AuthorS: Pete Stewart, Matt Elhardt, and Dr. Charles Fryer, Forest2market Blog
FOREST2MARKET — It would be an understatement to say that 2020 has been a long, strange year. While my annual predictions for the forest industry this year didn’t entirely miss the mark, I couldn’t possibly have anticipated the ever-unfolding developments associated with the COVID-19 pandemic.
Just imagine, for a moment, your reaction if I posed the following predictions this time last year:
- Many of the world’s 8 billion residents will find themselves in various stages of home confinement for the better part of the year.
- Schools and universities across the globe will close en masse and students will take up remote learning at home.
- The Dow Jones Industrial Average (DJIA) will lose 40% of its value in less than a month before reaching a new all-time high just eight months later.
- In a single quarter, GDP in the G20 area will drop 9%; GDP in the US alone will drop by over 30%.
- Demand for toilet paper and lumber will skyrocket; lumber prices will hit $1,000/MBF.
You would likely laugh out loud (with good reason), and I would expect my phone to ring off the hook with calls from concerned colleagues.
In light of these events, it’s tough to tell if things are beginning to moderate or not, which makes it all the more difficult to provide a fresh set of predictions for 2021 with any degree of certainty. While there is promising news of a successful vaccine that will be widely available in the coming months, rigid lockdowns are still the norm in many countries – and will likely remain in place for the foreseeable future. Just how devastating these lockdowns will be to national and local economies is not yet known, but I suspect there will be a long road to recovery in many areas.
To help sharpen the focus of my predictions for 2021, I thought it most appropriate to enlist the expertise of some of the brilliant professionals that make up the new organization that now encompasses Forest2Market, Fisher International, and Tecnon OrbiChem:
- Matt Elhardt – Vice President, Global Sales at Fisher International. Matt is a seasoned and well-respected industry veteran with over 20 years of experience in sales, marketing, product development, and operations. Matt has included his predictions for the global pulp & paper industry below.
- Dr. Charles Fryer – Senior Advisor & Founder of Tecnon OrbiChem. Charles has been involved in scores of major chemical research projects, has over 40+ years of activity with Tecnon OrbiChem and has presented countless papers at international conferences. He is now principally involved in the company’s Individual Project Studies business. Charles has included his predictions for the global chemicals industry below.
Predictions for the Global Forest Industry in 2021 (Pete Stewart)
1. Southern log markets will remain soft.
Sawmill production capacity has increased in the South over the last year driven by surging demand for finished lumber. However, due to the oversupply of timber in southern forests, the demand hasn’t been enough to move sawtimber stumpage prices higher. Log prices have come down slightly in 2020, though the situation could have been much worse if demand for new housing had disappeared with the arrival of COVID-19. While that has not been the case (thus far), we look for sawtimber prices to remain flat in 2021, while pulpwood prices will display more volatility that will be concentrated in pockets of high demand.
2. US housing starts will taper.
Home inventory for sale is on par with, or at, all-time lows in months-of-current-sales terms (new homes: 3.3 months; resales: 2.5 months). In October alone, builders committed to 385,000 units (SAAR) for which they had not yet broken ground; this should contribute to starts in the short to medium term. The coming months could see a “moderation” in activity, however, at least in resales. October pending home sales decreased by 1.1%, the second decrease in as many months. Most analysts attribute the pullback to rising prices from scarce inventory and low-interest rates combined with tightening credit standards, which will also impact new homebuilding. While there is long-term demand for new homes on the horizon (National Association of Realtors data indicates millennials’ share of mortgages recently surpassed 50% for the first time), we expect total starts in 2021 to average 1.233 million units (-10.5% relative to 2020).
3. Forest industry in the Pacific Northwest will face challenges due to tightened log supply.
PNW sawlog prices continued to decline during most of 2020 while sawmills were running wide open trying to take advantage of record profits. However, that all changed when the devastating wildfires gripped the region in mid-summer. Log prices shot up in early fall, but they are beginning to drop off due to quality concerns and the growing supply of burned logs. The export market has really fallen off this year as well, and I don’t see that changing in the near term. The China export market has nearly vanished, and most regional export companies remain shuttered due to lack of demand. Domestic and export log prices should temper based on increasing uncertainty in the global market, although tight supplies will ultimately dictate just where those prices will settle. Taking a longer view, fire damage to private forests in the region has been so severe that some localized areas may face long-term gaps in future timber supply. Damage to mature timber – which forces early harvest – and the loss of many years of immature growing stock will have serious long-term implications for regional log supply.
4. The US dollar (USD) will struggle.
Strategist Michael Boutros recently wrote that “The US Dollar Index has plummeted more than 4% off the September highs with the sell-off breaking below major multi-year uptrend support last week – the technical implications of this break are massive and suggest a significant shift in the longer-term USD price outlook.” Analysts at Focus Economics predict that Eurozone “activity should bounce back robustly in 2021, thanks to sustained EU funding, supportive monetary and fiscal policies and the gradual reopening of the global economy.” They warn, however, that the EU’s Single Resolution Board has urged banks to prepare for soaring levels of non-performing loans. Moreover, “lingering global trade disputes, a possible no-deal Brexit and rising stocks of public debt in the region cloud the outlook.” So, too, do the lockdowns again proliferating across the Eurozone and the US. On balance, we expect the CAD to appreciate on-trend within a range of C$1.243 to C$1.315, while the EUR depreciates between €0.828 and €0.929.
5. Brazil’s forest sector will be in the catbird’s seat.
Brazil’s forest sector will bounce back and will be positioned nicely for a run in 2021. As global demand for pulp/paper and forest products rebounds when the world emerges from COVID-induced lockdowns, the Brazilian forest products industry will be well-positioned to take advantage of the situation. Brazil is a low-cost pulp producer and has a strong plywood presence in the US. We expect Brazilian industry production to pick up while the Brazilian Real remains weak, and Brazil should benefit from these tailwinds in 2H2021.
6. Capital will continue to flow to lumber manufacturing in the US South.
The lumber and panel markets went crazy in 2020. Demand for lumber and panels escalated as homeowners took on new home improvement projects and new house construction rebounded quickly after a tough late winter and early spring – all of which sent prices soaring. The record prices and mill profitability attracted new capital to lumber manufacturing assets. Due to the South’s low log costs and deeply embedded forest supply chain, we expect this trend to continue into 2021 with a handful of greenfield lumber announcements.
Predictions for the Global Pulp & Paper Industry in 2021 (Matt Elhardt)
1. Demand recovery and shift among segments.
Travel and live entertainment will slowly resume as a vaccine is implemented, however, away-from-home and foodservice segments will not fully recover in 2021. Some demand for cut-size papers, away-from-home tissue, and foodservice paper products will be permanently destroyed as many jobs will not return to traditional office buildings even post-vaccine.
2. Capital flow will accelerate into packaging and allied industries.
The rapid growth of e-commerce, combined with changing consumer packaging preferences for paper, will continue to be the catalyst for investment into the packaging segment globally. Expect to see more investments in new machines, mill conversions, and packaging plants. Will demand continue to grow to satisfy the increase in supply, particularly in Europe which could become oversupplied by 2022?
3. Deals will pick up again.
After a general pause in 1H2020, a vaccine for COVID-19 will provide the confidence needed for deal-making. We expect to see several mid-market deals ($500 million to $1 billion), and perhaps, a few large market deals ($1 billion or greater) take shape. China will continue to buy pulp and paper assets overseas.
4. Environmental regulation will take hold – helping pulp and paper to win in some segments.
EU legislation taxing plastics, and consumer focus on the circular economy, together with a Biden administration focus on climate change will benefit paper in certain segments – particularly where performance characteristics make paper a suitable substitute. Newer, bigger, and less consuming/ emitting plants will be winners at the expense of small, old, and low invested production facilities.
5. Pulp prices will move off the bottom after a year of lows.
Pulp prices will rise off the bottom seen throughout 2020 and continue upwards; prices should improve so long as the global economic recovery from COVID continues. However, significant new supply additions, together with the rapid reduction of P&W markets, loom on the horizon.
6. The “new” China era in pulp and paper begins as capacity investments in China slow significantly.
Implementation of full imported recycled fiber bans, together with rotation of low-wage manufacturing industries to Southeast Asia will slow growth in China’s paper industry, and players will look for other ways to expand, including increasing integration. Investors will look towards wealth-driven paper products like packaging and tissue for future investments. Capital in the paper industry that previously was spent in China will now be spent in Southeast Asia (and to a lesser extent India) particularly because of the Regional Comprehensive Economic Partnership (RCEP) trade deal. Chinese consumers will begin looking to higher-performing tissue products.
Predictions for the Global Chemicals Industry in 2021 (Dr. Charles Fryer)
This view of the chemical industry seeks to identify some of the global trends that will have an impact in 2021 and beyond.
1. Lingering Logistics Problems
World trade in chemicals, and indeed for many commodities, has met impediments from a number of sources in 2020. Chief among these has been the drop in consumer demand for industrial products of all types, one of the worst-hit industries being automobiles. Another factor has been lack of personnel in ports to download cargoes and to process the documentation. In the case of crude oil tankers and other vessels, ships have not been able to dock at all, in some cases for months, leaving the crew stranded on board. Inability to download cargoes, or to load export shipments, has left millions of containers stacked up where they were not supposed to be, causing a dearth of containers worldwide, and provoking an escalation in freight rates for the few containers left in service. It is likely that these problems will slowly be resolved during 2021. Personnel will return to work in the dockyards, especially as vaccinations against COVID-19 are distributed across countries. Gradually ships and containers will return to their appointed routes. Freight rates will return to normal rates. That should allow chemical trade to resume its normal pattern during the coming months.
2. Reducing Present Obstacles to Trade
Another factor impeding trade has been the stand-off between the USA and China. Attempts to bridge the differences through trade talks have been largely unsuccessful. In addition, the Trans-Pacific Partnership (TPP) was abandoned by the US administration in 2017. But things have not stood still. Last month saw the signing of the 15-member Regional Comprehensive Economic Partnership (RCEP) that included China. China is busy negotiating new trade deals and upgrading existing agreements with countries in Asia, while promoting the belt-and-road initiative. There are signs that the incoming Biden administration will take a more constructive approach to re-opening trade talks, even maybe reviving the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) as a counter to RCEP. CPTPP is the renegotiated and renamed version of the TPP. Encouraging signs in this direction are the change in approach to trade being made by President-elect Biden, with a more emollient tone towards improving trade relations with Asian countries, and the appointment of Katherine Tai as Trade Negotiator. All this should help trade in chemicals to recover, including exports of chemicals by the USA to China. But probably exports of chemicals by China to Asian countries will also expand during 2021 and later.
3. Sudden Shortages as the Recovery gets Under Way
There is a feature of the chemical industry as it emerges from the recession that we have seen again and again. As demand finally picks up after months in the doldrums, shortages suddenly appear. How come, when there should be lots of inventory to draw on? Well, actually, consumers run down their inventory as their production activities become scaled back since large stocks can deteriorate, as well as tying down cash reserves. But plants have been running at low rates, so there should be plenty of spare capacity, right? Not necessarily. Maintenance has probably been neglected since low running was not a problem. The workforce at plants may be understaffed, due to lockdowns and efforts by companies to slow down cash drainage. Some plants may have been shut down for many weeks or even months. So when demand expands, companies may be unable to react quickly. Shortages become apparent, to the point that prices rise (a good sign at first) but can then escalate as the shortfalls really bite – made worse by logistics difficulties. We shall probably be seeing more and more shortages emerge as we move into Q12021, but then being mitigated during Q2 as supply chains return to normal.
4. Growing Pressures to Recycle Plastics
Recycling of plastics will certainly gather pace in 2021, as public awareness of the negative effects of irresponsible plastics disposal continues to grow. For packaging made from a single polymer type, the remedy is already here, namely identification of the plastic-type by infrared scanning followed by retransformation. PET bottles can be identified, sorted, cleaned, and converted to low-quality fibre fairly easily. But much packaging is made from multi-layer film in order to meet requirements for impermeability – preventing liquids inside from leaching out and oxygen from diffusing in. The challenge for the packaging and recycling industry is to find ways of using single polymers for such demanding applications so that they can be recycled as easily as PET bottles today. There will be increasing pressure on polymer producers and packaging technologists to come up with single layer plastics that can make packages that meet supermarkets’ and shoppers’ needs for long shelf lives of perishable foods but can be easily recycled.
5. Recycling of Textiles
Recycling of plastics, or the lack of it, has been in the forefront of the news. An equal problem, only now starting to be realized, is the need to recycle textiles. The challenge is greater than for plastics since fibres recovered from used garments have deteriorated properties compared to virgin fibres. In some cases, monomers or other starting materials can be regenerated in a way that allows fresh polymer to be made and virgin fibres to be produced. Polyamide 6 is the fibre that best lends itself to this approach, since the monomer from which it is made, namely caprolactam, can be easily regenerated from the polymer. Aquafil in Italy has been pioneering this approach and is using post-consumer waste nylon 6, including fishing nets lost at sea and then recovered, as starting material. After depolymerization, purification, and regeneration of fresh polymer, polyamide filament is spun under the name ECONYL® and used in the highest quality nylon garments, which proudly announce their planet friendliness.
However, it is blends of fibres, intimately mixed together, that are in most of our clothing. The answer, in this case, is likely to be chemical recycling. Commercial systems are being developed that dissolve cotton cellulose and reprocesses it into man-made fibres like viscose or lyocell. Infinited Fiber in Finland has a process in which urea is added to the cotton waste, which results, on heating, in the cellulose reacting to form carbamate groups. The treated cotton can then be dissolved, and the pulp regenerated into filament using a process similar to viscose spinning. Common textile material is a blend of cotton and polyester. Ingenious ways are being developed to separate them by dissolving one of the two in novel solvents. In one such process, the polyester is dissolved and goes into solution, leaving the cotton behind as a solid with the two then being separated by centrifuging. PET polymer recovered from the solvent can be spun to produce polyester filament of the same quality as virgin fibre. The solid cotton can be dissolved in an ionic liquid and the resulting dope processed as in viscose plants. In alternative technologies it is the cotton that is dissolved, leaving the polyester intact. This can be done using caustic soda, but today’s processes are more sophisticated. Today these are processes in development, but the future will see a massive development as volumes increase to the point of commercial viability. The public is increasingly looking out for consumer goods that can properly claim to be protecting the planet, and increasingly they bring judgment on environmental friendliness to bear in their shopping selections.
6. Farming Gets Caught up in Chemical Matters
The farming industry is often thought to be the guardians of the natural approach to life, but here, too, steps are afoot to improve certain practices that are anything but planet-friendly. Concentration on cattle rearing may be what the meat-eating public wants, but it is inefficient in the use of land. What is more, cattle are large generators of methane, which is a greenhouse gas, more potent than carbon dioxide. Just as natural gas pipeline operators are being threatened with fines for methane escapes, maybe cattle farmers will face penalties in the future for methane emissions. Another problem for farmers is the loss of fertilizers into the wider environment, though leaching into rivers is being prevented by better compounding. But there is still the problem of the emission of ammonia from urea fertilizer, which can then exacerbate other air pollutants. Urea is cheap and has a high nitrogen content, so it is beloved by farmers, but moves are in place to ban its use. Farmers may have to use the more expensive ammonium nitrate, though this has problems of its own. Maybe ammonium sulfate, a poor but cheap fertilizer, will benefit. If urea is banned in some countries, maybe urea producers will be able to tap into a new outlet – recovery of cotton from used clothing as mentioned above.