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Paper prices Still climbing

Oct 1, 2006 12:00 AM

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Paper Outlook

Coated and uncoated freesheet paper prices have continued to rise this summer to levels not seen for many years. But the current robust market conditions might not last, according to many observers.

Uncoated freesheet prices are currently at a 10-year high in North America, and some producers plan a further round of hikes late in the third quarter. Both Weyerhaeuser Co. and Boise Cascade Inc. reportedly have announced $40-$60/ton price increases for offset and opaque grades, the fourth increase announced for uncoated freesheet grades so far this year.

In July, producers implemented a $60/ton hike for cut-size grades and at least one analyst believes the latest price increase on offset grades could be a precursor to further cut-size hikes later in the year.

The current strength of uncoated freesheet prices largely is due to more than 1.7 million tons per year of capacity that has been idle since 2003, limiting supply and boosting operating rates of paper producers. Regional demand, however, has continued to slowly decline.

Uncoated freesheet shipments in North America were 1.8 percent lower in the first seven months of 2006 compared to the same period last year, according to figures from the Pulp and Paper Products Council (PPPC). Operating rates, however, increased from an average 90 percent to 92 percent in that period, and inventories in July 2006 were 186,000 tonnes lower than the same month last year.

Are prices peaking?
Despite relatively robust operating rates, dwindling demand and the threat of cheaper imports still could undermine the pricing power that paper producers currently enjoy.

“While imports of fine paper into North America have historically been low, increasing offshore capacity and the threat of imports will be a discipline on any exercise of pricing power,” warned Don Roberts of CIBC World Markets in an August research note. “Furthermore, it should be remembered that the recent strength in uncoated freesheet prices is primarily due to capacity closures rather than robust demand,” he added.

Some analysts believe uncoated freesheet prices are close to peaking and expect average 2007 prices to be lower than the current level of $850/ton.

The late-August announcement that Canada's Domtar Inc. will acquire the fine paper assets of Weyerhaeuser Co. to create a jointly owned uncoated freesheet giant could have added implications for the fine paper market. Several analysts believe the merger will result in continued discipline on the supply side of the uncoated freesheet market. The size of the “New Domtar” also means it will have far greater pricing power in the market than either Domtar or Weyerhaeuser has separately.

Weyerhaeuser will own 55 percent of the new company and receive a $1.35 billion cash payment. The new company will operate 16 uncoated freesheet mills in the United States and Canada with a total annual capacity of 5.2 million tons of paper. It will be the second largest uncoated freesheet producer in the world and the largest in North America, with an estimated 37 percent market share.

Forestweb N.A. Publishing Papers Index
Mo./Day/Yr. Units
10/1/04 95.92
11/1/04 95.66
12/1/04 95.66
1/1/05 96.97
2/1/05 96.97
3/1/05 99.49
4/1/05 101.88
6/1/05 101.59
6/1/05 101.59
7/1/05 103.73
8/1/05 104.07
9/1/05 103.23
10/1/05 1043.42
11/1/05 103.94
12/1/05 103.94
1/1/06 103.68
2/1/06 104.22
3/1/06 104.51
4/1/06 105.15
5/1/06 105.8
6/1/06 105.47
7/1/06 105.62
8/1/06 106.3
Source Forestweb

Coated freesheet prices also have been on the increase this summer as demand remained strong.

Total North American coated freesheet shipments were down 1.4 percent in the first seven months of 2006, but total demand increased by 6.6 percent, fed by a surge in imports, according to PPPC figures. July inventories also remained a healthy 126,000 tonnes lower than last year.

Healthy demand reportedly helped coated freesheet producers implement a $40-$50/ton price increase in July, a price rise that many observers believed was an optimistic bet just a few months ago. Forestweb's “Reel Time Report” recorded August prices for 60-lb. coated freesheet rolls at $960/ton, up from $890/ton at the beginning of the year — the highest they have been since August 2000.

Forestweb N.A. Pulp Index
Mo./Day/Yr. Units
10/1/05 114.54
11/1/05 114.54
12/1/05 114.1
1/1/06 113.33
2/1/06 114.61
3/1/06 114.61
4/1/06 118.61
5/1/06 121.23
6/1/06 123.39
7/1/06 129.25
8/1/06 129.74
Source: Forestweb

Whether further price increases are likely this year remains in doubt, according to some analysts, particularly as imports from Europe and Asia continue to grow. Imports of coated freesheet to North America in July surged by almost two thirds to 147,000 tonnes, according to PPPC figures, and were up by more than 25 percent in the first seven months of 2006.

Several major producers in Europe plan coated freesheet capacity cuts by the end of the year and early 2007, but oversupply in that region will persist and could end up being exported to North America.

Nevertheless, most agree the market balance still remains in favor of producers. “The market will become much more robust in the near future, and lead times will extend out significantly. It could be a very interesting fall,” Forestweb's Verle Sutton wrote in his July “Reel Time Report.”

Presented by: Forestweb
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