Quake to Keep Pulp Prices High

By LESTER ALDRICH

Wall Street Journal

3/3/10

World pulp supplies have tightened substantially following the massive earthquake in Chile, putting upward pressure on a market that has seen prices rise nearly 30% over the past year.  Prior to the earthquake in Chile, world market pulp supplies already were tight. In the wake of the temblor, most wood and pulp mills in Chile, which accounts for about 8% of global pulp production capacity, have been shuttered owing to damage and power outages.

RISI, a market analysis firm, said at least 3.75 million metric tons of Chile's 4.8 million tons of annual capacity is closed due to aftereffects of the earthquake.

Mark Wilde, research analyst at Deutsche Bank, said the Chilean supply disruption, at a time of lean pulp stocks, "makes it more likely that the rally will continue." Meanwhile, "weather-related fiber issues in many parts of the Northern Hemisphere make it unlikely that other parts of the world can pick up the slack," he said.

Over the last 11 months, prices for most pulp grades have risen more than $200 a ton. Finland index provider FOEX this week said its U.S. list price index for northern bleached softwood kraft pulp, the benchmark grade, was $875.23 a metric ton, up $1.10 from a week earlier and $45.23 higher than on Jan. 1.

A continued rise in prices would add to the profits of world pulp producers, but could hurt paper makers that are struggling with demand that is marginal at best. Some paper producers could shut down machines in response to continually higher raw material costs.

Celulosa Arauco, part of Chilean fuel and forestry conglomerate Empresas Copec SA, said some of its units suffered "important" damage. Because of transportation and communications problems, it is unclear when operations will restart, the world's second-largest pulp producer said in a statement.

CMPC Celulosa SA, Chile's second-largest pulp producer after Arauco, said none of its plants appeared to have suffered severe damage. Still, the company, a unit of Brazil's Fibria Celulose SA, closed all facilities because of a lack of potable water and electricity, while declaring a 30-day force majeure. Under a force majeure, a typical clause in contracts, producers don't have to honor certain terms if operations are affected by extraordinary events such as natural disasters.

"The epicenter of this earthquake is located close to our pulp mills and as a result the whole supply chain has been heavily affected," CMPC Chief Executive Sergio Colvin and Sales Manager Guillermo Mullins said in a letter to customers dated March 1, a copy of which was obtained by Dow Jones. "Therefore it is very difficult to have clear picture as to when we could restart our operations."

Brian McClay, principal at TerraChoice Market Services, a paper and pulp consulting firm, said the Chilean production losses could have some paper makers either looking for alternative sources in an already very tight world market or they could stop making paper because they will run out of pulp.