Packaging / Advertising & Office

A few days ago, the international pulp trade market price hit a record high again, with major players announcing new price increases almost every week. If we look back at how the market has gotten to where it is today, these three pulp price drivers require special attention - unplanned downtime, project delays and shipping challenges.

Unplanned downtime

First, we found that unplanned downtime is highly correlated with pulp prices today and is a factor that market participants need to be aware of. Unplanned downtime includes events that force pulp mills to temporarily shut down. This includes strikes, mechanical failures, fires, floods or droughts that affect the ability of a pulp mill to reach its full potential. It does not include anything pre-planned, such as annual maintenance downtime.

Unplanned downtime began to re-accelerate in the second half of 2021, coinciding with the latest increase in pulp prices. This isn't necessarily surprising, as unplanned downtime has proven to be a powerful supply-side shock that has driven markets in the past. The first quarter of 2022 saw a record number of unplanned shutdowns in the market, which of course only worsened the pulp supply situation in the global market.

While the pace of this downtime has slowed from levels seen earlier this year, new unplanned downtime events have emerged that will continue to impact the market in the third quarter of 2022.

project delays

The second factor of concern is project delays. The biggest challenge with project delays is that it offsets market expectations of when new supply might enter the market, which in turn could lead to volatility in pulp prices. In the past 18 months, two major pulp capacity expansion projects have encountered delays.

The two projects are:

Arauco's MAPA project, meaning more than 1.5 million tonnes of new bleached hardwood kraft (BHK) supply, is now experiencing several delays, but is expected to start by the end of the third quarter of 2022.

UPM's Paso de Los Toros project, a new BHK plant with a capacity of 2.1 million tonnes in Uruguay, also had a delayed start date, but is now expected to start in the first quarter of 2023.

The delays are largely linked to the pandemic, either due to labour shortages directly linked to the disease, or visa complications for high-skilled workers and delays in the delivery of critical equipment.

Transportation costs and bottlenecks

A third factor contributing to the record high price environment is transportation costs and bottlenecks. While the industry may get a little tired of hearing about supply chain bottlenecks, the truth is that supply chain issues do play a huge role in the pulp market.

These bottlenecks impacted the market in two important ways:

1. Extend the supply chain, or increase the average delivery time of pulp

2. Increase the cost inflation per ton of pulp produced

3. Overall congestion, due in part to pandemic-related labor shortages, has affected the availability and reliability of rail and trucking around the world.

4. The low availability of sea containers and extremely high spot container rates (still 4-5 times pre-pandemic levels) also impacted the supply of pulp, especially cork grades that are more reliant on containers.

On top of that, ship delays and port congestion further exacerbate the flow of pulp in the global market, ultimately leading to lower supply and lower inventories for buyers, creating an urgency to get more pulp.

It is worth mentioning that the delivery of finished paper and board imported from Europe and the United States has been affected, which has increased the demand for its domestic paper mills, which in turn has pushed up the demand for pulp.

With increasing cost pressures in today's market, are we at risk of a collapse in demand? Collapsing demand is definitely a concern for the pulp market. Not only will high paper and board prices act as a deterrent to demand growth, but we also need to worry about how inflation will affect general consumption in the economy.

We are already seeing signs of a shift towards spending on services such as restaurants and travel in consumer goods that helped reignite demand for pulp in the wake of the pandemic. Especially in the graphic paper industry, higher prices will make it easier for consumers to switch to digital. Paper and board producers in Europe are also facing increasing pressure, not only from pulp supplies, but also from the "politicization" of Russian gas supplies. If paper producers are forced to suspend production in the face of higher gas prices, this means downside risks to pulp demand.