Wood-pulp prices are soaring thanks to speculators in China, with help from paper takeout containers, a weaker dollar, and people using restrooms at home instead of the office.
Bleached softwood kraft pulp futures have risen 48% on the Shanghai Futures Exchange since Dec. 1, to about $1,037 a ton. Meanwhile, producers around the world are boosting prices for the wood mash at unusually sharp rates. Domtar Corp. UFS 2.90%, based in South Carolina, said it would raise prices this month between $100 and $130 a ton, depending on grade.
“Spot prices are really jumping,” said Brian McClay, a pulp-market consultant and a founder of pricing service Trade Tree Online. “I’ve been in the pulp business since 1978 and have been asking friends: No one has seen this before, no one has seen the scale of this.”
Prices are hottest for softwood pulp, the type that comes from coniferous trees and is used to make products such as premium toilet tissue, paper towels, junk mail, and coffee cups. It is made from sawmill scraps as well as from trees too skinny, knotty, or crooked to be cut into lumber.
China buys more than one-third of the world’s pulp and churns out paper products and packaging. Shanghai pulp futures, which began trading in 2018, serve as a price guide for an array of varieties and grades, similar to the way that West Texas Intermediate and Brent crude futures are reference points for oil prices.
Demand for virgin pulp, from trees as opposed to recycled cardboard and paper, has been on the rise in China, which has limited scrap imports that it once bought by the boatful to feed its factories. Pulp producers in Europe and North America have been diverting shipments from local spot markets to China to capture the surging prices, analysts say.
Though pulp was a poor performer for most of 2020, the Covid-19 pandemic shook up the market for paper products and set the stage for a rebound in demand.
The big change occurred in bathrooms and kitchens. More time at home during the pandemic meant greater demand for premium toilet tissue, napkins, and paper towels made with virgin pulp—and a lot less for the scratchy stuff made from recycled material and found in offices, restaurants, and other public places.
“ “It is unclear whether this is a short-term bubble or the beginning of a cyclical rebound.” ”— Mark Wilde, BMO Capital Markets
A big question lingering over the market is how much of the demand is from Chinese companies needing pulp to make products and how much is being bought by speculators who have bid up futures and need bales in case they get stuck having to deliver pulp to trade counterparties. In the latter scenario, futures prices are effectively pulling up physical, or spot, prices and there is a risk of a sharp reversal of prices, Mr. McClay said.
It typically takes only about three days of pulp futures trading to match China’s total annual import volume of about nine million metric tons, he said. Frenzied trading among speculators and individual investors makes it difficult to gauge actual demand, especially because end-users in China are known to get in on the action as well, reselling pulp purchases.
“It is unclear whether this is a short-term bubble or the beginning of a cyclical rebound,” said Mark Wilde, who studies forest products for BMO Capital Markets.
Reasons to be bullish include the push toward biodegradable packaging, an important component of many companies’ appeal to ESG funds, which aim to invest with environmental, social, and governance issues in mind.
As more people shop online, there’s a lot more cardboard in the recycling stream these days.
Graphic Packaging Holding Co. GPK 1.72%, an Atlanta-based maker of paper cups and folding cartons, estimates that $5 billion of plastic and plastic-foam cups, food trays, salad bowls, takeout containers, stand-up pouches, and six-pack rings could be replaced with paper products each year.
Pulp also has gotten a boost from a weaker U.S. dollar, which makes it cheaper for buyers in China and elsewhere. Like many other commodities, the pulp is priced in U.S. dollars. Over the past year the WSJ Dollar Index, which measures the dollar against a group of other currencies, has declined 5.6%.
If high prices are sustained, analysts say slimmer margins are likely among makers of tissues and hygiene products, such as Kimberly Clark Corp. KMB 0.86% and Procter & Gamble Co., along with potentially higher prices for consumers. Winners would be pulp makers, including Domtar, International Paper Co. IP -1.03% and Canadian firms Canfor Pulp Products Inc. CFX 7.07%, and West Fraser Timber Co.