- Slow-but-steady demand
- Quiet futures market
- Opportunities in China
The last time you probably saw the word "pulp" and made note of it was when you bought that orange juice with "Loads o' Pulp" emblazoned on it and knew you'd have to face days of removing shreds of orange pith from between your teeth: very annoying.
Pulp is, however, as you will well know, also the stuff from which paper and paper products are made, with wood pulp being derived from trees once they have been stripped of bark and have been treated either chemically or mechanically (or both). Wood pulp is used to make a plethora of different products.
Primarily:
And, as there are for both plastics and orange juice, there are also wood pulp futures (and options).
Paper Facts
Paper was not, originally, made from wood. It was made from rags. The first U.S. paper mill was established around 1690, predated by mills in Spain (the first in 1120) and the first successful commercial mill in England in 1588.
Having been developed first in China in the second century, the process for making paper traveled to the Middle East and then, with the Moors, to Europe. Indeed, the first mention of the use of toilet paper reportedly dates back to sixth-century China!
Until mid-19th century, cotton and linen rags were used to make paper. In both the 17th and 18th centuries, with the burgeoning of the printing industry, there were severe shortages of cotton rags, the "picking" of which provided a meager income to huge armies of the poor in Europe (and still does for some, in certain countries, today).
Detail of "The Ragpicker" (1869) by Edouard Manet
owned by the Norton Simon Foundation, Pasadena, Calif.
The mechanical and chemical processes (to separate the cellulose fibers in trees) developed in the mid- to late-19th century to make wood pulp and, therefrom, cheap paper not only solved the rag problem, but also revolutionized the paper-making industry. Amongst the processes developed at this time, the sulfate (or kraft) process developed by Carl F Dahl in 1879 is now the leading process for making wood pulp.
Global wood pulp production, comprising a number of different types of pulp, now exceeds 175 million tonnes a year.
Different Types of Pulp[i]
Source: PÖYRY
According to a presentation given by PÖYRY (a global consulting and engineering firm quoted on the OMX Nordic Exchange in Helsinki), back in late March last year, the consumption of wood pulps is expected to grow by some 0.9% per annum 'til 2020. The demand for recovered paper, however, is projected to grow by 2.9% per annum over the same period.
As the share of recovered paper used in the world's paper making increases (currently around 50%) to 56% by 2020, so, equally, wood pulp's share is expected to drop from a current level of somewhere just below 46%, to 39-40% by 2020.
Source: PÖYRY
Still, there has as yet been no slowdown in demand ... although there have been shifts, as PÖYRY puts it: "...from the West to the East and from the North to the South." In addition, the firm projects that: "The papermaking fibre [sic] in Asia, Latin America and Eastern Europe will grow rapidly, eventually eclipsing Western Europe and North America in overall size."
Source: PÖYRY
Concurring, PricewaterhouseCoopers sees South America on the supply side benefiting from competitive advantage, and, on the demand side, China continuing to be the major market driver of industry growth. Indeed, after the U.S., China is the world's next-largest producer of paper and wood products. China has, in addition, become a major exporter of paper and paper packaging.
Wood Pulp Futures
With North America and Western Europe now accounting for around 70% of the world's wood pulp production, it is not surprising that various plans for establishing wood pulp futures on a regulated derivatives exchange have been formulated and executed there.
Back in 1997, three different organizations tried to establish markets in wood pulp futures - FOEX, Pulpex and Livedex. It didn't go well. Livedex never got off the ground. Pulpex closed in 2003 due a lack of interest. FOEX, for its part, had fundamentally to refocus its business and is now "a Finnish private, independent company that specializes in providing audited, trade-mark registered pulp and paper price indexes" to the Chicago Mercantile Exchange (CME), amongst others.
Since then, recognizing a potential gap in a market worth upward of $17 billion per year, the NYBOT (now a wholly owned subsidiary of IntercontinentalExchange [ICE]) introduced both a pulp futures contract and an options-on-pulp-futures contract in February 2004, and the CME launched its own pulp futures and options on futures contracts on September 9 of last year.
The CME wood pulp futures contracts are cash-settled contracts based on NBSKP using the PIX NBSKP Europe Index from FOEX, which provides the benchmark price for this type of pulp. NBSK pulp "is the benchmark grade for pricing market pulp around the world," according to the CME, and is the largest category of market pulp in the European region.
Settlement on the NYBOT wood pulp contracts is, on the other hand, physical, with three deliverable growths (BSK at a discount, NBSK at par and Radiata [pulp from the radiata pine] at a discount) at a number of different delivery points around the world. The NYBOT will include Changsu Xingao, China, on or after the June delivery this year.
Before grabbing your phone seeking an opportunity to diversify your portfolio further with another commodity, you should be aware that current trading volume on both these exchanges in wood pulp is thin ... very thin. So far this year, a total of only 39 futures contracts have traded on the NYBOT. And on the CME, by the end of March, only some 2,602 contracts had traded.
Opportunities In Pulp
This does not mean, however, that there are not opportunities out there in wood pulp and paper. Paper is having a pretty rough time of it at the moment, creating opportunities for the aggressive investor.
Over the past several years, the paper industry has been going through quite considerable restructuring, with the major, integrated participants shedding everything from forests to extraneous businesses along the way. International Paper (Bloomberg Ticker - US: IP), once the largest private landowner in America, not only got rid of some 90% of its forestland in 2006, but has also continued to divest itself of various businesses. Weyerhaeuser, too, has been involved in a radical overhaul of its business over the past several years. Not least, many of these huge, sprawling companies are now becoming increasingly specialized.
Assuming the demand of pulp does continue to grow, there should occasionally be IPOs for spun-off pulp and paper companies, offering targeted exposure. The debut of Boise Inc. this February marked once such occasion.
Even without these, however, in the U.S. anyway, the continuing consolidation in the industry has led both to a number of paper mills being shut down and the subsequent rise in prices for certain types of paper.
As the paper industry further consolidates, with companies become increasingly specialized, and as the wood pulp futures market continues to mature, gaining in both depth and breadth, some other interesting opportunities could open up for investors. These may include not only spread and arbitrage opportunities, but also ways to achieve indirect exposure to the paper industry through wood pulp futures and vice versa.
PwC's Top 10 (by Sales) Global Forest, Paper and Packaging Companies 2007
|
Company |
Country |
Sales 2006 (US$) |
Net Income 2006 (US$) |
ROCI1 2006 (%) |
Wood Pulp Producer2 (Rank) |
|
International Paper |
U.S. |
21,995 |
1,050 |
5.3 |
2 |
|
Weyerhaeuser |
U.S. |
18,561 |
142 |
3.1 |
3 |
|
Stora Enso |
Finland |
18,330 |
740 |
7.0 |
1 |
|
Kimberly-Clark |
U.S. |
16,746 |
1,500 |
12.1 |
|
|
Svenska Cellulosa |
Sweden |
13,796 |
739 |
6.0 |
|
|
UPM |
Finland |
12,588 |
427 |
3.8 |
5 |
|
Procter & Gamble |
U.S. |
11,972 |
1,299 |
20.6 |
|
|
Metsäliitto |
Finland |
11,644 |
(325) |
0.7 |
|
|
Oji Paper |
Japan |
10,439 |
181 |
3.2 |
8 |
|
Nippon Unipac |
Japan |
9,908 |
148 |
1.7 |
|
Source: PwC and PÖYRY
1 Return On Capital Invested
2 The world's top 10 pulp-producing companies account for 34%
of the global wood pulp capacity
In The Meantime...
...there are the always-exciting opportunities to be found in the world of recycling, just like in metals (Thank Scrap: The Market For Recycled Metals). As has been noted, in the world of paper, recycling is becoming ever-more important, as is Asia as a market for paper. Put the two together and it is possible to have a success story like that of Nine Dragons (Bloomberg Ticker - US: NDGPF), which provided an ROCI in 2006 of some 14.2%, and is now up there with International Paper and Smurfit-Stone (Bloomberg Ticker - US: SSCC) as one of the world's largest paper producers.
Only last week the company sold $300 million in five-year bonds (senior unsecured notes) at a yield of 8% to repay existing bank loans, to provide general working capital and for expansion plans.
On the other hand, there's also indirect exposure driven by a healthy demand for all the different machinery with which pulp and paper are made - especially as environmental issues are now so important. This demand covers both new pulp mills/lines and the refurbishment/modernization of existing machinery. Two of the leading companies in this arena are the Finnish company Metso Oyj (Bloomberg Ticker - US: MXCYY), and the German company Andritz AG (Bloomberg Ticker - US: ADRZF).
A Paper Machine Line
Courtesy: Metso
Conclusion
The CME's wood pulp contracts are still young and it will, perforce, take a while for the market to mature. It remains anybody's guess, however, as to what will happen to the wood pulp contracts on the NYBOT, even though that market is now totally electronic.
While the consolidation taking place generally in the paper and pulp industry may provide some oblique stimulus to the futures markets, opportunities will certainly arise from those industries themselves. Should wood pulp contracts take off, there could be some very interesting spread and arbitrage opportunities across both arenas.
In the meantime, the continuing global shifts in both the production and the consumption of pulp and paper certainly appear to warrant a closer look at the companies supplying the industry with its machinery as a way to gain exposure to both paper and wood pulp.
Chemical Pulp Production
Source: Metso
Resources:
American Forest & Pulp Association (in particular their paper Wood for Paper:
Fiber Sourcing in the Global Pulp and Paper Industry
[i] Some Pulp Abbreviations
|
Abbreviation |
Type of Pulp |
|
FCTMP |
Fluff Chemi-Thermo-Mechanical Pulp |
|
ONP & ONC |
Old News Print & Old Corrugated Cardboard |
|
BSKP |
Bleached Softwood Kraft Pulp |
|
BHKP |
Bleached Hardwood Kraft Pulp |
|
UKP |
Unbleached Kraft Pulp |
|
BSP |
Bleached Sulphite Pulp |
|
USP |
Unbleached Sulphite Pulp |
|
CTMP & CMP |
Chemi-Thermo-Mechanical Pulp & Chemi-Mechanical Pulp |
|
RMP & TMP |
Refiner Mechanical Pulp & Thermo-Mechanical Pulp |
|
SGW & PGW |
Stone Groundwood Pulp & Pressure Groundwood Pulp |
|
NSSC |
Neutral Sulphite Semi-Chemical |
