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MANUFACTURING RESIDUAL SUPPLIES AND PULP MILL CAPACITIES

BY BROOKS MENDELL AND AMANDA LANG

Figure 1: Recyled Fiber Consumption and Virgin Fiber Prices

SOURCES: FORISK WOOD FIBER REVIEW, AMERICAN FOREST & PAPER ASSOCIATION

The management of risk continues to dominate conversations with forest industry professionals, even as firms continue to invest capital into increasing capacity at sawmills, pulp mills and pellet plants. While North America’s forest industry demonstrated discipline and caution when expanding mills in 2020, they also took the opportunity to strengthen balance sheets (reduce debt) with the profits from building products sales. Still, executives feel the need to put available capital to work.

In the past 12 months, North America added 1.4 billion board feet (BBFT) of sawmill capacity, with another 1.6 BBFT of coming in the second half of 2021. A significant amount of softwood sawmill capital expenditure is in the queue, including Canfor’s recently confirmed plans for a new 250 million BF mill in Louisiana for 2022. The size and location of this capacity continues to influence the current availability and expected pricing for residual wood fiber and roundwood pulpwood by region.

Residual chip supplies in 2020 surged as sawmills worked hard to benefit from record lumber prices. This pushed prices of chips and roundwood pulpwood lower across the U.S. Meanwhile, closures of printing and writing paper and newsprint mills lowered total production capacity, and several paper mill investments and restarts are targeting increased recycled fiber usage, thus lowering potential virgin fiber demand. A cooling lumber market can quickly reorient the supply-demand balance, but over the past six years, a shrink-

ing paper sector, using more recycled fiber, and a growing domestic lumber industry are pushing fiber prices lower (Figure 1).

Pulp and paper mills continue to evolve. Pulp mill capacity in North America declined 13% in the past 12 years. Over this time frame, East Canada lost the most capacity (32%), followed by the West and the North. The U.S. South has the largest share of pulping capacity at 55% and has been the steadiest region, shedding only 5% over this period (Figure 2).

Markets for pulpwood are strong for mills producing containerboard products, as healthy pulp mills in competitive southern markets buy available pulpwood and wood chips. Other markets, alternately, are losing mills—the Park Falls Development mill in Wisconsin shut down in March, and Paper Excellence announced the permanent closure of the idled Mackenzie mill in British Columbia due to, in part, a shortage of fiber. M&A activity continues in the sector, with the announcement by Paper Excellence to acquire Domtar in a transaction valued at $3 billion.

More generally across the industry, institutional investors behind many of the larger timberland deals are changing the way they talk about the sector. This is especially true with respect to ESG (environmental, social

Figure 2. Pulping Capacity in North America

SOURCE: FORISK

and governance) and carbon markets (two different things in practice) and risk management. As one investor said, “Fire and weather issues are here to stay, so we need to think about them more up front,” than we did in the past. Another investor expressed a concern shared by others regarding the unintended consequences on forest supplies from policy and legislation. The above is data from the Forisk Wood Fiber Review, a quarterly publication tracking North America’s major wood fiber markets, and the Forisk Market Bulletin, which tracks forest industry investments

Author: Brooks Mendell and Amanda Lang Forisk Consulting LLC 770-725-8477 bmendell@forisk.com; ahlang@forisk.com

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