Healthy pulp, paper production drives wood fiber prices upward

Rubber and Wood  |  2011-05-06 03:44:08   |   By

Market pulp and linerboard product lines continued to command high prices, nudging fiber costs higher in the West in the 3Q, for two main but different reasons

WASHINGTON (Scrap Monster): Market pulp and linerboard product lines continued to command high prices, nudging fiber costs higher in the West in the 3Q, for two main but different reasons. In the Pacific Northwest, where pulp mills have historically relied on ample residual sawmill chips, lumber production was once again been curtailed, drying up a brief surge in residual chips, and signaling fiber buyers that they will have to increase the whole log chip component as 4Q and 1Q/2011 loom.

In Western Canada, wood fiber prices continued to rise for a fundamentally distinct reason. Due to formula agreements where residual chip prices are tied to prices for market pulp, prices for wood chips in Alberta and British Columbia have risen over 30% from 3Q/09.

In addition the large fiber cost increases seen in Western Canada have brought Ontario and Quebec wood fiber prices much closer in parity. The differential, normally over C$25/green ton higher, has shrunk to within C$5-10/green ton, a dramatically change in the norm.

Lumber production remains a critical first level process for the entire North American forest products industry. For pulpmills, the sawmill sector provides a less expensive residual chip supply, and “come along” pulpwood logs derived from sawlog production. Western pulpmills in particular have been built around an abundant residual chip supply, and many integrated Eastern Canadian forest products companies have relied on their sawmill facilities to fuel their pulpmills. Sawdust and shavings are the raw fiber of choice for the composite board and domestic pellet sectors.

Unfortunately, U.S. housing starts, at the heart of both Canadian and U.S. lumber operations, continued at an annualized pace of just over ½ million units in 2010. Housing sales recorded a near record low of 276,000 annualized in July. A recent report regarding the unsold inventory of foreclosed houses stated that the foreclosure rate in the U.S. lead by the states of Nevada and Florida was a record for three of the previous five months. With “home seizures,” “default notices,” “foreclosure auctions” and “price depreciation” the apparent new lexicon for the housing industry, most sawmills across the continent have once again curtailed operations to levels found early in 2010.

With British Columbia leading the way, both West Coast U.S. and Canadian lumber shipments have increased in 2010. Increased shipments to China and Japan pushed BC lumber production up over 20% this year compared to last, and Pacific Northwest mills up over 12%. In comparison, Southern U.S. lumber production was down a little under 4% from a year ago.

The U.S. South balance of pulp fiber supply and demand has re-emerged, leading toward more traditional wood fiber prices after strong shortages in the first half of the year. Once again, fiber costs in the U.S. South are the lowest on the continent.

In spite of an over abundance of woody biomass at the beginning of 3Q, left over from the largely BCAP-driven operations in the first half of the year, prices in most regions are stabilizing at pre-BCAP levels. New wood-to-energy projects at existing forest industry facilities continue to expand woody biomass utilization which has implications for future prices.