps going to China are so large that is has the potential to totally change the market situation in Europe if they were to be redirected there.
It is though important to remember that all the scenarios described above have been created by political decisions and these can be quickly altered.
Another cause of volatility is the sharp fall of the Turkish lira against the USD in what is already a challenging climate.
Supply: Extraordinary times
In the Nordic countries and the Baltic states, it has been a highly unusual year which started with a very wet and mild winter creating difficult harvesting conditions which resulted in a general undersupply of pulpwood in the whole region. Then followed a series of forest fires after an exceptionally warm, dry summer which resulted in the worst forest fires Sweden has ever seen. Even in areas unaffected by the fires, forestry operations were restricted for fear of creating a fire hazard. The same scenario was repeated in Finland and the Baltic States, which made compensation with importing pulpwood very difficult.
“Sweden is a big forest country and we are not about to run out of pulpwood,” says Omholt, “but this year all these factors together have accumulated to create a very tight pulpwood market this summer. We have not had to make any curtailments at any of our pulp mills yet due to pulpwood shortage, but it has been close. Just now the pulpwood situation looks much better and the production plans are normal, but our stores of pulpwood logs are still relatively low, so we really can’t afford for anything else to happen.”
“Europe’s economy is looking healthy for the moment even if several indicators look like a peak has been reached. Our impression is that our customers are generally enjoying full order books so demand for softwood pulp is strong,” Omholt continues. “Strong demand and reduced supply have created a situation where neither buyer nor seller can really shift or change any significant volumes of softwood pulps. The stressed market with high prices and no extra volumes sets extra high demands on our delivery planning and delivery security.”
“But while it is fair to say that a surplus of softwood pulp is no longer something to take for granted, and another unusual event notwithstanding, we should see a more balanced market emerge before the end of the year as new pulp capacity is brought on stream and that’s actually good news for everyone. But in my opinion, this will be a short respite as there are a lot of projects planned in the European pulp and paper business during 2018/19 that will either reduce the supply of, or increase the demand for, softwood pulp in Europe.”