U.S. South Central Fiber Prices: A Q3 Snapshot

Andrew Copley of Forisk Consulting LLC provides an overview of third quarter fiber prices in the U.S. South Central region.
By Andrew Copley | October 29, 2020

Managers battled multiple issues in Q3 2020, including fires, hurricanes, COVID and market volatility. While lumber production surged, generating more residual volumes into fiber markets, demand from the pulp and paper sector continued to struggle with the impacts of the coronavirus on end-market products. The pandemic deteriorated market conditions for printing and writing paper while accelerating newsprint’s decline. In the woods, the combustible mix of hot weather, strong winds and low humidity fueled explosive fires. Hurricane Laura added to the volatility, snapping 30 million tons of pine and 9 million tons of hardwood in Louisiana alone, comprising more wood than in-state mills consume in a typical year.

At the end of Q1 2020, uncertainty surrounding coronavirus impacts on lumber markets led to mill curtailments and a drawdown of inventory. Although housing slowed, it bounced back and became a bright spot for this year; housing starts for the three months ending in August were up 10% year-over-year. The uptick in housing, as well as repair and remodeling, increased lumber demand while supply chains were depleted, pushing lumber prices to record levels. According to the Producer Price Index (PPI), softwood lumber prices have risen 47% since April 2020, the highest four-month increase since data collection began in the 1940s (Figure 1). In August alone, prices rose 16% from the previous month, the highest monthly increase on record.

Responding to prices, lumber manufacturers increased production, generating more residual volumes into fiber markets as variance across end products in pulp and paper continued to separate winners from losers. Printing and writing papers remained unattractive, still “eclipsed by newsprint for an uglier market,” according to Forisk Wood Fiber Review Editor Tim Gammell. U.S. paper production in July and August was down over 13% year-over-year, while paperboard production declined 2.0%.

This imbalance put downward pressure on pulp fiber prices in the U.S. South Central  region. Delivered softwood roundwood and residual chips both declined 2% in Q3 2020, representing a seven-year low for roundwood and a 10-year low for residual chips (Figure 2). Hardwood also declined with roundwood falling 3% and residual chips down 1%.

Following outages and mill upgrade projects, the eastern portion of the south central region was moving toward more supply/demand balance for pulp fiber. IP’s Rome, Georgia, plant was operating again, and its mill in Selma, Alabama, was partially operating. Further west in the region, however, Hurricane Laura disrupted mill operations. In anticipation of the hurricane, mills in the projected path―WestRock Evadale and IP Orange amongst others―shut down. Though most mills returned to operations, the storm added volatility to the markets. Also, south central market dynamics included Domtar’s announced plans to close the Kingsport, Tennessee, mill and convert it to recycled linerboard in three years. The company also announced the closure of its communication papers machine in Ashdown, Arkansas, and will convert it to fluff pulp production. Resolute FP strives to reopen the sawmill in El Dorado, Arkansas, later this year.

Although other sectors struggled, capital investments in U.S. export-oriented wood pellet capacity continued to increase, with most growth in the south central region. Pinnacle is constructing a 360,000-metric-ton (MT) facility in Demopolis, Alabama. The project―a joint venture between Pinnacle, Westervelt, and Two Rivers Lumber―is scheduled to begin operations in Q2 2021. Enviva continues to advance on its announced “Pascagoula Cluster.” The company plans to build three 700,000 MT pellet plants in the Gulf Coast, one of which—Enviva Lucedale—is under construction and expected online by the end of 2021. Drax is expanding its Morehouse, Amite, and LaSalle facilities by a combined 350,000 MT, and Huntsville Pellets began operations at its 40,000-MT mill in Huntsville, Texas.

While the Forisk Wood Fiber Review tracks fiber prices over time and provides a snapshot from the first half of each quarter, it also captures imbalances across regions. U.S. south central pulp fiber prices declined in Q3 2020 as fiber supply outstripped demand. Sawmill manufacturing increased while pulp markets and production were spotty and relatively weaker. Capital continued to flow into the region’s industrial wood pellet sector, however, with over 1.45 million MT of announced new capacity and resulting demand. Caution abounds with respect to lumber markets. Therefore, short-term planning horizons persists for many managers and executives.

The above is an excerpt from the upcoming Forisk Wood Fiber Review, a quarterly publication tracking North America’s major wood fiber markets.

Author: Andrew Copley
Forisk Consulting LLC