Is There a Cycle Bottom?
10-12-2008
The last severe down cycle was in 1999 which commenced in October 1998 and bottomed in May 2009, when bleached pulp bottomed at US$420 per tonne.It is now US$450.
 
There are obviously many parallels with 2009, however in this cycle the economic fundamentals are far worse, particularly at the sources of the collapse, being America, and the crash this time was deeper and faster leaving no room to compensate for losses.
 
Unfortunately, the production cuts in Asia and especially with large Chinese producers was too slow and these producers are reported to have high finished product inventories, one alone of one million tonnes, which could last two to five months, as well as excessive raw materials which are of similar volume.
 
Stock piling of pulp and recovered paper or prime roll stock is also occurring e.g. the UK and elsewhere, and whilst this continues, the value of finished products and raw materials will continue to be depressed. Such values are below cost, and until America starts buying again and increasing raw materials pricing, Asian producers will only pass on savings, losing money themselves and prolonging the recession.
 
In the past, banks had money to lend, whereas this cycle, trillions of dollars have been lost to the American sub prime, with little remaining to provide working capital back to manufacturers who are awaiting government bale outs.
 
Open and extended terms are being requested which are a receipt for transit discounting,commercial claims and default payments.
 
The cycle can only turn when suppliers say no more losses, as we cannot go the distance, and we are laying off staff which is already occurring.
 
There are two opposing scenarios being put forward by industry leaders:
1) a rapid recovery from March;
2) a prolonged three year struggle which is more realistic, and may be necessary for service charges to reflect actual costs. Paper qualities will need to fulfil the global industry definitions that their individual price represents, and governments and NGOs accept that there is a lifecycle cost beyond the collection point, and without material buyers, alternative disposal costs will increase faster, and no extended producer responsibility can reverse oversupply conditions.