Summary
WRI has published an excellent overview of the global aspect of wood chips as a strategic benefit to those pulp mills in countries where forest resources are limited.
Even though tonnage shipped is down 28% in 2009 the benefits assure this business of growing substantially as economies get back to normal.
As market pulp prices increase and energy becomes more expensive, it will prove beneficial for all pulp mills to maximize production-in many cases from purchased chips, especially softwood.
Analysis
Chips are becoming increasingly more important to pulp mills in Japan, Korea, Taiwan and China. By running their mills at 100% capacity they generate more black liquor (fyi: each ton of kraft cooked pulp creates 256 gallons of black liquor which can then be burned in the mill's recovery boiler). Burning black liquor produces steam which turns turbines to produce electricity...thus reducing the amount which must be purchased from the local grid. Another benefit is that chips can readily be purchased from chip mills in the Pacific Northwest. These chips come from 200+ year old Douglas Fir, Pine, Hemlock and Spruce trees which have excellent strength characteristics. The market pulp made from these trees is known as NBSK which has excellent tensile, fold and burst strength properties - ideal for the recently installed big high speed (very demanding) paper machines that measure 400" wide and which can run 4000 fpm. Producing pulp from these softwood chips will produce a pulp which will allow these demanding machines to run at peak efficiency. Buying NBSK market pulp means paying top price compared to any of the various market pulp grades....today's list price is $700/admt and looks to keep going up. Cooking chips reduces the resulting pulp's price to half this amount.
The shipping industry is cooperating by building larger tonnage ships (upwards of 48,000 tons compared to today's 38,000 ton vessels) which will cross the pacific in less time. These huge new ships have speeds 25% higher than vessels built 10 years ago.
How many tons of chips did these four Pacific Rim countries estimate they would buy? They estimated 18.2 million mt according to RISI. WRI reported the global demand in 2008 was 32 million mt for all countries and all species of chips. These are huge numbers but are doable in light of the decline of dimension lumber, plywood and OSB because of the drop in housing starts and construction. Changing over a saw mill to a chip does not involve a huge Capex nor a long transition time. We believe the Pacific NW has a bright future in becoming the major softwood chip supplier to those Pacific Rim countries having extensive pulping capabilities. Better still, these Pacific NW suppliers never have to worry about a lower cost country in the southern hemisphere taking this business away!
Dave Hillman consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
