Pulp & Paper – Global Pulp Pulse

Pulp prices are off to the strongest rally ever as market tightness has been exacerbated by speculative demand in both futures and physical markets. We recently joined a webinar from Trade Tree Online to better understand how the futures market is impacting the current run-up in prices. Most notably, Trade Tree and Brian McClay & Associates noted that retail investors account for ~50% of softwood trading at Shanghai Futures Exchange, while industry players (mostly pulp traders) represent only ~10%. Similarly to other commodities, retail investors are largely perceived to be mostly momentum-focused, with very short investment horizons (typically intra-day). In fact, our analysis suggests the current softwood pulp futures holding period is 4 hours vs. 7-hour historical average since the debut of Bleached Softwood Kraft (BSK) contracts in Nov 2018. This compares with 6 hours average for iron ore and 8-10 hours for rebar/HRC.

Speculative demand is prone to causing price bubbles as both traders and pulp buyers add to orders to beat expected price increases ahead. We expect  futures market to continue gaining relevance ahead and ultimately enhance pulp price volatility.

Other than speculation, Trade Tree Online and BMA noted that market fundamentals are supportive of pulp price strength, namely:

1. record softwood downtimes in 2020 and ongoing disruptions;
2. major logistics constraints increasing supply risk;
3. USD weakening; and
4. still-strong tissue demand and better prospects for Printing & Writing.

That said, experts believe that margin pressure from higher pulp prices will only start to be felt by paper producers in second quarter of 2021 and should lead to reduced   pulp consumption/paper production downtimes, adding pressure to prices in second half of 2021.