Pulp Prices Fall Due to Weak Economy

In my July post on pulp prices, I looked at the increases in pulp pricing that materialized between June 2009 and June 2011. Since that time, much has changed. After reaching their June peak, pulp prices fell consistently in the 3Q2011.  

As the following chart shows, the Forestweb North American Pulp Index has declined 9.1 percent over the three months since reaching the June peak.  NBSK list prices (USD) were in the $1,020 – $1,030/tonne range in the first week of July.  During September, North American NBSK prices have been widely reported in the $970/tonne range.  If the recent report of Canfor’s price reduction of $20/tonne for NBSK is any indication of the broader market, we can expect the third quarter’s downward price trend to continue into 4Q2011.  This should drive the Pulp Index further below the 5-year trend line.

Drivers of Pulp Price Declines

The following chart shows the five-year price data in one year increments (normalized, with all peak prices set at the same level). Presented in this way, the data can help us determine if seasonality is one of the drivers of the price declines.  While pricing data from 2010 and 2011 have some similarities in their shape, the similarities are not conclusive enough to suggest that seasonality is the cause of falling pulp prices, however. 

Instead, if we follow these lines year-by-year, we can clearly see the shape of the general economy and the market turmoil that has occured since mid-2008. With prices below the trend line and no real seasonality apparent in the data, the general economic outlook will perhaps give us a more meaningful view of price direction. 

Where is the economy headed? Forest2Market’s Economic Outlook calls for a second recession, one that began in either the second or third quarter of 2011. According to our current  forecast model inputs, both 2011 and 2012 will see negative annualized growth in GDP (see Suz-Anne Kinney’s post, “Is a Second Recession Imminent?”). Based upon this economic outlook, pulp prices are likely to remain below the trend line for the near term.

Note: All prices in US dollars.