The Company reported an operating loss of $6.3 million for the second quarter of 2020, down $12.4 million from operating income of $6.1 million reported for the first quarter of 2020. Reported results for the second quarter of 2020 included an $8.2 million finished pulp and raw material inventory write-down at period end. After adjusting for this, the Company’s operating income was $1.9 million for the second quarter of 2020, up $6.5 million from a similarly adjusted operating result in the previous quarter.
The Company’s operating results for the second quarter of 2020 reflected direct and indirect impacts of the coronavirus outbreak (“COVID-19”) on global markets, and more specifically the pulp and paper business. Global pulp prices improved during April, resulting largely from increased demand for at-home tissue coupled with supply disruptions, principally in Latin America and Australasia; however, prices came increasingly under pressure in the back half of the current quarter reflecting a sharp decline in printing and writing demand combined with more moderated tissue purchasing activity.
For the second quarter as a whole, Canadian-dollar pulp unit sales realizations showed a modest increase compared to the previous quarter, boosted by slightly higher Northern Bleached Softwood Kraft (“NBSK”) prices to North America, improved prices for Bleached Chemi-Thermo Mechanical Pulp (“BCTMP”) and a weaker Canadian dollar.
The effect of COVID-19 on lumber sawmill operating rates in the BC Interior, particularly in April and May, materially impacted residual fibre supply to the Company’s Prince George (“PG”) based operations, resulting in a three-week curtailment at the Company’s Northwood NBSK pulp mill (“Northwood”) in the current quarter, as well as increased fibre costs reflecting a higher proportion of more expensive whole log chips.
Global softwood pulp producer inventories at the end of June 2020 were significantly above the balanced range at 42 days of supply, an increase of six days supply compared to March 2020 (market conditions are generally considered balanced when inventories are in the 27-34 days of supply range).
Average US-dollar NBSK pulp list prices to China were US$572 per tonne, broadly in line with the prior quarter; however, the Company’s NBSK pulp unit sales realizations benefited from a 2 cent, or 3%, weaker Canadian dollar, combined with a US$31 per tonne, or 3%, increase in the average US-dollar price to North America (before discounts, which were largely unchanged quarter-over-quarter), and to a lesser extent, the timing of shipments (versus orders).
Energy revenues were down quarter-over-quarter, largely reflecting seasonally lower energy prices combined with decreased energy generation in the current quarter associated with lower production.
Pulp production was 260,000 tonnes for the second quarter of 2020, down 38,000 tonnes, or 13%, from the previous quarter, principally driven by decreased operating days in the current quarter due to the three-week COVID-19 related curtailment at Northwood, which reduced pulp production by 35,000 tonnes. Improved productivity at the Company’s Taylor BCTMP mill, which set new record-high production volumes in the current quarter, largely offset operational disruptions at the Company’s PG pulp mill in June.
Pulp shipments were down 42,000 tonnes, or 14%, from the previous quarter, mainly due to the aforementioned decrease in pulp production quarter-over-quarter, combined with a 13,000-tonne vessel slippage at the end of June into early July 2020.
Pulp unit manufacturing costs were slightly higher than the prior quarter as the effects of increased fibre costs and the impact of reduced production in the current quarter were largely offset by seasonally lower energy costs and decreased planned maintenance spending. Fibre costs were moderately higher than the previous period primarily due to a larger proportion of higher-cost whole log chips as a result of sawmill curtailments in the current quarter.
Operating income in the Company’s paper segment was $7.4 million, up $0.6 million from the previous quarter, principally reflecting increases in paper production and shipments of 3,000 tonnes and 2,000 tonnes, respectively. This was combined with slightly higher paper unit sales realizations, which more than offset increased paper unit manufacturing costs in the current quarter. The latter was due to moderately higher slush pulp costs driven by increased Canadian dollar NBSK pulp unit sales realizations.
At June 30, 2020, the Company had net cash of $6.0 million and available liquidity of $153.1 million. Available liquidity improved by $49.3 million during the current quarter, largely reflecting a decrease of accounts receivable balances combined with reduced capital spending and a number of additional initiatives underway as part of the Company’s response to COVID-19. The Company remains in full compliance with all covenants relating to operating loan facilities and term debt and expects to remain so for the foreseeable future.
Recognizing the effects on fibre supply from COVID-19 related sawmill curtailments in the second quarter, on July 6, 2020, the Company commenced a four-week curtailment of the Company’s PG and Intercontinental Pulp mills, which will reduce Canfor Pulp’s production output in the third quarter by approximately 38,000 tonnes of NBSK pulp and 12,000 tonnes of paper.
In addition to COVID-19 related downtime, the Company has a maintenance outage currently scheduled at its Northwood mill in September 2020, which will continue into October to complete a capital upgrade to extend the useful life of Northwood’s number five recovery boiler (“RB5”). This Northwood outage will result in 48,000 tonnes of reduced NBSK pulp production, 30,000 tonnes of which is currently forecast for the third quarter of 2020. The Company’s Taylor BCTMP mill is currently scheduled to complete its maintenance outage in the third quarter of 2020 with a projected 5,000 tonnes of reduced BCTMP production.
Looking forward, the Company anticipates global softwood pulp demand will remain weak through the third quarter of 2020, against a backdrop of tepid demand for most pulp products, elevated inventory levels and the ongoing weakness in demand for printing and writing paper.
Bleached kraft paper markets are anticipated to be relatively stable in North America through the third quarter of 2020, with a steady projected demand for bleached kraft paper products that meet food grade specifications.
Offshore bleached kraft paper markets are anticipated to soften slightly over the same period.
Commenting on the Company’s second quarter results, CPPI’s Chief Executive Officer, Don Kayne said, “Despite the various challenges presented by COVID-19, including material fibre supply disruptions as a result of sawmill curtailments, we managed to preserve our strong cash position through the second quarter. As we continue to navigate the global impacts of the COVID-19 pandemic on our business, our top priority remains to ensure the health and safety of our employees, while taking the necessary steps to protect the business and optimize liquidity.
As a result of the current summer production curtailments at our PG and Intercontinental mills, we should be well placed to run at full capacity through the winter. We continue to actively monitor the ongoing situation in these unprecedented times and remain prepared to take further action as required.”
Canfor Pulp Products Inc. is a leading global supplier of pulp and paper products with operations in the central interior of British Columbia (Canada) employing approximately 1,300 people throughout the organization. Canfor Pulp owns and operates three mills in Prince George, BC with a total capacity of 1.1 million tonnes of Premium Reinforcing Northern Bleached Softwood Kraft Pulp and 140,000 tonnes of kraft paper, as well as one mill in Taylor, BC with an annual production capacity of 230,000 tonnes of Bleached Chemi-Thermo Mechanical Pulp. For further information, visit: www.canfor.com.