-----Original Message-----
From: 	Singh, Vikram  
Sent:	Monday, July 16, 2001 12:29 PM
To:	Causholli, Monika
Cc:	Carter, Karen E.
Subject:	Pulp #s

Here's note that just came from Merrill on last Wednesday's Pulp numbers...I'll leave the choice between what is and what isn't important up to you...

Thanks!
V

Grim Pulp Outlook The situation in the pulp market is grim. Here are our comments on last week's statistics. A pick up in prices before next year is getting slimmer by the day. 
Last Wednesday, the Norscan pulp producer inventories came out, showing a decline of 84,000, compared to the 10 year average of 65,000 tons. The difference is immaterial, but it is impressive that the stocks fell at all because of the very low operating rates in the European fine pape rmarket, the key market for chamical pulp sold in the open market. With Nordic operating rates for June believed to have been lower than 70%, there was a much lower than normal pulp consumption. We may make one important observation, however. Maybe the smaller fine paper producers, all non-integrated, has continued to operate at 100%, and this may explain why Norscan stocks fell. Then the next question is: how long are the Nordic producers, and Sappi, going to be willing to give away customers to the price cutters? M-real, and yesterday Stora Enso, has announced HIGHER fine paper prices. This is just surreal. Keeping prices relative stable is a phenomenal achievement in it self, and if they manage, there will be a dramatic multiple expansion over the next year. 
Europulp, the pulp kept in European harbours, fell by 67,000 tons in June, to 1.36 million tons. This is the second highest figure during the 2 1/2 years this statisitic has been collected, and brings us back to the April level. A year ago, the level was 765,000 tons, and the stocks kept within a band of 600,000 and 900,000 from the start of 1999 (when our information starts) to November last year. So, in one way, this is good news, but we believe the stocks are still much too high. The little history we have show a small decline in June, but 2001 was better than the average. The Europulp stocks are owned by pulp producers (of which some is included in Norscan), traders (very little) and buyer (almost all of this would be included in Utipulp). We have to wait a few days for the Utipulp figures, but there is a small increase, historically, of 4,000 tons in June. The fact that the Norscan stocks fell 17,000 more than the Europulp figures suggest that the Utipulp stocks would have increased this year, too. 
Another reason for the declining Norscan figure may be found in Aracruz's 2Q figure. Thomas Souza, our South American colleauge, reports that Aracruz dramatically increased its sale to Asia. The reason was that the Chinese started buying pulp again in March/April. If they bought more eucalyptus pulp from Brazil, they would most likely also have bought a lot more softwood pulp from Canada and the US. Thus, Norscan shipment rates would most likely have been high, despite of the low fine paper production in Europe. The important point the Norscan figure is that the stocks still are way above 1.5 million tons level, where the inventories typically have to fall to in order to create pricing power for the producers. The stocks have fallen 225,000 since the seasonal peak in February, compared to a drop of 338,000 tons during the last 10 years. So, this was a bad spring. July and August typically see a seasonal increase in stocks, 230,000 on average over the last 10 years. There is no reason to believe that it will not increase this summer, too. As a matter of fact, there is a seasonal increase of 377,000 (implying a 29,000 per year increase in the stocks) tons in the Norscan stocks from June to February.
 The price is now very close to the cash cost for the high cost producers, and it is just a question of time before we get announcements of indefinite pulp mill closures. Then it's time to buy. However, we are starting to think that the pulp market may not recover before the start of next year. Not since 1978 have there been a recovery in the pulp price during the second half of the year, and at that time it started in 3Q ( In think all would agree that the possibility for a 3Q recovery is small), not Q4. Thus, every recovery in the pulp price during the last 23 years has either started in 1Q, or more often in 2Q.