Industry Reports

Deutsche Bank Reports Summaries

080507 Deutsche Bank Report - Pope & Talbot Closures

Deutsche Bank - Equity Research

After a proposed sale of its 3 pulp mills to an arm of the Sinar Mas Group collapsed, Pope & Talbot is reportedly being forced to close at least 2 of the mills. Pope has been forced to idle a 400K mtons/yr mill in Nanaimo, British Columbia and a 220K mtons/yr mill in MacKenzie, BC. Both mills are struggling with a strong C$ as well as fiber shortages in British Columbia. Harmac (Nanaimo) is reputed to have among the highest cash costs in the sector. Trade reports are now suggesting that the third mill, a 200K mtons/yr mill in Halsey, Oregon, may also be idled. The prospective loss of 820K mtons/yr of pulp capacity could rattle global pulp markets and act like a cattle prod on market prices.

Although pulp prices have continued to trend upwards, there have been signs that the market is flagging - - - especially on softwood grades. The 3 mills account for approximately 3% of global production of softwood market pulp (approximately 24MM mtons/yr).

The key beneficiaries of prospective closures will be other market pulp producers, including major Brazilian, Chilean, Indonesian and Russian producers. On our North American coverage list, Weyerhaeuser is the largest market pulp producer with over 2MM mtons/yr of capacity. Other coverage names with meaningful market pulp capacity include Domtar. The "second derivative" impact is apt to be on white paper. As global pulp prices push higher, they raise production costs for nonintegrated paper mills around the world. Since nonintegrated mills represent a substantial part of the market in Asia and Europe, this should tend to force global white paper prices upward. This should benefit integrated North American producers like Domtar, International Paper and Boise (BZ, not rated, $3.97).