FW: Pulp #s

-----Original Message-----
From: =09Singh, Vikram =20
Sent:=09Monday, July 16, 2001 12:29 PM
To:=09Causholli, Monika
Cc:=09Carter, Karen E.
Subject:=09Pulp #s

Here's note that just came from Merrill on last Wednesday's Pulp numbers...=
I'll leave the choice between what is and what isn't important up to you...

Thanks!
V

Grim Pulp Outlook The situation in the pulp market is grim. Here are our co=
mments on last week's statistics. A pick up in prices before next year is g=
etting slimmer by the day.=20
Last Wednesday, the Norscan pulp producer inventories came out, showing a d=
ecline of 84,000, compared to the 10 year average of 65,000 tons. The diffe=
rence is immaterial, but it is impressive that the stocks fell at all becau=
se of the very low operating rates in the European fine pape rmarket, the k=
ey market for chamical pulp sold in the open market. With Nordic operating =
rates for June believed to have been lower than 70%, there was a much lower=
than normal pulp consumption. We may make one important observation, howev=
er. Maybe the smaller fine paper producers, all non-integrated, has continu=
ed to operate at 100%, and this may explain why Norscan stocks fell. Then t=
he next question is: how long are the Nordic producers, and Sappi, going to=
be willing to give away customers to the price cutters? M-real, and yester=
day Stora Enso, has announced HIGHER fine paper prices. This is just surrea=
l. Keeping prices relative stable is a phenomenal achievement in it self, a=
nd if they manage, there will be a dramatic multiple expansion over the nex=
t year.=20
Europulp, the pulp kept in European harbours, fell by 67,000 tons in June, =
to 1.36 million tons. This is the second highest figure during the 2 1/2 ye=
ars this statisitic has been collected, and brings us back to the April lev=
el. A year ago, the level was 765,000 tons, and the stocks kept within a ba=
nd of 600,000 and 900,000 from the start of 1999 (when our information star=
ts) to November last year. So, in one way, this is good news, but we believ=
e the stocks are still much too high. The little history we have show a sma=
ll decline in June, but 2001 was better than the average. The Europulp stoc=
ks are owned by pulp producers (of which some is included in Norscan), trad=
ers (very little) and buyer (almost all of this would be included in Utipul=
p). We have to wait a few days for the Utipulp figures, but there is a smal=
l increase, historically, of 4,000 tons in June. The fact that the Norscan =
stocks fell 17,000 more than the Europulp figures suggest that the Utipulp =
stocks would have increased this year, too.=20
Another reason for the declining Norscan figure may be found in Aracruz's 2=
Q figure. Thomas Souza, our South American colleauge, reports that Aracruz =
dramatically increased its sale to Asia. The reason was that the Chinese st=
arted buying pulp again in March/April. If they bought more eucalyptus pulp=
from Brazil, they would most likely also have bought a lot more softwood p=
ulp from Canada and the US. Thus, Norscan shipment rates would most likely =
have been high, despite of the low fine paper production in Europe. The imp=
ortant point the Norscan figure is that the stocks still are way above 1.5 =
million tons level, where the inventories typically have to fall to in orde=
r to create pricing power for the producers. The stocks have fallen 225,000=
since the seasonal peak in February, compared to a drop of 338,000 tons du=
ring the last 10 years. So, this was a bad spring. July and August typicall=
y see a seasonal increase in stocks, 230,000 on average over the last 10 ye=
ars. There is no reason to believe that it will not increase this summer, t=
oo. As a matter of fact, there is a seasonal increase of 377,000 (implying =
a 29,000 per year increase in the stocks) tons in the Norscan stocks from J=
une to February.
The price is now very close to the cash cost for the high cost producers, =
and it is just a question of time before we get announcements of indefinite=
pulp mill closures. Then it's time to buy. However, we are starting to thi=
nk that the pulp market may not recover before the start of next year. Not =
since 1978 have there been a recovery in the pulp price during the second h=
alf of the year, and at that time it started in 3Q ( In think all would agr=
ee that the possibility for a 3Q recovery is small), not Q4. Thus, every re=
covery in the pulp price during the last 23 years has either started in 1Q,=
or more often in 2Q.