Selective Cuttings

Selective Cuttings

Low Canadian dollar boosts competitiveness of Canadian newsprint producers

February 22, 2017

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In the previous blog post we showed that the current low value of the Canadian dollar allows Canadian NBSK producers to maintain their competitive advantage over international competitors; a situation that is unlikely to change anytime soon. We ran some exchange rates scenarios to see if the situation was similar for newsprint producers.

Canada is the largest producer and exporter of newsprint worldwide. In 2015, newsprint exports were valued at $2.3 billion. Sixty percent of our exports are destined for the US market, and American producers are our main competitors in the regional North American market.

Currently, the North American higher cost producers are all concentrated in the United States, but exchange rate movements could significantly alter our competitive position. The graph below illustrates how Canadian production costs increase when the Canadian dollar appreciates to 90 cents (Scenario 1) and to parity (Scenario 2) against the US dollar. In Scenario 1, Eastern Canada remains the low cost North American producer, while Western Canada producers become higher cost producers than Western US. Scenario 2 shows that further appreciation of the Canadian dollar erodes the competitive advantage of all Canadian producers compared to their US competitors.

Exchange Rate Scenarios: Canadian dollar appreciates to 90 cents (Scenario 1) and at par with the US dollar (Scenario 2)

This chart shows how the production cost of Canadian newsprint producers in Eastern and Western Canada increase when the 
Canadian dollar appreciates to 90 cents (Scenario 1) and to par (Scenario 2) with the US dollar. This is shown in relation to the US regions 
of West and Southeast.

Source: FisherSolve
Long description

 

Additionally, we considered the cost of getting product to market and found that Eastern Canada remains the lowest cost producer once transportation cost is factored in — that is, until the Canadian dollar is at par with the US dollar.

Canada is in a good position and is likely to remain the lowest cost producer over the medium term. However, the low Canadian dollar offers a limited buffer in the long run against permanently lower newsprint demand.

  • Newsprint demand in North America has fallen by 72% since 2000 and there is no sign of a recovery. In fact, demand declined by 9.5% annually from 2013-2015 compared to the 2000-2010 average of 7.5%. Similarly, demand is declining in other markets but at a lower rate.
  • On average, two to three North American mills would need to close per year to keep pace with declining North American demand and offshore exports. Given Canada’s currency advantage, most analysts expect the next few closures to be in the US.

Exchange rate movements and competitiveness in the global NBSK market

February 7, 2017

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Canada has the largest share of the northern bleached softwood kraft pulp (NBSK) capacity (>40%), and our mills are among the lowest cost global producers.
However, exchange rate movements could alter our position in a globally competitive market.

We examine the importance of exchange rate movements in two scenarios for NBSK market pulp producers:

  1. Canada relative to large European competitors. Large European competitors include Russia, Finland, Sweden, and Germany;
  2. Canada relative to the United States. The United States is a small producer, but an important market given its size and proximity to Canada.

Scenario 1

As seen in Graph1, average production costs in the three large Canadian provinces are significantly lower than in Finland, Sweden, and Germany. This is in large part due to high fibre cost in the European countries. As a result, the Canadian dollar would have to appreciate beyond historical highs against the Euro and Swedish Krona to hinder our cost competitiveness.

Graph 1: Canadian dollar appreciation against Euro and Swedish Krona scenarios

 

For example, the Canadian dollar would need to appreciate 15% against the Euro to reduce German production cost to Canadian levels. An even larger 22% appreciation against the Euro would be required to lower Finnish production costs to the Canadian levels. Similarly, the Canadian dollar would have to appreciate 20% against the Swedish Krona to bring Sweden’s cost down to Canadian levels.

The good news for Canadian producers is that these scenarios seem unlikely as the dollar has not been traded at those levels in recent years. A 22% appreciation against the Euro would actually take it past the historical high of August 2012 (CAD/Euro 0.81), and a 20% appreciation against the Swedish Krona would take it beyond the historical high of 7.5 (June 2010).

Canada also remains more competitive than European producers after accounting for transportation cost to the largest market, China. However, once transportation costs are considered, the Canadian dollar would only have to appreciate 6% against the Euro for German costs to China to equal that of Canada’s. This would imply a Canadian dollar-Euro exchange rate trading near its historical upper bound, which is unlikely in the short-term.

The only European country that can currently compete on cost with Canadian producers is Russia. Russia remains the global lowest cost producer under any plausible currency scenario given their significant labour cost advantage and low fibre and energy costs. Additionally, Russia has a proximity advantage to the large Chinese market and will remain the lowest cost supplier of NBSK.

Scenario 2

Closer to home, Canada is more competitive than the US in part due to lower energy, labour and fibre costs. This relationship holds in all scenarios where the exchange rate ranges from 70 cents to parity with the US dollar.

Graph 2: Changes in Canadian production cost with CAD-USD exchange rate movements

 

Over the short-term, the exchange rate is forecasted around 75-80 cents, which would give Canada about USD100/tonne cost advantage. This advantage remains after we factor in transportation cost to the US market. In fact, even with transportation costs Canada is more competitive than the US. Only once the exchange rate reaches parity would the US producers gain a slight advantage of $5 per tonne advantage. However, this latter scenario is very unlikely in the medium term.

Overall, the low Canadian dollar supports the industry at a time when it is challenged by continued shrinking printing and writing paper demand, additional softwood kraft pulp capacity coming online in the next few years, and strong competition from low-cost hardwood kraft pulp producers.


The forest sector Q3 financial results rebounded

February 8, 2016

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The financial performance of Canadian forest sector firms rebounded during the third quarter of 2015. The ten largest publicly traded Canadian forest companies1 reported a combined operating income of $476 million, up 109% compared to the second quarter of 2015, though this still represented a 9% drop relative to the third quarter of 2014. On an individual basis, all those companies also reported positive operating income. This is an improvement compared to the previous quarter, when only seven firms reported positive operating income.

Total sales of those ten companies reached $8 billion, a 6% increase compared to the previous quarter. It is the highest quarterly sales level since 2009.

Financial results of the largest Canadian publicly traded forest companies

This chart shows the quarterly financial results of ten largest Canada-based publicly traded forest products companies, from Q3 2014 to Q3 2015. Together, the ten largest publicly traded Canadian forest companies reported an operating income of $ 476 million.

The improved financial results of the third quarter of 2015 were in part the result of weaker Canadian currency, as the exchange rate declined by 6%. It more than offset the challenging market conditions in forest products markets:

  • On the lumber side, Q3 2015 Random Lengths framing lumber composite price was 2% lower than previous quarter, falling to levels not seen since early 2012. This was due to the combination of the weak Chinese demand (volume of softwood lumber exports to China dropped by a significant 27%) and of the oversupply in North America. On the other hand, total volume of Canadian softwood lumber exports to the US was up 4% compared to previous quarter.
  • Meanwhile, global pulp and paper markets were relatively weak. The average North America Northern Bleached Softwood Kraft (NBSK) pulp price was down about 2%, compared to the average in the previous quarter. In China, Canada’s largest pulp export market, the average NBSK pulp price was down 5%.

Going forward, North American lumber market should slightly improve in the fourth quarter of 2015 due to relatively stable North American demand. Offshore markets are also expected to improve; lumber market in Japan is expected to remain stable while market conditions in China are projected to show a slight improvement. Global pulp markets are expected to continue to be under downward pressure in the fourth quarter of 2015. However, the weakening of the Canadian dollar should continue to cushion the negative impacts of weak markets for Canadian forest companies.

1Including Domtar, Resolute, Cascades, West Fraser Timber, Canfor, Tembec, Norbord, Mercer, Catalyst, and Western Forest Products


Vulnerability of B.C. pulp and paper mills to MPB infestation

November 16, 2015

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Over the past decade, B.C. pulp and paper mills have greatly benefited from increased demand from Asian markets; however, the aftermath of the mountain pine beetle (MPB) infestation is increasingly constraining B.C.’s fibre supply. Since 2014, at least two sawmills in the B.C. interior have shuttered due to a shortage of pine, and more closures are anticipated in the coming years. Because pulp mills tend to purchase wood chips from nearby sawmills, the MPB impact is likely to spread to the pulp subsector if many more sawmills shut down.

There is an important interrelationship between pulp and paper mills and sawmills in Canada. Pulp and paper mills purchase wood chips residues from nearby sawmills, which reduces the need for higher cost whole log chipping. This also provides sawmills an important revenue stream, As nearby sawmills shutter, pulp and paper mills either need to purchase and transport wood chips from more distant sawmills or invest in sourcing and chipping logs themselves – both situations greatly increase the operating cost of the mill.

To gauge how vulnerable B.C. pulp mills are to a decrease in pine supply, let’s first have a look at how much pine is currently used in B.C.’s pulp and paper industry.

B.C. pulp production using pine in 2014

Table detailing the estimated amount of pulp that was produced from pine in B.C. in 2014 at the pulp production stage only. Finished products are not listed. Data is based on 2014 Q3 data from FisherSolve.
Pine usage Number
of mills
Pulp production from pine (tonnes per year, air dry metric ton)
Northern bleached softwood kraft pulp Bleached chemi-thermomechanical pulp / Thermo-mechanical pulp Unbleached northern softwood kraft Dissolving pulp
70% or more 3 290,907 560,632 n/a n/a
60 - 69% 2 593,320 n/a n/a n/a
40 - 59% 4 461,184 n/a 73,527 n/a
20 - 39% 2 127,238 68,094 n/a n/a
1 - 20% 1 39,156 59,769 n/a n/a
Total B.C. production 17 4,036,843 1,741,562 179,804 190,874

(Source: FisherSolve)

Pine represents about a third of B.C.’s SPF growing stock and about a fifth of the province’s total growing stock, so not surprisingly, nearly all of B.C.’s pulp and paper mills used fibre from pine in 2014. For many mills, pine accounts for less than half of their fibre source; these mills will likely be less impacted by a pine shortage because they have other sources of fibre.

However, of the five mills that used the greatest proportion of pine in 2014 (60% or greater), four are located in the heart of the MPB ravaged area. They produce pulp only and have manufacturing costs hovering near the national average. The added cost required to replace 60%+ of their fibre with whole logs rather than chips could be prohibitive.

While both northern bleached softwood kraft pulp (NBSK) and bleached chemi-thermomechanical pulp (BCTMP) have positive market outlooks, global competition is expected to keep heating up which means that demand for pulp feedstock – chips – will become an increasingly important determinant of competitiveness, The viability of mid-quartile B.C. pulp mills that currently rely heavily on pine woodchips could be in jeopardy as their fibre sources become more limited.


East and West – a shift of the historical distribution and dynamics of Canadian pulp production

July 23, 2015

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It has long been accepted as a fait accompli that Eastern Canada is dominated by pulp and paper product manufacturing while Western Canada is dominated by wood product manufacturing. However, with 67% of all Canadian wood pulp exports, British Columbia, Alberta and Saskatchewan are the powerhouse of Canadian market pulp.

So let’s have a closer look at the distribution of wood pulp production in Canada.

Looking beyond exports to actual production, Eastern provinces do indeed produce more total wood pulp than the Western provinces although this hegemony breaks down at the level of specific types of pulp (see graph). Noticeably, British Columbia does remain the lead producer of Northern Bleached Softwood Kraft (NBSK) with 57% of Canadian production but Quebec tops semi-chemical pulp production (46%). The most significant difference between east and west is that a large proportion of the pulp produced in eastern provinces is used in the manufacture of paper products.

Annual wood pulp production by region (2013)

 Tonnes per year pulp production at the lines level, as of the first quarter of 2014. Only pulp made from wood fibre is included.

British Columbia pulp producers share with British Columbia lumber producers the benefit from easier access to key Asian markets, which have grown to become Canada’s top pulp export market by value – with the majority of the exports coming from British Columbia. With a decline in demand from such traditionally important markets as the US and Western Europe, access to the growing Asian market has sustained solid exports from British Columbia and Alberta, while Eastern Canada pulp producers, remaining highly dependent on the US have seen shipments of both pulp and paper weaken.

 Graph 2. Total pulp exports (encompassing everything under HS Code 47) to China/Taiwan/Hong Kong, to the United States, and to the rest of the world from 1995-2014.  Graph 3. Total pulp exports (encompassing everything under HS Code 47) by region to China, Taiwan and Hong Kong from 1995-2014.

Looking ahead, Asian markets will be key to the ongoing strength of western Canada pulp production while eastern Canada pulp production is vulnerable to the ongoing decline of printing and writing paper in North America and could therefore continue to experience curtailments.

 


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