Canadian pulp has gone through a difficult cycle over the past three years as Chinese demand has slowed and new hardwood pulp became available in South America.Reuters
Canada is very well known for its forest industry. The production side of the industry falls into two main categories: sawmills and pulp (and/or paper) mills. I would like to review the pulp side of this business.
Background:
Canadian northern bleached softwood kraft (NBSK) pulp has gone through a difficult cycle over the past three years. Following exceptionally strong prices after the pandemic, the market weakened as Chinese demand slowed, producer inventories grew and new hardwood pulp capacity came online in South America.
Pricing:
When examining pricing for NBSK we see two very different prices quoted, as it does not trade on the futures markets like lumber does. The spread between the public list price and the spot price has widened from historical levels, with list now in the US$1,550 range and spot in the US$700 range. Long-term supplies and contracts negotiate with a percentage decrease below list, whereas short-term contracts start near spot. Days of inventory is a direct pricing driver as well for this industry and a metric that is widely tracked. We have seen a range of 30 to 48 days of global inventory over the past 10 years, with the current level at 42 days.
Markets:
China remains the single most important external influence on Canadian pulp prices. As the world’s largest importer of market pulp, changes in Chinese inventories, paper production and economic growth quickly move global prices. Strong Chinese buying typically supports Canadian producers, while periods of inventory reduction or weak manufacturing place immediate downward pressure on pulp markets.
Mechanical pulps have also evolved. Traditional ground-wood pulp and the thermo-mechanical pulp family (TMP, CTMP, BCTMP – C Chemi, B Bleached) have declined alongside newsprint and magazine papers. However, CTMP and BCTMP have become increasingly important in packaging board, tissue and specialty products because they provide bulk and stiffness at a lower cost than kraft pulp. Rather than disappearing, these grades have found new markets such as product packaging for online purchases that should provide relatively stable long-term demand.
The Canadian industry has changed dramatically:
Canada has lost roughly half its pulp-producing mills over the past 30 years, from about 75 to 85 mills in the mid-1990s to about 38 today. The collapse of newspapers, magazines, catalogues and office paper eliminated demand for many smaller, higher-cost mills. At the same time, the surviving operations became more efficient and focused on market pulp, packaging, tissue and specialty products.
The first wave of closures was driven by a one-time structural decline in graphic papers. That decline has largely run its course. Future consolidation will be driven more by cost competitiveness than falling demand.
Several long-term trends should support Canadian pulp demand: Continued growth in e-commerce and corrugated packaging, the increasing substitution of plastics with fibre-based packaging, stable tissue and hygiene demand and growth in specialty pulps and engineered fibre products. Rather than another 50-per-cent reduction in Canadian capacity, a more realistic outlook is 30 pulp-producing mills by the mid-2050s, implying eight additional closures over the next three decades.
Recovered fibre:
Recovered (recycled) fibre has become an increasingly important part of the industry, rising from roughly one-quarter of total fibre furnish in the mid-1990s to more than 40 per cent today. While this has reduced demand for virgin pulp, recycled fibres gradually lose strength after repeated use. Even in a mature recycling system, a significant proportion of new virgin fibre will always be required, creating a natural long-term floor under pulp demand.
The industry’s greatest challenge is increasingly on the supply side. British Columbia has demonstrated how diminishing timber harvests and sawmill closures can sharply reduce residual chip availability, increasing fibre costs for pulp mills. Fibre constraints, rather than weak demand alone, are likely to determine which mills survive over the coming decades.
Over the next two to three years, the outlook for NBSK is cautiously positive. Unlike hardwood pulp, very little new softwood capacity is being built globally. At the same time, several high-cost Canadian and European mills have curtailed production, gradually tightening supply. As inventories normalize and Chinese demand improves, NBSK prices should recover, although the path will remain volatile.
More about the author
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.