November 28th, 2018.- Reflecting on cellulose fundamentals and specifically on demand, it is necessary to insist that there are no new projects that could add capacity to the market slated to become operational before the second half of 2021. Only one project in Chile has been announced and, possibly, another in Uruguay for 2022, although the latter is yet to be confirmed.
It must be taken into account that new cellulose plants are very large and require investments in the 1.5 bn to 2 bn USD range, as well as requiring forestry operations of approximately 300,000 hectares with a minimum foresight of 6 years in Brazil and 10 years in Chile. Moreover, authorizations and environmental permitting processes are increasingly complicated and lengthy, even in Asia. All of these are exceedingly visible constraints, and consequently we believe that we are correct in identifying the new capacity that will enter the market up until 2022. There are no confirmed facilities after this date.
On the demand side, the market will continue to grow at 1.5 million tons per year, driven by urbanization of Asian society which will result in an increase of tissue demand. It must be noted that tissue consumption in China per capita is 6 kg per year, in contrast with 16 kg in Western Europe or 25 kg in United States. Growth potential for tissue paper is, consequently, very high in China, where the majority of cellulose employed in tissue is imported. Cellulose is one of the few commodities in which, not only is there is no overcapacity in China, but there is a clear shortage.
The trade war initiated by the US administration could result in slowing down China’s growth which, in addition to the country’s necessity of slowing down their economy to reduce debt and address the overly large real estate bubble, could result in decreasing investments in infrastructure and construction. But it will not affect demand for basic products, such as tissue paper. In the previous deceleration of the Chinese economy, demand did fall as well as prices of steel, cement, soya and crude oil, but there was no noticeable decrease of cellulose prices, as demand continued robust despite strong reduction in GDP.
There is no doubt that there exist other relevant phenomena that can temporarily affect market evolution, as has been the case of transportation strikes in South America –that after being resolved have resulted in sudden increase of cellulose availability in international markets-, crises such as the Turkish lira, and other examples, that could provoke temporary alterations of inventories and in the cellulose market.
But these are not circumstances that will affect prices. As a matter of fact, we see that FOEX has remained stable at 1,050 $/t over the past many weeks for eucalyptus cellulose in Europe, mainly due to solid market fundamentals being sturdier that temporary negative situations.
ENCE remains optimistic on cellulose prices. Analysts have been consistently wrong over the past year in affirming that the price tendency will change. And they are incorrect because they underestimate the strength of the industry’s fundamentals. Cellulose demand will clearly and easily outstrip supply, at least until the year 2022, and therefore we will continue to see a period of strong prices in the cellulose sector.
