Will The Pricing Bubble Burst?
07-09-2009

Whilst the frenzy for price restoration led by pulp producers and shipping lines during 2009 remains valid, it is often outstripping the ability of the consuming manufacturer to pass on these cost increases to their customers. Most packers are still recovering from enforced losses from contract cancellations in Q4 2008.  No doubt, once Chinese inventories are replenished, the demand and pricing manipulation will recommence. 

Financial reserves are non-existent within the industry and not all banks are that healthy. Payment terms have drifted out, even within Australia to 60 days which means 75 days. It would take very little to send many suppliers back into the red or close. 

Chinese buyers who withdrew from the market late 2008 are back and moving contaminated materials into China to the relief of some suppliers, who would otherwise be reliant on over supplied domestic consumers. 

Whilst the Australian economy is reported to not be in a recession, due to continued strong employment figures, the underlying truth is that one country cannot remain in isolation from the rest of the global economy. China cannot continue to remain bullish if the global markets are not buying their products as strongly. Over the next two months, demand will determine how strong Asian economies are truly travelling, leading up to the seasonal end of year ordering cycle. 

The Newsprint price has always been a key indicator to the health of recovered fiber. Presently, ONP prices are over heated, and when other costs are added, the total cost of deinked fiber is deducted from the newsprint price. Consequently, a correction is inevitable. Packaging and fine papers are no different, so when we see newsprint producers switching to low quality fine papers, this too becomes over supplied and the bubble finally bursts, as it has done following past recessions.