Pulp Prices Continue Steady Rise

In a North American lumber market going from bad to worse with each passing day, the one bright economic light is NBSK (Northern Bleached Softwood Kraft) pulp. Currently the US price for this international commodity stands at US $830 per ton. The European price is US $800. This week producers announced another US $20 price hike, to take effect in September, and bring pulp to its highest level since the end of 1995 (US $910).

2005 was a very poor year for pulp (ironically, lumber and panel prices were enjoying record highs) for various reasons, yet the industry rallied to push through price increases. By November of 2006 European pulp was up US $126 (to US $725).

As the forest products industry has become more intergrated, lumber companies have come to supply their pulp mills with chips from their own sawmills. The turmoil of the past few years saw massive closures across Canada and the US, as new countries emerged with highly-competitive pulp of their own (S. America, Indonesia, India, China). Some pulp mills were bought by other lumber companies, but more than a few continue to stand idle today (St. Stephens, NL; Prince Albert, SK). Just like Port Alice on Vancouver Island, these towns are destined to die -having lost basically the only employer- unless another source of revenue can be found. Terrace, BC also continues to struggle after the closure of several mills (due to decadent forests), the last being the New Skeena mill. The forests of the area, having stood for too long (no major forest fires) can no longer be harvested for any useful purpose, even wood chips, and will simply rot where they stand making it very difficult indeed for new growth to take hold.

When there is a down-cycle in the market, as we have right now in North America, and many mills are under curtailment to keep supply down, there are less chips generated to service pulp mills. However, as it is only pulp that can currently garner profits for producers, the price of chips goes up when pulp mills need to source product from the open market. The only other recourse for Canadian producers, in a last-ditch attempt to prevent the bleeding out of their bottom line, is to export raw logs. The temptation is irresistable; they can circumvent paying the new 15 per cent tax (duty) on dimension and panel products imposed by the latest Softwood Lumber "Agreement", and they save on all the production costs. This short-term solution has always proven in the past to be an unwise choice, and exceedingly unpopular with the industry (generally companies deny shipping raw logs altogether, but it's difficult to hide a fully loaded ship leaving port!) because it affects timber prices locally, costs jobs, and takes business out of the hands of wholesalers and exporters.

The brutal crash of the US housing market, and now the absolute scandal of the sub-prime mortgage debacle, has brought Canada's main lumber customer to it's knees. It is generally acknowledged by analysts that America will see recovery at the end of 2008. I, however, said at the beginning of this year, that there will not be a turn-around until the spring building season of 2009 at the soonest. I still stand by that (in fact, I frankly think it might be even longer but don't want to ring more alarm bells than are already going off).