Will the new eucalyptus mills burst the bubble?

Implications: For the second year in a row pulp prices have increased across the board with NBSK now at US$810/admt and going up again in June/July. Bleached Eucalyptus is the highest priced hardwood at US$715. China will is expected to purchase 7.5 million mt this year and their appetite continues to grow as new paper, board and tissue machines are built. New Eucalyptus capacity is scheduled to come on stream in the 4Q with new mills in Brazil and Uruguay bringing on almost 2.5 mmt/year.  Many believe this will erode prices by more than $100/mt for BEK but producers are confident the market will absorb this new tonnage. Fluff Pulp continues to grow at 5%/year with new diaper plants starting up weekly in the Middle East and Latin America.  The US enjoys a strong supply position...producing 4 million mt out of a global market of 5.4 million.  Prices now are at $820/admt and going up again in June.

Analysis:

Softwood has been in short supply for two years because of increased demand in China, India, Indonesia and most other highly developed countries.  There is no new capacity coming on stream and, to make matters worse, sawmills have shut down greatly reducing the supply of chips.  Pope & Talbot and Canfor, to name just two have had to take downtime in the lQ that reduced supplies by 14,000mt.  To compound the problem, normal springtime maintenance shutdowns of 2 weeks at many mills has also reduced supplies.  Prices are expected to continue to climb through 2008.  Several southern mills are changing over from papergrade softwood to Fluff Pulp....Weyerhaeuser at Port Wentworth, GA, GP at Leaf River, MS and IP at Riegelwood, NC.

World demand has grown by 3.5% in the past year and is expected to continue to grow at this rate into 2008.  Pulp producers are faced with reduced wood supplies as Russia increases its taxes on exported logs from 8% to next summer's 15% and possibly as high as 80% in 2009 according to the Gov't.  Scandinavian birch is also projected to be in short supply as mills switch to softwood and also to use more internally.

BEK capacity is expected to grow by over 7 million mt/year as the two new mills in Uruguay come on stream and as the new mills in Brazil begin producing - VCP, Suzano, Ara Cruz and (projected) Stora Enso.
Indonesian Acacia supplies also continue to grow with RGM's Karinci mill now producing at the rate of 2.4 mmt/year.

Tissue and towelling production continues to expand around the world. APP has announced 24 tissue machines will be built on Hainan Island which will, when complete, consume all the pulp from their 3265mt/day mill.  At present much of this pulp going to their papermills on the mainland.