Summary
The horrific earthquake in Chile has resulted in temporary shutdown of about 4.5 million metric tonnes/year of market pulp capacity. Information is scarce due to the loss of infrastructure and power. Arauco and CMPC have issued "force majeure" letters to their customers saying that they will not fulfill their commitments. Detailed structural analysis of the mill facilities will be needed to determine needed repairs and when production can be resumed.
Analysis
The Chilean earthquake and resultant reduction in pulp supply comes at a time when pulp markets are already very tight with Chinese customers on allocation. The immediate impact is likely to be higher pulp prices leading to higher paper prices. NBSK pulp prices are already at US$890/tonne. In addition to the temporary closures in Chile, supply problems have resulted from flooding in the USA South and Indonesia. Canadian pup mills have announced maintenance shuts for April. Pulp producers are in a position to go for one or two price increases. It is likely that NBSK pulp prices could escalate to US$940/tonne by mid-2010. This could be very beneficial in the short term for market pulp producers including Sappi (SPP-NYSE ADR), Mercer International (MERC-NASDAQ), Tembec and SFK Pulp Fund. Tembec has the highest leverage to pulp. The increased pulp prices could result in increase paper prices ranging from US$25 to US$40 per ton depending on the grade. The pulp price increases will have differential impact on paper prices - affecting fully integrated producers less. The impact will depend on the percentage of market pulp used papermaking.
