Number 11 on the Top 100 public companies of B.C., Mercer International Inc. (Nasdaq:MERC; TSX:MRI.U) is a Vancouver-based major pulp producer with three state-of-the-art kraft mills.
With combined annual capacity of about 1.5 million tonnes, Mercer operates Celgar near Castlegar and two mills in Germany, each employing about 500 workers.
All three produce northern bleached softwood kraft pulp (NBSK), the paper industry’s benchmark grade. Through efficient processes, the mills also earn considerable revenues from production of chemicals and energy from waste wood.
The impact of the Eurocrisis and China’s slowdown on prices slashed net income in the first quarter of 2012 to $1.6 million from $39.2 million in the same quarter of 2011.
This spring, Mercer failed in its bid to buy Quebec-based
How do you see the pulp industry currently?
It’s a cyclical commodity business and in the short term there are challenges with demand – particularly, weak demand in Europe. And China has been weak with the fiscal tightening they did last year. Liquidity was not as readily available in China so a lot of paper customers were having difficulty keeping their machines running. That’s pushed prices down. Between the fiscal tightening in China and the recessionary conditions in Europe, we feel like we’re hitting the bottom.
What’s the outlook for the medium term?
We’re optimistic that in the medium term conditions will be really good for the supply-demand fundamentals for NBSK pulp, which is a very significant product to the B.C. forest industry. The evidence is the global capacity of NBSK has shrunk a lot over the last couple of decades and the demand for NBSK has grown quite significantly, particularly in the developing economies.
Is that because of plants that were shut down?
The old, small pulp mills that were around forever finally are shutting down. In 2006, there was a couple million tonnes of closure globally. And then in the 2008–2009 time frame in the global crisis there were 5.5 million tonnes shut down. That was almost a third of the industry.
Specifically about Mercer, what’s the impact of the Eurocrisis?
The demand for paper in Europe is weaker than normal so that impacts on the general health of our business. Europe is a very large paper market. It’s a global commodity so the pricing in Europe, the U.S. and Asia kind of follows each other. We’re not uniquely disadvantaged by the fact that we’re in Europe but the Euro weakness is impacting on paper demand globally.
Pulp prices were under $US840 a tonne in early June. How does that affect you?
If it goes much lower, then some of the higher-cost producers are going to have to curtail their production. Very modern facilities like ours that have the high-energy component will still do OK. But these are bottom-trough prices. They can’t stay there for too long.
Mercer’s 2012 first-quarter revenues were down over the year earlier and earnings fell even more. What accounts for that?
The price of the commodity is the only thing to look at. Our electricity revenues are very stable. It doesn’t matter what the economy does; we have a baseload of close to 60 million euros of electricity revenue per year. The rest of the business is driven off pulp prices and foreign exchange. The last quarter of 2011 is where we saw the downturn. First quarter similarly. The second quarter will be similar and hopefully the back half will be stronger.
How do you see prices moving?
We are heading into the summer, which is seasonally a slow time for paper. So I might expect that we’ll sort of bumble along at these levels through the summer with some pickup in activity expected in the fall. The post-summer season is typically the highest-demand season for paper products generally.
How does Celgar’s performance compare with your German mills?
The disadvantages it had in previous years were that it had a smaller energy-generation capacity compared to its German cousins, and we had a period through 2008–2009 when it was challenged on the wood side, particularly because of the weakness in the U.S. housing market. It was difficult for it to purchase enough fibre.
We’ve spent about $100 million on Celgar since we bought it in 2005 and basically doubled its electricity-generating capability. Today it’s as competitive as our German mills. •
