Commodities to Watch: Dissolving Pulp

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— www.asiapapermarkets.com — February 2011 — BRIEFING PAPER

The global dissolving pulp market is booming with an increasing number of pulp & paper manufacturers stepping into the textile markets to provide dissolving pulp, a pulp product used to make rayon • Surging cotton prices are pushing a forgotten retro staple back onto the fashion runway: Rayon. • The result of the rayon renaissance has been huge gains for dissolving pulp manufacturers, a key ingredient in rayon. • Global production of dissolving pulp, which is also used in filters, screen films and diapers, has grown by roughly 25% to 5.2 million tons since 2008. Introduction
ith the demand and cost of cotton on a continual upswing, more and more pulp and paper manufacturers have been stepping into the textile markets to provide dissolving pulp, a pulp product used to make rayon. The main ingredient in rayon is a wood based substance called specialty cellulose, also known as dissolving pulp. A study released by RISI last year, shows that the global market demand for dissolving pulp is increasing the world over. World dissolving pulp demand turns upward after 30 years

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000mt/year to rayon grade dissolving pulp for shipment back to India. said. the rayon market has grown by 7 per cent globally. The RISI study reports “dissolving pulp is one of the few growth markets in the pulp and paper industry today. Neucel at Port Alice. . Bouregaard has mills in Norway and Austria. there are fewer than a dozen market pulp mills in the world producing this grade. BC. The decision -. Four years ago the Indian company Aditya Birla purchased the former Parsons & Whittemore mill at Nakawic. Since dissolving pulp is not an easy pulp to produce. the North American mills have been attracting the interest of Asian buyers. Today the two (very) low cost producers are both eucalyptus-based -. GA and Fernandina. is “a rapidly growing middle class in China and India” who illustrates a high demand for rayon products and clothing. given the dynamics.RGM’s BahiaPulp in Brazil (350. There is also some dissolving pulp being made from acacia in Indonesia (Inda Kiat). Quebec in August last year with the intent of converting it into a highly specialized dissolving pulp producer in order to meet these market demands. Que. and over 10 per cent in China alone. CEO and Chairman of Canada-based Fortress Paper. South Africa (830.purchased a near-bankrupt mill in Thurso. Inevitably. and Rayonier’s two mills at Jesup.000mt/year) and SAPPI-Saiccor’s mill near Durban. China. Not surprisingly. FL.” Chadwick Wasilenkoff. the report continues.apparently -.a newcomer to the pulp industry -. In North America there are five older (softwood based) mills: Tembec at Temiscaming. Fortress Paper -. Buckeye at Foley. who face huge demands in their own domestic markets. Indonesia and India are leading the surge in demand for the acetate dissolving pulp from which rayon fabric is produced.000mt/year).” Key to the product’s success. In the last five years. In Europe.was a wise one.(Source: RISI) “There isn’t enough dissolving pulp to feed the market demand for rayon. NB and upgraded its 190. FL.

” Cotton on the ICE Futures U. together with Zhejiang Fulida Ltd. 2011): “U. Jianer Qi. 21. Verheyden of the Financial Post (article dated January 14th. from a consortium of investors led by Wellspring Capital Management and GSC Group. cotton clothing … But that will change in 2011 after cotton prices rallied to a level last seen in the 1861-1865 American Civil War. which had established a minority equity position along with a strategic supply agreement with Neucel in 2010. Cotton prices surged 91% in 2010.S. Americans have for years been used to cheap. summed up the deal: “Viscose rayon fibre competition in China has become intense. With the purchase of Neucel. and thus help it to further achieve its unique enterprise value.S. Neucel Specialty Cellulose Ltd. Writes J. given tight supplies.” ______________________________________****____________________________________ Market Dynamics High Cotton Prices & the Rayon renaissance: It’s good news for the rayon industry! The spike in global cotton prices has boosted demand for rayon. sustainable and rapid development for Neucel. And the trend is expected to continue. consumers wracked by a shaky economy and steep unemployment will likely think twice about buying clothes from retailers trying to pass on cotton prices that recently scaled a 150-year peak. was snapped up by Chinese Fulida Group Holdings Ltd. Fulida gains a stable supply of dissolving pulp along with cost advantages and quality assurance which extends the value chain of our business.5912 per lb on Dec. Chairman of Fulida Group Holdings. . 2010 and analysts expect it to jump to US$2 this spring. I strongly believe that this purchase will ensure a stable. is now assuming full ownership of the company.And this month. Fulida Group Holdings Ltd has purchased Neucel Specialty Cellulose Ltd. analysts said. Fulida. exchange hit a record US$1.

For the first time in recent memory.com) Enter rayon or “artificial silk. And the market is not going down anytime soon.. (Source: CCFGroup.The following graph illustrates the difference between cotton linter pulp and dissolving pulp prices [in yuan / million tons vs. screen films and diapers. said Peter Vinall. informed the Financial Post. While the cost of the most common rayon fabric has risen of late in the U. US$ / million tons] during the period 2009 – November 2010. __________________________________________________________________ Rayon demand.35 per yard compared to $4 per yard for cotton shirting.S.” that increases its appeal in hotter climates. Rayon commands a huge market in Asia. where an emerging middle class favors the fabric. it is still relatively cheap at $2. said Rayonier CEO Lee Thomas. he said. CEO of Fortress’s specialty division. and buyers are struggling to get orders filled. which is also used in filters. who develops clothes for New York’s Meryl Diamond Ltd. and its feel is better than polyester. Global production of dissolving pulp. demand for dissolving pulp has outstripped supply.” Ms. Brokerage analysts say they see more gains ahead for these companies. That reflects a corresponding move in the price of dissolving pulp (as of the first week of . according to Tembec.2 million tons since 2008. market. It’s not just the U. grew by roughly 25% to 5. and Rayonier Inc. Tembec Inc.S. a windfall for dissolving pulp manufacturers: The result of the rayon renaissance has been huge gains for North American manufacturers like Fortress Paper. The synthetic “has better drying capability than pure cotton. Sera Coblentz.” Rayon is making headlines as a lower cost alternative and replacement fiber for cotton.

Rayon has been a welcome windfall for Tembec. In response to this demand.” He stressed on the massive demand: “The former Canadian NBHK mill.000 tons of dissolving pulp annually. Chinese buyers have already lined up for 156. The company restructured $1. list prices were raised to $1350/admt. current pricing levels look to be very sustainable. yes. at least in the near future. while affirming the role of cotton prices in driving up demand for rayon (& consequently dissolving pulp). while in the Northern Hemisphere paper grade pulp mills are converting to dissolving pulp. Mr.550 per ton 12 months ago.” . Additionally. Analyst Dave Hillman of Gerson Lehrman Group (GLG) confirms the above. attracting producers in the Southern Hemisphere to start new lines. has restarted and is upgrading to dissolving pulp. reaching an estimated 4. 2010. Spot prices in the 2Q were at $1600/admt vs. _____________________________________________ Are the demand & current pricing levels sustainable? Is the turnaround in demand and price of world dissolving pulp set to continue.January 2011) to approximately $2. Now rumor has it that producers will announce a whopping $200/admt price hike on January 1st to bring the list up to $1550. in terms of both supply and pricing. Chinese viscose fiber producers have helped dissolving pulp consumption in China triple over the past 10 years.350 per ton from $1. Sappi also expects the dissolving pulp market to remain tight. In the 3Q.2 billion in bonds in 2008. 2011 conference call. CEO James Lopez said during a November conference call. ruled out any possibility of a drop in cotton prices.000 tons of the pulp annually and anticipates a $200 per ton price increase starting January 2011.000 tons of the production. on account of the limited (and time consuming) number of capacity additions coming onstream.” Sappi CEO Ralph Boëttger. where the popularity of rayon (and similar materials) has been boosted by limited supplies and surging prices of cotton. dissolving pulp usage has turned upward sharply over the last decade..given the surging Asian demand and the spike in cotton prices – yes! To quote from the report: “After three decades of decline.and is already 75% sold. Fortress is spending over $120 million to refurbish a pulp mill that it says will produce 200. The big turnaround has been led by a jump in the viscose fiber market. asks the RISI study Outlook for Global Dissolving Pulp Market. Boëttger. In a report dated October 19. So. Mr. Hillman wrote: “China. The answer -. Dissolving pulp prices have appreciated with the demand. Mr. Tembec manufactures about 300. Thurso. during a February 09. ruled out the possibility of any oversupply situation coming up in the dissolving pulp market due to a (potential) drop in global cotton prices in turn due to a (potential) good cotton crop this year. and cut debt by 200 million last year. a list of about $1150-1250/admt.5 million tonnes in 2010. Vinall said. Indonesia and India are leading the surge in demand for the acetate dissolving pulp from which rayon fabric is produced..

which are used in a multitude of end-uses and which are also produced in a number of different ways. End-uses and end-products of dissolving pulp . few mill managers would opt for any pulp grade requiring that much additional wood supply. high purity (very low heavy metals) and very uniform degree of polymerization (dP). low ash content. “with list prices expected to reach $1600/admt on January lst. Not so with dissolving pulp i. That is a grade of pulp. as Dave points.e. the group of high-alpha pulps). it is still more viable for existing (dissolving pulp) mills to consider major expansion programs then for the other pulp/paper mills to switch over to dissolving pulp. Consequently there was little incentive to even consider spending the money to upgrade to dissolving pulps. rise. with a wider end-use spectrum. The most costly drawback to producing dissolving pulp is the low yield.” Even under the current market circumstances. As such there are fewer than a dozen market pulp mills in the world producing this grade. peak. dissolving pulps require 5-6 mt.Another major factor in keeping the market tight is.” to quote Dave. viscose pulp (or. _____________________________________****____________________________________ Dissolving Pulp . as illustrated below. Given a choice. In 2008/09 the lower quality dissolving pulps (i. producing dissolving pulp is both extremely expensive and time consuming. Whereas commodity papergrade pulps require 4 mt of chips to produce one mt of pulp. decline and a quiet burial. birth. or rather a family of pulps with high alpha-content. “Dissolving pulp is not an easy pulp to produce because it demands both a high Alpha cellulose content (6 carbon polymers vs.The Great Come-Back T he life-cycle of most pulp and paper products includes the same phases that many other products have. hemicelluloses’ 5 carbon chains which dissolve easily in caustic and are then sewered).e. borderline Alpha cellulose content) were selling for barely $200/admt more than papergrade pulps.

2MT and 2010 at 5.This is a product family which was in serious difficulties in 19970’s. Total demand has thus made a full come-back. or slightly higher. Including cotton linters pulp would show 1980 consumption at 5.9MT in 1980 to 3. dissolving and other high alpha pulps have made a good recovery and the old consumption records from early 1970’s will soon be beaten. Future growth is driven by China and other Asia (excluding Japan).2MT. The outlook for viscose and other high-alpha pulps is good. _____________________________________________ The Turn-around Since the end of 1990’s. 2009 at similar 5. even if surrounded with some ever-present risks. World consumption of dissolving pulp decreased from 4.15. shown below from 1980 onwards.5MT in 2010. if the consumption of cotton linters pulp is added to the dissolving and other high alpha wood pulp consumption numbers.1MT in 2001 but has been rising since and is likely to approach 4.5MT. Dissolving & other high-alpha wood pulp market development . 1980’s and 1990’s but which has made a remarkable come-back. by region.

g. numbers rounded). The biggest change has been seen in the interplay between cotton and viscose. the difficulties in cotton cultivation have also impacted the cotton linters based dissolving pulp production and wood-based pulp production has benefited. Thirdly. Draughts and other weather-related problems have also limited the cotton supply. The importance of the substitution impact is easily seen from the attached table revealing the use of the different fibres in textile production (average of years 2007-2009. Dissolving and other high-alpha pulps have taken some market share from oil-based synthetic fibres but in many applications these still hold on to their share. especially in production with the highest speed looms. the cultivation area for cotton has been reduced.g. the spinning and other techniques needed in the textile production have been developed to allow more and more blends. where corn and soy-bean have taken over some of the acreage earlier held by cotton. Fibre consumption in textile industry Fibre Type Synthetic Cotton Other Viscose Total . wool and silk. Viscose volume includes cotton linters and the use of staple fibre in non-woven products. Secondly. However. As about 25% of the dissolving pulp is produced from cotton linters.For this turnaround. there are many reasons. and most importantly. Other natural fibres include e. Most of the substitution has taken place in these blends through a gradual introduction of higher shares of viscose fibres in those applications where the special features of dissolving pulp based fibres can be utilized. e. technical development of viscose fibres has allowed a more direct replacement in some end products. substitution has been the most important driver over the past few years. in the US South. Firstly.

First statistics from 2010 indicate that a strong growth continues. mainly in the specialty pulp sector. Once this switch is nearly completed. The price for standard grade dissolving pulp has climbed up to/near alltime record levels. turned.5 6. new products and applications using these fibres could eat into the dissolving pulp demand Some recently positive end-use trends are likely to turn less positive or even negative. So far the switch to filter cigarettes in developing countries has outpaced the reductions of smoking in the Western World. the recent substitution trends Far more money is invested into the development of synthetic fibres than into wood pulp based fibres. dissolving pulp demand goes up by nearly 11% and if viscose replaces 1% of cotton. Chinese import statistics showed the Q1 2010 dissolving pulp intake up a whopping 79% over January-March 2010 on this nowadays clearly biggest single dissolving pulp market. depending on success of the annual cotton crops.0 The low share of viscose fibre of the total fibre volume used in textiles means that if viscose replaces 1% of synthetic fibre. growing demand in non-woven products and positive growth in some other end-uses. plan with great enthusiasm to jump into the band-wagon.5 31.0 75 100. a word of warning is in order for those who now. hoping to catch a wonderful ride.Million tonnes % (oil) 43 57. as earlier said. the consumption of dissolving and other high-alpha pulps did not go down in the 2009 recession as demand leaped in China. among others: • • Lower oil prices and better cotton crops could reverse.0 4 5. at least temporarily. further reductions in smoking start reducing the consumption growth in this end-use considerably • . The combination of substitution of those positive drivers in the textile end-use. One such example is the high alpha pulp for acetate tow. While we believe that the demand growth will continue in the foreseeable future at rates varying somewhere between 3-7%/annum. of oil price levels and many other issues. dissolving pulp demand back up in the turn of the century. What about the risks? These include. _____________________________________________ Come-Back Continues? Opposite to most other grades of pulp.5 natural 4.5 23. even if a large number of textile mills were closed during the 1st half of the year. after a long decline through 1970’s-1990’s. nearly 6% more of dissolving pulp is needed. seeing the high prices.

Tembec (www.com does not accept any responsibility or liability for any damage or loss to any person / institution / organization for the result of any action taken on the basis of this information. Fortress Specialty Cellulose (http://specialtycellulose.com/) 9. (Source: Pöyry Management Consulting Oy / 2010) _____________________________________****____________________________________ Sources: 1.com) 4. Gerson Lehrman Group (http://www.com & http://fortresspaperblog.com/) _____________________________________________________________________________________ Disclaimer: This report contains general information only.com) 8. Business in Vancouver (http://bivinteractive. AsiaPaperMarkets. compiled from secondary sources. There are some success stories but there are also complete or partial failures. Seeking Alpha (http://seekingalpha. The Globe & Mail (www. While every care has been taken to ensure the accuracy of information furnished in this report. Fortress Paper Ltd.com) 6. RISI 3.texindex.com) 5. (www. dissolving pulp assets are old and continue to have environmental problems on mill sites The quality control is very strict and the acceptance of the quality from a new mill takes up to two years in some end-uses The investments into a totally new dissolving pulp line are manifold to building an equal amount of synthetic fibre capacity Conversion of existing paper pulp lines into dissolving pulp is complicated. AsiaPaperMarkets. in terms of carbon footprint.com) 7.com) 10.g.tembec. is clearly better than for synthetic fibres or cotton but. The Financial Post 11 The Wall Street Journal 12.fortresspaper.com makes no warranties about the integrity of the content included in this report. Pöyry Management Consulting Oy 2. China Textile & Apparel Online (http://www. _______________________________________****___________________________________ .theglobeandmail. e.glgroup. All parts of the chain from the forest resource to marketing of the final products need to be taken into account in the planning process.• • • • The environmental message of wood-pulp based fibre.

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