Mercer Inc. is a corporation organized under the laws of the State of Washington.
Its common stock is quoted and listed for trading on the NASDAQ Global Select
Market (MERC) and the Toronto Stock Exchange (MERC.U).
We are one of the world’s largest producers of “market” NBSK
pulp, which is pulp that is sold on the open market. Our size provides us increased
presence, better industry information in our markets and close customer relationships
with many large pulp consumers. We operate two modern and highly efficient mills
in Eastern Germany and one mill in Western Canada and have our headquarters
in Vancouver, Canada. We are the sole NBSK pulp producer, and the only significant
market pulp producer in Germany, which is the largest pulp import market in
Europe. We are able to supply the growing pulp demand in China both through
our Canadian mill’s ready access to the Port of Vancouver and through
our Stendal mill’s existing logistics arrangements. In addition, as a
result of the significant investments we have made in co-generation equipment,
all of our mills generate and sell a significant amount of surplus “green”
energy to regional utilities. We also produce and sell “tall oil”,
a by-product of our production process, which is used as both a chemical additive
and as a “green” energy source.
Our mills are some of the most modern and newest NBSK pulp mills in Europe
and North America. We believe the relative age, production capacity and electrical
generation capacity of our mills provide us with certain manufacturing cost
and other advantages over many of our competitors. We believe our competitors’
older mills do not have the equipment or capacity to produce or sell surplus
power or chemicals in a meaningful amount. In addition, since our mills are
relatively new, they benefit from lower maintenance capital requirements and
higher efficiency relative to many of our competitors’ mills.
Our modern mills generate electricity, which is surplus to their operating
requirements, providing our mills with a stable revenue source unrelated to
pulp prices. Additionally, our German mills generate tall oil from black liquor,
which is sold to third parties for use in numerous applications including bio-fuels.
Since our energy and chemical production are by-products of our pulp production
process, there are minimal incremental costs and our surplus energy and chemical
sales are highly profitable.
Pulp is used in the production of paper, tissues and paper-related products.
Pulp is generally classified according to fiber type, the process used in its
production and the degree to which it is bleached. Kraft pulp, a type of chemical
pulp, is produced through a sulphate chemical process in which lignin, the component
of wood which binds individual fibers, is dissolved in a chemical reaction.
Chemically prepared pulp allows the wood’s fiber to retain its length
and flexibility, resulting in stronger paper products. Kraft pulp can be bleached
to increase its brightness. Softwood kraft pulp is noted for its strength, brightness
and absorption properties and is used to produce a variety of products, including
lightweight publication grades of paper, tissues and other paper-related products.
There are two main types of bleached kraft pulp, being softwood kraft made from
coniferous trees and hardwood kraft made from deciduous trees. Softwood species
generally have long, flexible fibers which add strength to paper while fibers
from species of hardwood contain shorter fibers which lend bulk and opacity.
We produce and sell NBSK pulp, which is a bleached kraft pulp manufactured using
northern softwood and is considered a premium grade because of its strength.
It generally obtains the highest price relative to other kraft pulps. Southern
bleached softwood kraft pulp is kraft pulp manufactured using southern softwood
and does not possess the strength found in NBSK pulp. NBSK pulp is the sole
pulp product of our mills.
Most paper users of market kraft pulp use a mix of softwood and hardwood grades
to optimize production and product qualities. In 2016, market kraft pulp consumption
was approximately 54% hardwood bleached kraft and 42% softwood bleached kraft,
with the remainder comprised of unbleached pulp. Over the last several years,
production of hardwood pulp, based on fast growing plantation fiber primarily
from Asia and South America, has increased much more rapidly than that of softwood
grades, based on fiber that has longer growth cycles. Hardwood kraft generally
has a cost advantage over softwood kraft as a result of lower fiber costs, higher
wood yields and, for newer hardwood mills, economies of scale. As a result of
this growth in supply and lower costs, kraft pulp customers have substituted
some of the pulp content in their products to hardwood pulp.
Counteracting customers’ ability to substitute lower priced hardwood pulp
for NBSK pulp is the requirement for strength and formation characteristics
in finished goods. Paper and tissue makers focus on larger paper machines with
higher speeds and lower basis weights for certain papers which require the strength
characteristics of softwood pulp. Additionally, where paper products are lightweight
or specialized, like direct mail, magazine paper or premium tissue, or where
strength or absorbency are important, softwood kraft forms a significant proportion
of the fiber used. As a result, we believe that the ability of kraft pulp users
to further substitute hardwood for softwood pulp is limited by such requirements.
Kraft pulp can be made in different grades, with varying technical specifications,
for different end uses. Softwood kraft pulp is valued for its reinforcing role
in mechanical printing papers and is sought after by producers of paper for
the publishing industry, primarily for magazines and advertising materials.
Softwood kraft pulp is also an important ingredient for tissue manufacturing
and tissue demand tends to increase with living standards in developing countries.
NBSK pulp produced for reinforcement fibers is considered the highest grade
of kraft pulp and generally obtains the highest price.
Kraft pulp is a globally traded commodity and prices are highly cyclical and
volatile. Kraft pulp prices are generally quoted in dollars. Pricing is primarily
influenced by the balance between supply and demand, as affected by global macro-economic
conditions, changes in consumption and capacity, the level of customer and producer
inventories and fluctuations in exchange rates. Generally, we and other producers
consider global NBSK pulp supply and demand to be evenly balanced when world
inventory levels are at about 30 days’ supply.