Conflicting Market Signs

Following a disastrous last quarter of 2008 when demand and pricing was down seventy percent, the Asian market demand bounced back in early January for a number of reasons including Chinese New Year forward orders, raw materials inventory replenishment, pulp prices nearing their bottom ( $370 ) and low fibre recovery in America.

Bulk grades pricing have increased mainly because newsprint generation continues to shrink as more people source information and seek employment electronically. Cardboard is down with depressed consumer demand and discretionary spending for essential luxury items. This lower waste generation has at least underpinned pricing above USD100 which will no doubt have surges and falls in demand until economies see sustainable improvement in sight.

Finished product demand remains at 25-40% below production capacity. Mills are closing down machines, many of which were recently commissioned in anticipation of high consumer growth which was optimistic when there was money available from banks to speculate.

Cash remains king and those that are not heavily geared and can reduce fixed costs will prosper. Cash flow is critical and with the law of payment elasticity, suppliers need to maintain tight credit control and margins even if it means rejecting orders.

The weak Australian and New Zealand dollars have prevented a major collapse in recovery for both Australia and NZ. This does not mean that a fee for service is not justified and will not be introduced in 2009, however domestic production has up until the year end 2008 remained strong and this has allowed mills to sustain domestic waste demand and their finished product selling prices to remain stable.

This domestic honeymoon may be over with supply contracts where legally viable, are now being renegotiated. The prospects of export reductions for finished reels must be a reality which will require lower pricing to compete which also means that domestic prices for finished products must also weaken.

Below are recovered paper prices for 2008 and where they may level out for the first quarter 2009. Bulk grades remain slightly below the five year average. Pulp substitutes slightly above with the continuing trend for the pricing of grades to merge during these depressed cycles when procurement is concentrated on price only and not quality nor fibre yields.