Provided by FOEX Indexes Ltd. on 2013-02-19

General Economy: US – Was the halting of the growth completely in Q4 2012 a prelude to a weaker-than-expected 2013? Unlikely, judging by the expansion and market sentiment in January/mid-February. The ISM data published over January was quite positive. The U.S. services sector remained strong, even if it eased slightly to 55.2 from 55.7 in December. The manufacturing index jumped from below 50 in December all the way to 53.1. The New orders index, the key for near-term future was up, as was also employment and inventories.  The strong advance in housing in 2012 appears to continue with little less pace. The Fed needs to decide just how long they should continue their bond buying program. Inflation and unemployment rate are the key issues. So far, more jobs are still badly needed and the present inflation, 1.8% over the past 12 months, is not a constraint on what the Fed is doing.

European economy is still weak. In fact, the Euro-zone fell, with a 0.6% retreat in GDP during Q4 2012, deeper into the recession than generally expected. Export performance was maybe the biggest disappointment. And, the beginning of the year 2013 has not been much better, even if Germany has moved back into recovery mode and the recoveries in the US and China, as well as the talks on a free trade agreement give more hope to the trade outlook. Interest rates will, most likely, remain low well into next year. Euro-zone’s stronger members are expected to show small positive growth already during the first half but most of the members remain in the contraction territory well into the 2nd half – and some into 2014. Even if most of the countries will move out of the recession before the year-end, the average annual growth for the Euro-zone as a whole, over this year, is expected to end up slightly negative at about -0.2/-0.4%.

In Japan, the economy contracted again during Q4, for the third consecutive quarter, at an annualized rate of 0.4%. The stagnation has lasted for two decades now. Japan’s GDP in 2012 was virtually the same as in 1992. The new government faces formidable challenges in trying to revive the growth. The retreat in exports and very subdued domestic consumption both contributed to the Q4 retreat. Stimulation efforts continue. The Bank of Japan has continued to leave the key interest rates unchanged at between zero to 0.1%. The recent fall of the Yen ＆#118alue will help the growth of the GDP. The problem is that it will not help the economy in terms of true economic fundamentals as the measures are taken to boost the short-term growth. That success is bought with an even higher debt-load. The rise of the debt will quasi-certainly prevent the sustained long-term net improvement.

In China, the outlook is clearly promising, at least near-term. Both exports and imports grew very rapidly in January, exports by 25% and imports by almost 29%. The timing of the Lunar New Year, last year in January this year in February, distorted the statistic basis, but the growth has undoubtedly been quite good, all the same. New lending by Chinese banks in January was more than twice the lending seen in December. The liquidity was high. This certainly supports growth but it also means that the inflationary pressures are already rising. Chinese authorities aim to reform the economy as also the official data now shows high levels of inequality. The main focus of the future economic planning is on the quality rather than the quantity. Efforts to narrow the income gaps include, for instance, a higher minimum wage, more welfare services, a broadening of the tax base and improvements to the land management.

Paper industry – No January statistics appear available at this stage but when looking at some of the key indicators, the paper industry news from the US in mid-February is encouraging. Firstly, the strong increase in the manufacturing ISM index suggests that the packaging sector should see the demand for boxes and packaging papers at a satisfactory level. Secondly, among the industrial activity indices, tracked by the Federal Reserve, the printing and support index showed the second strongest growth in new order inflow among the 18 industry sectors covered by the report, even if that index remained far below the total industrial average. And thirdly, the Media Industry Newsletter numbers show that the ad pages in the consumer magazines were marginally above (in practice flat) against February 2012. This is the first positive comparison month since mid-2011.

In Europe, the price negotiations are still not over in some markets & grades. The announcements of substantial graphic paper capacity reductions (UPM, Stora Enso and Holmen in the forefront) have added to the producers’ resolve to obtain, if not a price increase, at least unchanged prices whilst the buyers of paper see that the sector is still over-supplied and European demand for publication papers remains on a declining trend with the latest monthly numbers (December 2012) among the worst ever with a double-digit decline against December 2011 in several key grades. As the order backlogs against last years’ contracts are running out, some sort of a solution is likely to be found fairly soon for the today’s still unfinished business.

NBSK pulp Europe – Apart from the graphic paper structural changes, most pulp market drivers are leaning in favour of the producers. The still strong paper industry growth in emerging economies, global growth in market pulp demand in tissue and the limited net capacity growth in paper grades market pulp have supported a pretty healthy supply/demand balance. Still, the efforts to get through the price increases announced at the beginning of the year have turned out to be a slow and strenuous. Developments in Asia have a global impact. Pick-up in the Chinese purchasing activity, coupled with the closure of the older line at Ilim/Bratsk is counter-balancing the negative supply/demand driver of the 3-day increase in BSKP producer stocks in December. Euro weakened by 0.4% against the USD from the previous week. Our PIX NBSK index moved up by 3.73 dollars, or by 0.45%, and closed at 823.95 USD/ton. Converted into Euro, the index moved up by 5.06 euro, or by 0.83%, and closed at 618.35 EUR/ton.

BHK pulp Europe – The first Eldorado tonnage is expected in Europe soon. Meanwhile, the volumes of Jari are disappearing following the mid-January closure of that unit. European market appears relatively well-balanced as the continuing growth in BHKP demand in tissue has compensated for the retreat of pulp consumption in the graphic paper sector. The balance also appears good between the different BHKP grades, eucalyptus, birch and mixed hardwood. Additional market pulp supply from integrated-to-market switches has been more on the softwood side and switches to dissolving have removed some of the European BHKP market supply. Euro weakened by 0.4% against USD from the previous week. The PIX BHKP index in Euro moved up by 3.45 euros, or by 0.59%, and closed at 592.89 EUR/ton. The PIX BHKP index ＆#118alue in USD headed higher by 1.71 dollars, or by 0.22%, and settled at 790.03 USD/ton.

BHK pulp China – The purchasing activity for pulp was fairly lively just before the Lunar New Year holidays and stoppages started. The first news of the market after the end of the holidays yesterday suggests that the purchasing mode is still on. Some hw BCTMP producers announced price hikes from February one. That and the drop in producer stock levels in December support the pricing efforts of the BEKP producers in China. Our benchmark has been moving up but remains well short of the 700 USD/ton level announced by several producers for February. Consequently, at least one producer (Arauco) has announced an unchanged price (of 700) for their BEKP while raising the BSKP price target. The PIX China BHKP index moved up by 2.23 dollars, or by 0.34%, and closed at 658.01 USD/ton. Yuan strengthened by 0.1% against the USD. The conversion of the USD ＆#118alue into Yuan resulted in an increase of 11.81 RMB, or of 0.29%, to 4100.85 RMB/ton.

NBSK pulp China – With about 600 000 tons/year, Russia is one of the main suppliers of BSKP to China. Temporary reduction of BSKP supply from Ilim with one of the old lines now closed and the new line still waiting to be started up, together with the narrow price gap to BHKP, increased the purchasing activity in China just prior to the Lunar New Year holiday. Good activity in pulp-buying is expected to continue now that the holidays are over, especially as Chinese economic growth is improving and exports grew substantially in January. Among producers, at least Arauco has announced a price increase of 20 USD/ton for their Radiata pine BSKP. Our PIX China NBSK benchmark ＆#118alue continued to move up with the index ＆#118alue rising by 3.00 dollars, or by 0.45%, with the index closing at 666.03 USD/ton. Yuan strengthened by 0.1% against the USD. The conversion of the USD ＆#118alue into Yuan resulted in an increase of 16.58 RMB, or of 0.40%, to 4150.83 RMB/ton.

Newsprint – The price negotiations in newsprint appear to remain in a deadlock in some markets. The announcement of major further capacity cuts by Stora Enso have impacted psychology much more than the volumes at this stage as the biggest impact of these and earlier announced closures is really on the 2nd half of the year. At present, especially after yet another major drop in European demand in December, market is not in balance and the price pressures downwards remain. The over 20% increase in exports outside Europe in 2012 helped with a 330 000 ton gain but this was not nearly enough to compensate for the 820 000 drop in regional shipments. The 1.0% strengthening of the EUR against the weighted non-EMU basket last week meant a downward pull on the benchmark. The PIX Newsprint index slipped lower by 37 cents, or by 0.08%, landing on 486.51 EUR/ton.

LWC – Paper industry is anxious to see the January numbers to verify whether or not the huge drop in December – e.g. in coated mechanical reels the European demand was down by as much as 16% - was just a statistical anomaly with holidays falling on regular week-days and reducing the shipping activity more than in an average December. The chase for lower costs among the printers and publishers has benefited SC-grades at the expense of LWC, especially in North America but also in Europe. In addition to weak demand, this adds to the downside price pressures. The approximately 1.0% strengthening of the EUR against the basket of non-EMU currencies pulled the benchmark down. The PIX LWC index lost 24 cents, or 0.04%, and settled at 677.91 EUR/ton.

Coated woodfree – In coated woodfrees, exports outside the region have remained close to year-ago levels and there has thus been no compensation for the retreat in the regional demand. Woodfrees did fare better than mechanical grades in 2012 volume-wise but the pressures on prices are just the same. The decades old poor market period pattern where newsprint takes share from uncoated mechanical in e.g. inserts and SC compensates the losses by taking shares from LWC with lower price leads to today’s situation where coated woodfrees and coated mechanicals compete over the volumes in end-uses where both can be utilized. Much of that battle ends up impacting the price differentials. The approximately 1.0% strengthening of the EUR had a negative impact on the benchmark ＆#118alue. The PIX Coated woodfree index retreated by 3.84 EUR, or by 0.56%, and closed at 679.01 EUR/ton.

Uncoated woodfree – As in coated woodfrees, uncoated woodfrees saw no gain in exports outside the region in 2012. Imports to Europe were down by about 50 000 tons, an almost insignificant amount in a seven million ton market. Capacity utilization came up in 2012 from 2011 with capacity closures exceeding the 4% drop in the European estimated demand. The at least so far limited increase in pulp prices in Euro-terms and further hike efforts by pulp producers creates upside pressure on prices but has not been able to prevent the uncoated woodfree prices from falling, also in a limited way, since the turn of the year. The 1.0% strengthening of the EUR against the basket of non-EMU currencies was instrumental in pulling the benchmark down. The PIX A4 B-copy index fell back by 3.24 EUR, or by 0.38%, settling at 858.09 EUR/ton.

Containerboard Europe – As already mentioned in the general section, US ISM-numbers on manufacturing came out strong in January and relatively positive numbers are expected out of the US box and containerboard statistics when published in a day or two. Also in Europe, the news from the market suggests that the order inflow has not been bad at all, considering the general economic woes. In some markets, including the biggest, Germany, deliveries were actually rising already during Q4. In early 2013, the supply/demand balance remains a question mark. Demand appears OK at present with new corrugated board machines building inventories. But, capacity increase in testliner and fluting compqared to 2012 is substantial, including Stora Enso’s 455 000 tons testliner and fluting line starting up at Ostroleka/Poland. Also, with poor overall economic activity, will the box demand rise sufficiently to absorb the corrugated board supply growth? If the demand pull for containerboards helps the prices up, as now seems to be the case in the RP-based grades, converters’ margins risk shrinking, unless box demand grows enough to pass the containerboard price hikes through the chain. Packaging manufacturers resist the containerboard producers’ price inititives with varying degrees of intensity.

Currency movements meant mixed pressures on our benchmarks this time as the Euro weakened by 0.4% against the USD but strengthened by about 1.0% against the weighted non-EMU currency basket. The price movements went against the currency pressures, however. Even with the Euro weakening against the dollar, our PIX Kraftliner index lost 1.50 euro, or by 0.26%, and closed at 580.76 EUR/ton. The PIX White-top Kraftliner index retreated by 1.58 euro, or by 0.21%, settling at 768.40 EUR/ton. Further gains of the price increase efforts in the RP-based grades showed in our recycled based benchmarks. Differences between the regions/countries remained substantial. In spite of the Euro-strengthening against the non-EMU basket, the benchmarks showed clear gains as follows: the PIX Testliner 2 index by 2.05 euro, or by 0.49%, to 420.70 EUR/ton; the PIX Testliner 3 by 6.47 euros, or by 1.65%, to 398.67 EUR/ton and the PIX RB Fluting by 7.34 euro, or by 1.94%, to 385.70 EUR/ton.

Recovered Paper Europe – The jury is still out as to the level of purchasing activity in China now that the Lunar New Year holiday season is over. In Europe, the demand for OCC appears to have picked up but in ONP/OMG grades the demand is lacklustre, understandably so after the very poor December statistics on publication paper demand. In OCC exports, Europe is less well based than the US, due partly to the quality (US OCC draws a better price in China due to higher virgin fibre content) and partly to the Euro-strength against the dollar. The start-up of the new RP-based capacity has added to the OCC demand in Europe with the new lines needing the fibre to consume and, in the early stage, to build some raw material inventory.

The PIX OCC 1.04 dd index gained 8 cents, or 0.07%, and closed at 108.68 EUR/ton. The margins to containerboards widened: to PIX Testliner 2 by 1.97 euro to 312.02 EUR/ton, to Testliner 3 by 6.39 euro to 289.99 EUR/ton and to RB Fluting by 7.26 euro to 277.02 EUR/ton.

The PIX ONP/OMG 1.11 dd benchmark declined further, this time by 67 cents, i.e. by 0.54%, settling at 123.66 EUR/ton. The price gap to PIX Newsprint grew by 30 cents to 362.85 EUR/ton.