Positive inventory data across the board Global pulp producers’ inventories and European pulp consumers’ inventories were down considerably in June on a sequential basis, according to PPPC and Utipulp. Also, according to Europulp, pulp inventories were down significantly at European ports in June. The de-stocking process along the whole chain has been happening faster than we anticipated. This, coupled with faster than forecasted pulp price increases could result in upside risks to our current pulp price estimates of US$530/t in 2009 and US$570/t in 2010. Global producers’ inventories down to 29 days PPPC (Pulp and Paper Products Council) reported monthly pulp markets statistics for June 2009. Global producers’ inventories were down to 29 days versus 34 days in May and 32 days a year ago. On hardwood, inventories decreased to 33 days of supply versus 38 days in May and 35 days a year ago. Such low inventory levels leave pulp producers in a more comfortable situation to go through the seasonally weaker Northern Hemisphere summer months. European consumers are also de-stocked According to Utipulp (European Market Wood Pulp Users), pulp consumers’ inventories were 742ktons in June, down 5% MoM, 28% YoY and 36% below historical average of 1,168ktons. However, in our view, given paper producers’ higher working capital needs, inventories at the consumer level should stay low for the remainder of the year. China remains the question mark; US/Europe: signs of life Also according to PPPC, pulp shipments to China in June were slightly down MoM (-1%), but still up 67% YTD. Shipments to China were 722ktons in June, versus 727ktons in May and ~800ktons monthly average since December 2008. We have been calling for lower demand from China after the most recent pulp buying spree since late 2008 and believe the downward trend in pulp shipments to China could continue over 2H09. On a positive note, pulp shipments to US and Europe were up 11% and 9% MoM, respectively, showing pulp demand might be picking up in these markets. VCP leveraged to higher prices; prefer Suzano on valuation This week, VCP announced intentions to increase pulp prices for all regions, effective in August, which could take European prices to US$550-560/t. VCP is the most leveraged to increasing pulp prices – for each US$50/t price increase, we estimate 2010e EBITDA would increase by 20%. As for Suzano, we estimate each US$50/t price increase represents a 10% increase to 2010e EBITDA. We prefer Suzano (BUY, R$21/share PO) mostly as it is trading at 6.8x EV/EBITDA2010E, compared to VCP (Neutral, US$13/ADR PO) at 9.6x.
