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International Paper sees higher costs, supply chain snags through 2021

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International Paper sees higher costs, supply chain snags through 2021

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Tight transportation affecting inflows of raw materials, outflows of products

Pulp, paper feedstock caustic soda showing supply tightness, higher costs

International Paper expects to wrestle with choked supply chains through the rest of 2021 while restocking inventories and working to increase output, executives said July 29.

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The company saw higher raw material costs in the second quarter and compensated with raising product prices, but moving products to and from mills to customers is expected to continue to be challenging in the coming months, CFO Timothy Nicholls said during International Paper's 2Q 2021 earnings call.

"Although some of the pressure in input costs could be transitory, such as the impact of heavy rainfall on our wood cost in the Gulf region, the extremely tight transportation environment will continue to put pressure on all inbound materials," he said. "Every mode of transportation is tight, and we expect them to remain tight as we move to the second half of the year."

Caustic soda supply tight

Those input materials include caustic soda, a key feedstock for pulp and paper industries. Caustic soda supply in the US and Europe has been tight in the aftermath of a deep freeze that hit the US Gulf Coast in mid-February, followed by heavy rain and operational issues that interrupted output in both regions.

US export and domestic spot caustic soda prices entered 2021 at $225/dmt FOB USG and $245/dst FOB plant, respectively. Both were last assessed July 27 at $475/dmt FOB USG and $650/st FOB plant, respectively.

Global prices have seen similar jumps as demand that had been sluggish in 2019 and 2020 picked up in 2021 as COVID-19 vaccinations allowed economic activity to pick up while supply tightened. The FOB NWE caustic soda marker has more than doubled to $650/dmt July 27 from $245/dmt Jan. 5.

And in Asia, the FOB Northeast Asia caustic soda marker has climbed 50% to $360/dmt July 27 from $240/dmt Jan. 5, and the CFR Southeast Asia marker has risen 47% to $390/dmt from $265/dmt in that same span, S&P Global Platts data showed.

Freeze, maintenance siphoned inventories

CEO Mark Sutton said July 29 that in Q2 the company operated with "extremely low" inventories of containerboard, which is used to make corrugated boxes, on a combination of lingering aftermath from the deep freeze and plant downtime for maintenance.

The freeze forced widespread petrochemical plant shutdowns, so International Paper saw a squeeze in raw material availability as well as some shutdowns of its own mills. Ongoing issues with record high freight rates, container shortages and tight trucking capacity has continued to exacerbate that fallout.

"Input costs and freight were a significant headwind in just about every category," Sutton said. "I would call out the sharp rise in recovered fiber cost in North America and Europe. Although it certainly had a significant cost impact, it is another indication of the strong demand environment."

The company reported net income of $432 million, up 62% from $266 million in 2Q 2020 amid the height of pandemic shutdowns. Net sales were up 15.4% to $5.6 billion from $4.86 billion a year ago, the company said.