Canfor Pulp Income Fund is expecting a "modest improvement" in its markets later this year thanks to a drop in inventories that is driving up prices despite sluggish demand.
The Vancouver-based fund, part-owner of the world's third-largest pulp producing partnership, said pulp prices rose in the second quarter and are expected to climb further for the rest of the year.
"The increase in prices is primarily the result of supply curtailments and is generally not a result of an increase in demand," Paul Richards, outgoing president and chief executive officer of Canfor Pulp LP, told a conference call Monday.
Mr. Richards said prices rose $30 (U.S.) to $40 higher in July, compared to June, to about $700 per tonne in North America, $670 in Europe and $580 in Asia.
And he said prices are already coming in higher for some suppliers in August.
Mr. Richards said a drop in global supply, from 26 days of inventory at the end of June against about 40 days at the start of April, is behind the price hikes.
"Markets have tightened and as such we have forecast moderate price increases for the reminder of 2009," said Mr. Richards, who on late Friday announced he will retire next spring.
The fund indirectly holds a 49.8 per cent interest in the partnership, with a subsidiary of lumber producer Canfor Corp. holding the remaining interest. The partnership has three pulp mills in Prince George, B.C., and is the largest supplier of long-fibre northern bleached softwood kraft pulp, or NBSK, in North America and third-largest global producer.
NBSK pulp is used primarily as reinforcement fibre in paper grades such as newsprint and tissue.
Demand for the product has dropped as a result of declining newspaper circulation across North America, due to growing Internet use and an advertising slump that has squeezed the size of newspapers. The global recession has also driven prices down further, causing producers to curb production to reduce inventories.
While second-quarter demand was still lower compared to the same time last year, Mr. Richards said it was higher in the second quarter of this year than in the first.
"We expect market conditions to show modest improvement," Mr. Richards told analysts Monday.
"We anticipate our earnings and cash position will continue to improve in the second half of the year."
Late Friday, the fund said it earned $4.4-million (Canadian), or 12 cents per unit, for the quarter ended June 30, compared with a profit of $7-million, or 20 cents, a year ago.
The results included a $3.7-million recovery on future income taxes, compared with a $2-million charge a year ago.
Canfor Pulp LP, the fund's operating company, earned $1.5-million in the quarter compared with a profit of $18.2-million a year ago.
Sales totalled $205-million, down from $212.6-million.
The rising Canadian dollar was a drag on earnings in the quarter, Mr. Richards said, having risen 7 per cent compared to the first quarter.
Mr. Richards also said a new so-called black liquor tax subsidy for U.S. mills partly offset global price increases in the quarter because the incentive enabled higher-cost American pulp mills to continue operating.
Ottawa recently announced a similar $1-billion aid program for Canadian pulp producers, which has kept mills operating in the country. The funding will start to be distributed later this year.
He said Ottawa's program is not expected to create a "noticeable increase" in production in Canada.
The Canadian aid program matches closely a key element of what the U.S. has been doing by paying its pulp mills 16 cents a litre for the production of black liquor, a liquid byproduct of the chemical pulping process used as an alternative fuel.
Under the deal, mills that produce black liquor between Jan. 1 and Dec. 31 of this year qualify for the grant on condition they use the tax money on capital improvements within a three-year period.
Mr. Richards said Monday that the so-called Green Transformation Program will fund projects for the next few years that will help it reduce pollution and odour at its mills.