Disruptions to the global supply of pulp, some related to the fallout from last month's earthquake in Chile, are proving to be a godsend for Canada's beleaguered forest products sector.
Chile, a major pulp exporter, was hit by a severe earthquake on Feb. 27 that left many forestry companies devastated and forced to halt production for an indefinite period.
Several facilities were located at the epicentre of the quake and some mills were destroyed. Others face disruptions resulting from extensive infrastructure damage as well as interruptions in the supply of electricity, water, wood fibre and chemicals.
Meanwhile, pulp producers in Finland, also major global players, have suspended work at several plants in the face of a crippling strike by dock workers that has halted most pulp exports from the country. The workers have been on strike since March 4 in a conflict over issues such as severance pay and job security.
Chile and Finland together account for more than 10 per cent of the globe's pulp market and the supply squeeze is happening just as China ramps up demand for pulp to feed continued expansion of its paper-making capacity.
The result is an unexpected rally in pulp prices, a welcome development for big Canadian pulp producers such as Domtar Corp., Canfor Corp. and Tembec Inc.
"This is that rare opportunity," said Kevin Mason, an analyst with Vancouver-based Equity Research Associates.
Canadian pulp makers stand to be the among the biggest beneficiaries of the runup in pulp prices because they have relatively high costs and weaker balance sheets, Mr. Mason said. A sustained rally in prices will allow them to generate significant cash flow to help repair their balance sheets and prepare for future dips and troughs, he said.
"Inventories were already reasonably snug," but the events in Chile and Finland are putting additional pressure on the global supply situation, he said.
Domtar senior vice-president and chief financial officer Daniel Buron cited the events in Chile and Finland, as well as heightened demand in China, as a "good news" scenario for his company in the short to medium term.
Mr. Mason said the rally comes just in time.
Global prices for pulp had been expected to stabilize and then begin to fall after recovering from a steep falloff in 2008 and recently reaching $900 (U.S.) a tonne.
Many observers expect the price to soon match or surpass the $1,000-a-tonne record high set in 1995.
"If Chile stays out a little longer, we could surpass those highs," Mr. Mason said.
Mr. Buron, however, was reluctant to go out on a limb and predict prices will reach $1,000.
"It's not impossible it goes to $1,000. But it's a tough call. We still have to assess the extent of the damages in Chile and establish how sustainable the demand in China is. We also don't know how long the strike in Finland could go on for."