Prices: Stricken by weakness

S. Vaidya Nathan

THE prices of pulp and paper have seen a relentless downtrend in 2001.

The unwinding from the highs of 2000 was fairly quick. Feeble signs of resistance to the higher price levels that obtained in 1999 and 2000 were evident last year when producers found it difficult to push the last few rounds of price hikes.

In that context, the downtrend that started in January 2001 was not surprising. Pulp is the key raw material in paper manufacture. Its price trend usually provides a good indicator of what lies ahead for the paper and paperboards market.

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The decline in pulp prices that began in early 2000 are reflected in the prices of various categories of paper. This was clear in the April-June 2001 quarter, where global players such as International Paper reported sharp dips in profits. In the Indian context, the evidence seems to be coming through in the July-September quarter.

Pulp prices are down by around $210 per tonne from the peak levels touched in the bullish phase in 1999 and 2000 and dipped below $500 per tonne. The rate for the benchmark NBSK (softwood) pulp was $480 per tonne both in August and September.

The magnitude of the decline, at around 28 per cent, is much smaller than the collapse of around 50 per cent in 1995-96 that sparked a four-year off-colour phase. Then, the prices had shot over $1,100 per tonne and the subsequent downtrend took prices to the $450-500 per tonne-mark.

This time, the pulp producers -- helped by bouts of consolidation among big players -- have put in place unquantified, but substantial, cuts. This helped stem the downtrend in September and the producers were hoping to put through a $20 per tonne hike in October.

This was on the expectation that production had been brought in line with demand. But the terrorist attacks on the US in September changed all that. Of course, quite a few strong indications of an impending slowdown in the US economy were available even before the attacks.

But September 11 has meant a drastic drop in consumer spending and an accelerated pace of business slowdown across industrial sectors. With the economies in Europe starting to move to a mode of slowdown and the deepening woes of Japan, a broadbased slowdown worldwide is likely. This may well mean lower levels of demand for paper and paperboards.

The Bank of Montreal, while taking note of the effect of production cuts, said in its latest monthly commodity report that ``markets reflected increasingly bearish sentiments as glimmer economic prospects in the short term darkened the already deteriorating outlook for forest products''.

It may well be beyond the first six months of 2002 that one can expect any sort of sustainable change in a best case scenario. Interestingly, in a conference with analysts on October 17, International Paper, US, left prospects for 2002 a `question mark' and its CEO has took the view that the effects of September 11 on long-term prospects are an unknown quantity.

The possibility of a further slowdown in demand may mean a further lowering of prices across paper categories. Even between the last two quarters on a sequential basis, prices fell $7-10 per tonne for container boards to $26 per tonne for uncoated papers to a whopping $56 per tonne for pulp.

Going forward, production cuts may not be adequate to stem softer prices. However, the downside from present levels may be modest -- 5-10 per cent going by the long-term trend in prices.

Any further decline could throw the industry into turmoil which could mean sizeable losses. What is more likely is for the recent trends to be more protracted than might have been the case before September.

When demand levels pick up (a big `if' considering that the US economic slowdown is still unfolding), the production cuts now in place may slowly come off leading to a gradual rise in prices over those in 1999. Then demand levels were up from a stable base while now that happen from lower levels.

In the last two quarters, the one segment where price declines where modest, at $15 per tonne, was coated boards. But here too the expected decline in consumer spending and exports could cast a shadow. As for Indian price trends, they usually catch up with global trends after a lag and are of a smaller magnitude.

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The impact of these price trends may be better reflected in the second half of 2001-02 and if paper companies manage a flat earnings curve, that may the best case scenario. With the import duty down to 30 per cent, the industry may also not have the degree of protection it did in the 1998-2000 period.

There is also the prospect of increasing threat from imports as demand levels in other markets fall. This could also have a bearing on domestic price trends and cap profitability levels. In this backdrop, any investment in paper industry stocks would have to look beyond 2001-02 for improvement in profitability parameters.

As for newsprint (where Tamil Nadu Newsprints is the major domestic producer), the price trend will help firm up levels longer than other categories of paper. But after September 11, and with a synchronised slowdown across economies, ad revenues could take a beating even if one sets aside the abnormal highs of 2000. This may affect newsprint consumption levels.

The note struck by the Bank of Montreal in its report is distinctly bearish as it states ``the drop in newspaper advertising that followed the September 11 terrorist attacks has exacerbated the weakness in the demand for newsprint that was spreading since mid-summer. Soft demand and rising inventories caused a $30 per tonne decline to $560 per tonne, a level last seen more than a year ago. Newsprint prices may stay under pressure.'' This is so across the paper industry.