An Operator's Dream
Chips Pile Up As Pulp Prices Decline
Summary: A glut of chips on the BC coast is forcing some tough choices on sawmills curtail production or stock unwanted inventory.
By Robert Forrest
Eighteen months ago, there was a fibre shortage in British Columbia. The price of pulp was rising, driven by world demand, and pulp mills were increasing production. Demand for wood chips outstripped supply.
Now, in mid-1996, pulp prices are down, dragged to the bottom by a decline in world demand for pulp. The price of pulp peaked in late 1995 at just over US $1,000 per tonne. Currently, it sells at US$500 to US$520 officially, and is trading below that figure. At that price, pulp mills are losing money.
Coastal pulp mills have been taking downtime since late last year and producers elsewhere are following suit. Although pulp mills have been reducing production levels through increased downtime, there has been a dramatic build-up of wood chip inventories. Some pulp mills are reported to have inventories in excess of three-month supply. Sawmills that supply residual chips to the pulp sector are reported to be able sell only 80 to 85 per cent of their production.
The combination of low pulp prices and high pulp inventories has forced pulp producers to curtail operations. There is an over-supply of chips on the coast, says Al Dent, general manager of log supply at MacMillan Bloedel Ltd. of Vancouver. If I had to guess, and I am guessing but Im not too far off, the south coastal pulp shutdowns since last Christmas amount to probably a million and a half cubic metres of fibre not used to make pulp. Dent indicates that the shutdowns have spread to coastal paper mills. Its a matter of mill shutdowns because of inventory problems, Dent says. Originally, it hit us in the late fall or winter in pulp and now youre seeing it in paper.
In the interior of the province, the impact of low pulp prices and high chip inventories lags behind the coast. The pulp mills have just started to take down-time and there are not many stockpiles of chips around right now, says Jerry Deere, the Prince George, BC-based vice-president of fibre supply for Canfor Corp. of Vancouver. We are indirectly affected by what happens on the coast. If the coast is short of chips they draw on the interior and then it is just like dominoes.
The reverse is also true. A chip oversupply on the coast can lead to a decline in demand for interior chips and a build-up in that region. But pulp and paper mill closures dont explain the entire chip surplus in the province; two other factors have contributed significantly.
One was the recovery of more fibre in the bush. The steps taken during the last shortage to get additional roundwood out of the bush were very significant in terms of chip supply, Deere says. It represented 10 to 20 per cent of the supply. Deere also points to improvements in sawmill recovery levels as a factor in the chip surplus. Chips never received the attention that lumber did and the last market cycle has focused attention on them, he says. Sawmills are doing a much better job. Improvements in chip production through modifications to machine centres and greater attention to maintenance and screening has allowed production of better quality chips at increased volumes.
A side benefit was a reduction in fines. Mills are still making improvements. It sounds strange, says Deere, but lumber recovery has improved and chip recovery has gone up. Logically, they dont go hand in hand, but nobodys paid a lot of attention to the manufacture of chips before. It was just something that was there when they finished.
In much of the industry, chip pricing is tied to the price of pulp. At the height of the pulp market last fall, pulp mills in the interior of BC were paying about $220 a bone dry unit (bdu) for chips.
By early May, that price has fallen to about $70 to $100/bdu, depending on location. On the coast, the price reached $110 a cubic metre for pulp wood and is reported currently at about $30 a cubic metre. You have to wonder if the price can ever go as high again or the premiums paid over the formula prices can ever be realized again , says analyst Hamish Kerr, vice-president of Goepel Shields & Partners of Vancouver.
We can now turn on the tap much more quickly when a shortage of chips develops. I dont think there is a shortage of pulp wood fibre in BC. I dont think you need to go to $220 per bdu to get enough wood. I think $130/140 a bdu is probably enough. The current chip surplus has at least one potential problem. If the government gives out long-term export permits and people negotiate long-term contracts, then we are just building in the certainty of a chip shortage when the pulp market does turn around and everyone wants to run, Deere says.
I dont have any problem with short-term permits but its hard for people to get a contract for the short term. Long-term commitments in the export market could create another short-age in the future.
There have been sawmill shutdowns, Dent says. There has been downtime because mills couldnt get rid of their chips and chose not to stockpile them. Other mills have chosen to continue to operate and to stockpile chips. We have mills in that position in our own company. A concern for many coastal sawmills is the lack of space for stockpiling chips.
Another solution to the problem of chip over-supply has been a move by some mills to a four- day work week in an attempt to lower production rates. As chip inventories continue to build at sawmills, shutdowns in this sector could increase. However, interior sawmills will build substantial stockpiles, particularly in a profitable lumber market. While pulp mills prefer to use chips less than three months old, several sources acknowledge the use of chips over a year old.
The problem with older chips is that the yield declines as they age. The current wood chip over-supply will not adversely affect pulp and paper mills. Their problems are with high inventory and unprofitable pulp prices. The surplus may well indicate that there is an ample supply of pulp fibre in BC and that, if it is well managed, shortages and surpluses can be avoided. I dont think theres any shortage of pulpwood fibre in BC, says Kerr. If there is any shortage of fibre it relates more to the sawmilling industry than it does the pulp industry.
The pulp industry just needed to find new sources of supply. The sawmills could no longer supply 100 per cent of the pulp mills needs in the interior. So they had to find some new sources of supply, and they found them.
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