Mercer to Benefit From Rise in Pulp Prices - Especially Relative to Euro

Apr.20.10 | About: Mercer International (MERC)

After pulp prices declined so much in the depths of the current recession that most producers were losing money (some hemmoraging), substantial industry capacity shuttered. As demand returned pulp industry inventory levels declined rapidly to levels returning pricing power back to the surviving more efficient pulp producers.

It was from these very low inventory levels that a confluence of events, creating the potential for a 'super spike' in pulp prices, has emerged. First, 8% of the entire worldwide pulp production capacity, located in Chile, was shut down as a result of the earthquake and Tsunami (one plant's equipment was washed out to sea). Then, another 4% of world capacity temporarily was shut down from a dock workers strike in Finland. While the docks are now opened and some of Chilean capacity is now coming back on stream, substantial production volume was lost, while paper demand has been rising as economies rebound.

This increased pulp demand on low inventory and the time consuming process to restart formerly unprofitable production has the potential to raise prices on common pulp grades such as NBSK (Northern Bleached Softwood Kraft) to over $1,000/mt, a height not seen since 1995.

Mercer International (NASDAQ:MERC) is the second largest producer of Northern Bleached Soft Kraft (NBSK) market pulp in the world with some of the world's youngest and most efficient mills (see company slide shows here).

Mercer is the most levered publicly traded company to movements in pulp prices. Page 48 of Mercer’s recently filed 10-K (see here) reveals operating leverage sensitivities yields a change in Operating EBITDA of approximately €10.4MM for every $USD 10/Tonne NBSK price move and a revenue delta of €8.0MM for every €0.01 change in exchange rate vs the USD.

Disclosure: Author is long MERC 8.5% convertible sub debt due Jan 2012 and is short MERC common stock. Author may buy or sell either of these securities at any time.