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UK exit likely to have very limited near-term effects on the pulp market

Kurt Schaefer, RISI

The UK voted in June to exit the European Union, surprising most observers and raising many questions and concerns.

RISI’s macroeconomist has just published a Viewpoint on the likely economic effects of this vote on Europe and on the world economy more generally. The RISI view on this is that what the vote does most of all is to create uncertainty, which has been a problem for financial markets over the past two days. The risks, or the “what ifs,” are quite considerable. At this point, however, the near-term anticipated effects on economic activity outside of the UK are expected to be quite small. The Euro has weakened slightly and the yen has strengthened, but these moves are, to this point, not very large.

Regarding the effect on the world pulp market, the long-term implications of the UK exit need to be thought out more fully. Longer-term questions include: Will Brexit actually happen? Will Scotland vote for independence from the UK in order to stay in the EU? What will be the terms of exit that the UK negotiates with the EU? Will other EU members (perhaps the Netherlands, Spain, or Italy) follow the UK out the door? We will leave consideration of these questions for another time.

In the near term, pulp demand is not likely to be impacted meaningfully, given our macroeconomic outlook. Financial markets seem to be stabilizing today, which takes some risk off the table. The UK accounts for 2% of world market pulp demand. On the supply side, there is no market pulp capacity at all in the UK. Looked at on a fundamental supply and demand basis, the potential direct effects of the UK economy and the value of the pound on the world pulp market is quite small.

A larger, but still limited, effect will be seen on the supply side of the world market via exchange rate movements and their effects on the industry’s cost curves. RISI will be slightly revising its dollar forecast versus the Euro and related currencies to show a slightly stronger dollar compared to our most recent forecast. A slightly stronger US dollar will put some additional downside pressure on pulp prices by lowering dollar-denominated production costs in Europe. But once more the effect is expected to be only marginal.
Again, there are considerable uncertainties about how the political and economic situation in Europe might proceed this year and beyond, but at present we are making only very marginal changes in our pulp price forecasts.

Kurt Schaefer, vice president, fiber, works out of RISI’s Bedford, MA, office. He is author of the World Pulp Monthly and lead author of the new edition of The China Pulp Market in Transition: A Comprehensive Analysis and Outlook. Reach him at kschaefer@risi.com.

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