Earthquake in Chile cause Paper Prices to Rise

Who would have guessed that the 8.8 magnitude earthquake that stuck Chile on February 27th would have caused paper prices to go up as much as 4% less than a month later?  Yet on March 10th Xpedx announced price increases from Georgia Pacific, International Paper, Wausau, Mohawk, Strathmore, FiberMark, and Appleton.

According to a March 11, 2010  Bloomberg news story; Chile’s earthquake, along with a port strike in Finland, caused the price of pulp to rise to it’s biggest seven-day increase in almost six years.  Chile and Finland together account for 12 percent of the world’s pulp sales and production in those two countries have come to a halt.

In Finland, Europe’s two largest papermakers have closed mills and cut production as a strike by port workers that started March 4th has cut off 90 percent of the Nordic nation’s exports. The Helsinki-based companies have said it’s only a matter of days before they halt production fully as they run out of space to store inventory.

“The pulp market has never seen a disruption this sudden and this large,” said Kurt Schaefer, who analyzes the fiber industry at Bedford, Massachusetts-based paper researcher RISI. “The market is so tight at this point that every disruption is magnified 10-fold.”

Pulp is the main raw-material for paper, and a shortage in supply will have knock-on effects in that market too, said Timo Jaakkola, a Helsinki-based analyst with Oehman.  Higher pulp prices will translate to higher paper prices when the paper market balance is tight enough,” Jaakkola said. “The pulp shortage will likely send pulp prices quite a bit higher for the next few months.”

Last month’s 8.8 magnitude earthquake in Chile, the country’s strongest in 50 years, killed hundreds, destroyed thousands of homes and hammered pulp and timber producers in the country’s central southern region, close to the epicenter.

Only one of 35 pulp plants and sawmills owned by Celulosa Arauco is currently operating, spokesman Andres Moran said. Part of the Mutrun sawmill was swept out to sea and pools of water remain in log stores, he said. A third tidal wave also flooded an area where it stores timber in southern Chile.

“We are still in a first stage of clearing away the debris,” Moran said. “Following that we will begin an evaluation process of determining in what condition the machinery is.” The company said it probably won’t produce in March.   CMPC, owned by Chile’s billionaire Matte family, said March 2nd it halted production at its plants because of a lack of power and water supply. The company owns three pulp plants in Chile and Argentina, where it makes paper products.

“It’s a perfect storm,” Cesar Perez, a managing director at brokerage Celfin Capital SA in Santiago, said in a telephone interview. “There’s not much availability of fiber in other parts of the northern hemisphere, so that’s going to push prices even higher in the following months,” he said.

One Chinese paper producer introduced Asia’s biggest price increase ever this week, raising prices by $150 to $1,050 a ton, said Sandy Lu, a Shanghai-based paper economist at RISI. It’s unclear whether the price hike will stick, she said.  Lu didn’t identify the Chinese producer.

Chile’s outages “are tightening the situation and supporting a rising price trend,” Ilkka Haemaelae, chief executive officer of Metsae-Botnia Oy, a Finnish pulp producer, said in a telephone interview. “Raw materials have no other drivers than the balance of supply and demand.”

Chad Thomas in Helsinki and Matt Craze in Santiago wrote most of the content in this story for Bloomberg News.  Thanks to Nan Faessler of Xpedx for bringing this to my attention.

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