The Global Wood Pulp Market: Three Price Drivers to Watch in the Second Half of 2022
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Today’s pulp markets are seeing record high prices, with major players announcing new price hikes almost weekly. If we take a step back to look at how we arrived here, there are three components of the market that could be indicators for when prices will reach an inflection point in the short term.
#1 Unexpected downtime
First and foremost, we have found unexpected downtime to be an extremely relevant factor to pulp prices today and is one for market participants to watch out for.
Unexpected downtime covers incidences which force a pulp mill to idle production temporarily. This includes things like labor strikes, mechanical failures, fires, floods, or droughts which impact the ability of a pulp mill to run at its full potential. It does not cover anything that has been pre-planned, such as annual maintenance downtime.
Unexpected downtime began to reaccelerate in the second half of 2021, which coincided with the most recent run-up in pulp prices. This is not necessarily surprising, since unexpected downtime has proven to be a potent supply-side shock that has moved the market in the past.
In the first quarter of 2022, the market saw a record high volume of unexpected downtime, which of course only worsened the supply situation of pulp to markets around the world.
While the pace of this downtime has eased from levels earlier in the year, new incidences of unexpected downtime have emerged that continue to impact the market in the third quarter of 2022.
#2 Project delays
The second factor to watch is project delays. The biggest challenge with project delays is that it offsets the market’s expectations for when new supply might be entering the market, which in turn can cause fluctuations in pulp prices. There have been two large scale pulp capacity expansion projects that have encountered delays over the past 18 months.
The two projects are:
• Arauco’s MAPA project, representing over 1.5 million tonnes of new bleached hardwood kraft (BHK) supply, has now encountered several delays but is expected to start by the end of the third quarter of 2022.
• UPM’s Paso de Los Toros is a 2.1 million tonne greenfield BHK mill in Uruguay that was also delayed from its original start date, but it is now expected to start up in the first quarter of 2023.
The delays have been largely related to the pandemic, either through labor shortages related directly to illness, or indirectly through visa complications for highly skilled workers and postponements of key equipment deliveries.
#3 Transportation costs and bottlenecks
The third factor leading to the record high pricing environment is transportation costs and bottlenecks. While the industry may be a little fatigued to hear about supply chain bottlenecks, they unfortunately have played an outsized role in the pulp markets.
These bottlenecks have impacted the market in two significant ways:
• Extending the supply chain, or increasing the average delivery time for pulp
• Adding to cost inflation for every metric ton of pulp produced
Overall congestion, in part due to pandemic-related labor shortages, has impacted the availability and reliability of rail and trucking transportation across the world.
The lower availability of shipping containers and sky-high spot container rates, still at 4-5 times the rate of pre-pandemic levels, have also impacted the supply of pulp, especially softwood grades that rely more on containers.
On top of this, vessel delays and port congestion have further aggravated the flow of pulp across global markets, which ultimately has led to less availability and slimmer buyer inventories, creating an urgency to secure more pulp.
It is also worth mentioning that the impact has been relevant for the delivery of finished paper and board imports in Europe and the US, which has increased demand on domestic paper mills and in turn ratcheted up the demand for pulp.
Demand destruction is absolutely a concern for the pulp market. Not only will high paper and board prices act as a headwind for demand, but we are also concerned with how inflation will impact general consumption in the economy.
Already, we are seeing signs of a shift away from consumer goods, which helped to rekindle demand for pulp following the onset of the pandemic, into spending on services like restaurants and travel.
In the graphic papers sector especially, higher prices will make the shift to digitalization that much easier for consumers. Paper and board producers in Europe are also facing increased pressure not only from pulp supply, but also the weaponization of Russian gas supply. This represents a downside risk for pulp demand if paper producers are forced to idle production in face of even higher gas prices.
