Pulp Prices are Down; What About Paper?

Pulp prices are slipping. Will paper prices follow?

No.

One reason is that most of the North American market is integrated and mills are not heavily dependent on purchased pulp. But there’s another, more fundamental reason.

Pulp prices are still high—more than 30% above year ago levels—but that’s not the point, either.

There is a more fundamental reason, and I can’t say this often enough—prices are determined by supply and demand. Pulp prices are determined by the supply and demand for pulp, while paper prices are determined by the supply and demand for paper.

As we have discussed, paper prices have been strong because, although demand has been weak, consolidation and capacity reductions have kept supply and demand in balance. Pulp prices have been strong because global demand, especially demand from China, has been strong and supply has not kept up. Pulp is truly a global commodity. Pulp also competes with recovered fiber and recovered fiber prices have also been strong, with some grades up more than 50% from year ago levels.

A few years ago, I did a detailed study of how well pulp and paper prices move together. At first glance, they move together quite well—very much like from space, the surface of the Earth looks smooth. But when you look closer, a different reality appears. In fact, there were several times in the past 20 years when pulp and paper prices moved in opposite directions for 12 months or more.

If anything, paper prices lead pulp prices, not the other way around. If you think about it, this makes sense. Higher paper demand will mean higher pulp demand, at least to a degree. And even though demand is only part of the price equation, if all else is equal, higher pulp demand will mean higher pulp prices.