Pulp Prices Fall below 5-Year Trendline

Pulp prices have continued to decline during the last three months, falling below the 5-year trendline in September and remaining there in both October and November. As the following chart shows, ForestWeb’s North American Pulp Index fell by 2.6 percent in September, 2.8 percent in October and 3.9 percent in November.

In his September post, Sam Houston suggested (see Pulp Prices Fall on Weak Economy) that Canfor’s announced $20/tonne price reduction would lead prices to decline through 4^th quarter and result in the index falling below the 5-year trend. This has indeed happened.

How far have prices fallen? According to FOEX, US northern bleached softwood kraft (NBSK) prices in September were at $970/tonne; by October, they had fallen to $950/tonne. Following announcements in late October that they would reduce prices for NBSK by $30.00, Domtar, Canfor, Weyerhaeuser and West Fraser tipped the market even lower. November NBSK prices are at $920/tonne, $1,000/tonne under early July’s highs. We expect prices to remain below trend in the near term, with a drop in December of another $20-$30/tonne. Most analysts expect prices will bottom in February 2012.

Global Economic Factors Driving 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. Pricing data from 2010 and 2011 have some similarities in their shape through August; since that time, however, the 2011 trend looks much more like the end of 2008 than it does 2010. This would suggest that general economic factors continue to exert more impact on prices than seasonal factors.

The economic conditions influencing prices are both domestic and global:

• Despite some strength in 3Q and 4Q indicators, Forest2Market economists and other analysts continue to forecast that the US is on the precipice of another recession; US demand is uncertain as a result.
• Tightening credit in China and a decrease in demand there has led to large price decreases; the lower demand has directed shipments that were headed for export markets to regional ones instead; prices in North America are falling as a result.

Note: All prices in US dollars.