BEDFORD, MA, Sept. 4, 2012 (RISI) - World demand for viscose pulp is growing at a rapid pace, led by the expansion of viscose staple fiber production in China. Our latest forecast shows global viscose staple fiber production jumping 12% in 2012, following average annual increases of the same magnitude over the previous three years, albeit following a sharp, double-digit downturn in 2008. Including an estimate of Tencel (Lyocell), world production of these cellulosic fibers is predicted to reach 4.2 million tonnes in the current year, up from 2.7 million tonnes in the recession year of 2008.
Sounds like a great business to get into, right? Unfortunately, too many companies have answered that question in the affirmative. Nearly 1 million tonnes per year of new viscose pulp capacity started just in the final quarter of 2011 and another 400,000 tonnes per year in the first quarter of this year. Capacity expansion has now slowed sharply but the damage has already been done. Even a market growing as fast as viscose pulp cannot absorb a 50% increase in supply over six months. Sky-high viscose pulp prices have crashed, with spot prices in China plummeting from $2,600/tonne in March/April of 2011 to around $900/tonne.
The logical response to such an abrupt change in fortunes is obvious: back off from adding even more capacity and let demand catch up with supply. And, in fact, this is happening. Some paper grade pulp lines that were rebuilt to be swing lines between viscose and paper grade are producing mostly paper grade pulp. Additionally, at least one paper grade pulp line in China that was going to be converted to a swing line has had the investment stopped and will remain purely a paper grade line, at least for now. An investment in another paper grade pulp line in Russia also appears to have been indefinitely postponed. Therefore, the amount of new capacity entering the market is set to remain at a relatively low level in the second half of this year.
It appears that the investment slowdown in the second half of this year will prove to be just a lull. Our latest survey shows another 1 million tonnes per year of new viscose pulp capacity starting up in 2013. Half of this new capacity will come from the largest producer, Sappi, as they move to protect their market position and build capacity in low-cost regions of the world. Nearly all of the remaining new capacity will be built by Chinese companies, but only a small portion in China itself. We expect to see another big increase in world viscose pulp demand next year but not nearly on the scale of the amount of capacity expansion that is apparently under construction.