Pulp facts

- Platinum Asset Management


The sector under-performed during the recent bout of market volatility (perceived sensitivity to a Western world economic slowdown). In stark contrast, proven China plays such as the metals stocks eg. BHP Billiton, have rebounded to new highs.

Over the past ten years global paper and containerboard demand has grown at around 3% pa. The major grades are newsprint, containerboard, tissue and writing/printing papers. The first three grades can all include a large component of recovered paper (recycling) as fibre input, whereas writing and printing papers are dependent on wood pulp for whiteness - the lignin needs to be removed in a chemical bleaching process).

Current annual world paper production of 375 million tonnes consumes approximately 180 million tonnes of wood based pulp, 140 million tonnes of recovered fibre and 55 million tonnes of non-wood pulp/chemical and fillers. Wood pulp capacity has grown over the past ten years at a very low 1. 5% pa as increases in recycling recovery rates, largely the collection of old containerboard (OCC) from supermarkets and old newspapers (ONP) from households grew at around 3.5% pa, to support total paper demand growth of 3%pa.

Asia (ex Japan) is now the world’s largest paper consuming region, 28% of total (up from 13% in 1990), with North America the next biggest at 28% (down from 33% in 1990). Over the last five years, China has accounted for nearly 30% of the growth in world paper and board capacity. Almost all the capacity China has added is recycled fibre-based; China has barely invested in wood pulp capacity as it does not have much of a local forestry industry. Instead, China has transformed itself into the largest global importer of recycled fibre (OCC and ONP) and wood pulp. North America and Europe are the major sources of the recycled fibre, whilst most of China’s hardwood pulp requirement is sourced from Indonesia and Latin America; softwood pulps are harder to source.

The continued upwards drift of OCC and ONP prices in the West suggests that we are approaching the limits of cost “effective” paper recovery. To put this in context, historically US recycled fibre containerboard plants have had a significant cost advantage over similar wood pulp plants. Most of this advantage was linked to the much lower capital costs, low energy prices and readily available, cheap recycled fibre. This is no longer the case. In fact, in some regions, wood pulp containerboard can now be produced at lower all in cost than recycled based containerboard.

With China now the driving force behind global recycled fibre prices (and increasingly wood pulp prices), we think we are not that far from an inflexion point, where longsuffering wood pulp producers start to benefit from much higher prices. During the quarter another two major Canadian wood pulp producers moved closer to bankruptcy, struggling to remain viable in the face of a strengthening Canadian dollar. Whilst we wait for the pulp and paper “super cycle” to emerge, our bets remained largely concentrated in well capitalised, low cost producers that should benefit from any capacity reduction. We remain committed to the position and note that it was not that long ago that the global steel industry was also littered with bankruptcies.

Platinum funds are available through a platform such as OneAnswer. For more information please call NZIJ Stockbrokers on 0800 90 60 90 or 04 499 3592.