Pulp market prices have hit record highs again a few days ago, with major players announcing new price increases almost every week. Looking 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, unplanned downtime is highly correlated with pulp prices 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 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.
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.
Demand collapse is definitely a concern for the pulp market. Not only will high paper and board prices act as a deterrent to demand growth, but there will also be concerns about how inflation will affect general consumption in the economy.
There are now signs that consumer goods that helped reignite demand for pulp in the wake of the pandemic are shifting toward spending on services such as restaurants and travel. 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.
Post time: Sep-02-2022
