The end of The Black Liquor Alternative Fuels Tax Credit

[thompsontimber]

I recall reading past forum topics regarding the black liquor tax credits for kraft pulp mills and the various opinions on the ethical issues involving the legal loophole.  However, I haven't noticed any chatter here recently regarding the impacts of the looming end of the credits.  While I realize this "opportunity" was only recently jumped on by the mills and that the industry was surviving prior to receiving these credits, there is very real fear among the supplier ranks as to what impact the end of these credits will have.  With many paper companies suffering and claiming major losses for years, and with a weakened economy and battered timber market, it has been a welcome sight to finally have pulp markets buying and prices trending upwards.  Starting about a year ago in this area, the pulp market began to crumble along with every other timber commodity.  By spring we were all but unable to sell anything, and the outlook was quite dismal, but the sudden rejuvenation of the pulp market slowly but surely allowed some of us to survive (though many did not).  Now we are seeing pretty strong pulp markets and the the typical fall inventory buildup is underway.  It seems they can't get enough pulpwood and are willing to pay high prices and weekend bonuses to get all they can buy.  That's all well and good for today, but it seems the mills are operating at full capicity in order to take full advantage of the highly profitable tax credits while they are available.  So, what is the outlook for the pulp industry following the expiration of the tax credits?  Are any of you consultants or timber buyers giving consideration to the affect on stumpage entering next year, and if so what are your expectations?  I have a couple of good tracts I need to act on, but I can't harvest until next year.  We are always guessing and trying to project price trends in order to be competitive yet profitable, but it seems we are in unprecedented times.  Would love to hear other opinions and feedback...

[WDH]

I can't say much about the black liquor tax credit, but some grades of pulp are selling at the high end of the price range.  It really makes a difference in what the mill produces.  Some produce paper, some produce packaging containerboard, and some produce pulp for uses like diapers, rayon, etc.

The pulp side has strong prices for their pulp.  That should last a while.  Not sure about paper and containerboard, but I do not believe that they are not faring as well.

[thompsontimber]

Perhaps it is simple fear fear-mongering amongst the mill side higher ups, but in any case there is a deep degree of uncertainty in the supplier ranks and the mills are doing little to alleviate those fears.  In fact, I'd say they are doing their best to promote it.  Domtar has addressed the issue by saying they have no idea what we can expect on the pine side but that they expect hardwood pulp markets to remain strong.  Basically, telling us to concentrate on hardwood and avoid that IP and Bowater pine market.  The pine markets in the area haven't really addressed it and seem as uncertain as the rest of us.  Being cynical of the plights of our local markets I have maintained a rather aggressive approach in buying of late, attempting to take advantage of a good period of time when we have a major shortage of suppliers, mills are needing wood, and many consultants are still not letting go of timber to meet that demand as they wait for "better times."  However, I am finding myself increasingly alone when aggressively going after pine stumpage in the area, as so many others seem convinced that another market collapse, at least on the pine side, is inevitable going into next year.  Reckon I'm feeling a little fear that I'm gonna take on too much pine at too high a price that I can't move, and that the strong markets are artificial due to such things as this tax credit issue.  I don't forsee consultants flooding the market with pine pulpwood in the next year, nor do I expect much expansion in the depleted supplier ranks.  What I'm less confident in is the effect that black liquor credits are having on the current market and what will take place within the market when the credits are no longer available.  I hate to pass on good tracts of timber, but if we get a repeat of early last year and the pre tax credit market, I can't take them on.

[WDH]

One thing that has been announced that will likely affect you is that Domtar in Plymouth NC has announced that they are converting the entire mill's production to fluff pulp which goes into diapers and such.  That will require almost 100% pine furnish as hardwood is a poor raw material for fluff pulp due to shorter fibers.

So, there may be a little ripple effect as they reduce hardwood consumption and increase pine consumption.  You may be too far away for a significant ripple.  Get on Google and see what you can find out about Domtar's announcement.

[Gary_C]

I don't really believe the Black Liquor Tax Credit has had any effect on pulp wood prices. It certainly has had a big effect on the profitability of the kraft mills but that has not migrated down to the pulp wood markets.

These pulp wood markets are now so regional that what is true in one area may not be true in another. Here in central Wisconsin the pine markets are strong and some mills are looking for more wood. However in northern Minnesota, the pine markets are poor and the prices are not good. I am sure the demise of the OSB markets has had a big effect in Minnesota and there were few OSB mills in Wisconsin.

Clearly there is an overabundance of supply available yet and the mills are supressing prices accordingly.

[thompsontimber]

Thanks for the info on Domtar WDH, I will look into that a bit more.  We are consistently one of the top 5 suppliers to the Domtar hardwood mill in western NC, and that market tends to stay fairly strong for us with competition for the supply from both Blue Ridge Paper and IP at Eastover.  IP has satellite yards that have been pulling a lot of supply from the Domtar supply area, and the outlook seems to stay pretty good on our hardwood markets, with the exception of grade sawlogs being so dismal for so long.  The big players for us in the pine pulp market are Bowater at Rock Hill, IP, and Blue Ridge.  Domtar resells to IP, as do some of the Blue Ridge supplier chip mills.  Its been my experience that sometimes those ripples can extend quite a ways, so it will be interesting to see how that ripple plays out with our markets.
Gary, perhaps you are right about the tax credit having no real effect on pulp wood prices.  Certainly it hasn't stimulated stumpage prices and has done little to boost delivered prices.  No doubt you are right that market conditions and prices are regional and not at all consistent overall.  However, at least in my area, there is no denying the sudden surge in pine pulp procurement and aggressive buying at the mill level, and no denial that tax credits have at least played a role.  They want to run at full capacity this fall, and of course there is the typical fall inventory buildup that is routine and typically provide us with some favorable market conditions for the short term.  There is also no way to ignore the fact that in the recent past the market was all but dead in this area.  Again, I'm not suggesting that these tax credits are supporting the market nor that I expect it to collapse when they expire, I'm simply curious as to what if any impact it will have and any insights others might have on that topic that I don't know or haven't seen. 

[Samuel]

I recall reading past forum topics regarding the black liquor tax credits for kraft pulp mills and the various opinions on the ethical issues involving the legal loophole.  However, I haven't noticed any chatter here recently regarding the impacts of the looming end of the credits.  While I realize this "opportunity" was only recently jumped on by the mills and that the industry was surviving prior to receiving these credits, there is very real fear among the supplier ranks as to what impact the end of these credits will have.  With many paper companies suffering and claiming major losses for years, and with a weakened economy and battered timber market, it has been a welcome sight to finally have pulp markets buying and prices trending upwards.  Starting about a year ago in this area, the pulp market began to crumble along with every other timber commodity.  By spring we were all but unable to sell anything, and the outlook was quite dismal, but the sudden rejuvenation of the pulp market slowly but surely allowed some of us to survive (though many did not).  Now we are seeing pretty strong pulp markets and the the typical fall inventory buildup is underway.  It seems they can't get enough pulpwood and are willing to pay high prices and weekend bonuses to get all they can buy.  That's all well and good for today, but it seems the mills are operating at full capicity in order to take full advantage of the highly profitable tax credits while they are available.  So, what is the outlook for the pulp industry following the expiration of the tax credits?  Are any of you consultants or timber buyers giving consideration to the affect on stumpage entering next year, and if so what are your expectations?  I have a couple of good tracts I need to act on, but I can't harvest until next year.  We are always guessing and trying to project price trends in order to be competitive yet profitable, but it seems we are in unprecedented times.  Would love to hear other opinions and feedback...

..

Its about time this loop hole was closed.  As far as supply goes, it is getting tighter which in turn is starting to drive up the pulp prices for both HW and SW products.

[Gary_C]

Its about time this loop hole was closed. 

It is supposed to run out by the end of the year as per the original bill. However the Canadian government has decided to start a similiar subsdity on their side of the border and who knows what kind of mischief that will start.

[SwampDonkey]

Yes, Gary they are. I just got my new Atlantic Forestry Review and it seems there is a similar "Green Program". Although, much much restrained due to the fact it only involves a finite $1B across the country at 38 hand picked facilities. We did get quite a chunk of change at a handful of NB plants (3 actually) averaging $33M each or so. Quite a gap however between $33M here and several $100M at US facilities. That basically covers the power bill with some change left over. I believe the allocation was $0.16/litre for 2009 production. Also facilities within this group or others can qualify for renewable energy and efficiency upgrades. As far as I know it's all out of the $1B pot. How big was the pot in the US? Who knows what the tally will be when it's over. I don't think you have cause for concern for our little bump on the radar.

[Tillaway]

Things heated up here for a while, one local kraft paper makers was trying to round up chip logs earlier this summer and offering a good support price.  They went all out over the summer logging their own sales as fast as they could.  I was told about a month ago this would stop come December and true to what I heard they are wrapping up as many jobs as they can with no intentions are starting any new ones.  A local publicly traded paper mill owner recently sold all their paper mills to IP.  IP is playing the bad guy and shutting them all down.  Rumor has it that its a quid pro quo and the local outfit has or is buying several of their mills in the SE with plans to do like wise.  An insider says that this prevents local company PR problems since the out of the area company plays the bad guy.

[Samuel]

Yes, Gary they are. I just got my new Atlantic Forestry Review and it seems there is a similar "Green Program". Although, much much restrained due to the fact it only involves a finite $1B across the country at 38 hand picked facilities. We did get quite a chunk of change at a handful of NB plants (3 actually) averaging $33M each or so. Quite a gap however between $33M here and several $100M at US facilities. That basically covers the power bill with some change left over. I believe the allocation was $0.16/litre for 2009 production. Also facilities within this group or others can qualify for renewable energy and efficiency upgrades. As far as I know it's all out of the $1B pot. How big was the pot in the US? Who knows what the tally will be when it's over. I don't think you have cause for concern for our little bump on the radar.

There were only a few mills that qualified for this money and you don't get it unless you are doing a "green" project like a recovery boiler upgrade or something.

[SwampDonkey]

Yes, that's the point i was trying to get across. But, it's still peanuts. Better than a kick in the pants though. 

[Samuel]

I agree...in the big scheme of things it is peanuts but I think our mill got something like 39 million or something so we will be able to redo our recovery boiler making it more efficient and add on a second power generating system to enable more power to be pumped onto the grid.