Mercer International's recent Q1 2024 earnings call revealed a company at a crossroads, navigating a recovering pulp market and a sluggish lumber sector. While analysts focused on capacity closures in British Columbia and the potential growth of mass timber, a seemingly innocuous statement from CEO Juan Carlos Bueno might hold the key to understanding Mercer's aggressive strategy for the coming year: their "mitigation strategies" for a potential Canadian railway strike.

On the surface, Mercer's Q1 performance was positive. EBITDA surged to $64 million, fueled by rising pulp prices and the absence of major maintenance downtime. However, the specter of a Canadian railway strike looms large, threatening to disrupt the flow of pulp from their Canadian mills to global markets.

Bueno's confidence in the face of this potential disruption is striking. He stated that while they are implementing mitigation strategies, a significant railway strike could hinder their ability to reach market. This implies that Mercer is not simply bracing for a strike, but actively leveraging the possibility to their advantage.

Here's the potential play: a prolonged railway strike will exacerbate existing supply constraints in the global pulp market. With nearly 1 million tons of softwood pulp production shuttered in recent years, the market is already tight. A disruption in Canadian supply, which accounts for a significant portion of global exports, could send prices soaring even higher than currently anticipated.

Mercer, with its robust liquidity position of $555 million, is well-positioned to weather a temporary production and shipping disruption. In fact, they might even be stockpiling pulp inventory, strategically delaying shipments in anticipation of a price spike driven by the strike.

Let's look at the numbers: the European NBSK list price jumped 12% from Q4 to $1,400 per ton, while the North American NBSK price rose 10% to $1,440 per ton. If a Canadian railway strike materializes, these prices could surge even higher, potentially reaching record levels.

But Mercer's gambit comes with risks. If the strike is short-lived or the mitigation strategies fail, the company could face significant inventory build-up and miss out on capturing peak pricing. Additionally, a protracted strike could damage customer relationships and harm their long-term market share.

NBSK Pulp Price Trend

The following chart shows the recent upward trend in NBSK pulp prices in both Europe and North America.

The decision to restart the Torgau lumber expansion project and the Spokane shorting line project amidst this uncertainty further highlights Mercer's risk appetite. While these projects offer long-term value, committing capital during a period of potential disruption signals a strong belief in their ability to control the narrative and emerge stronger.

Interestingly, Mercer has a history of playing the long game. Founded in 1968 as a small sawmill operation in British Columbia, the company has grown through strategic acquisitions and a relentless focus on efficiency. They were early adopters of bioenergy, becoming one of the world's largest producers of green energy from biomass. Their recent investments in mass timber and lignin extraction demonstrate a forward-thinking approach to leveraging the circular carbon economy.

Will Mercer's Canadian railway gamble pay off? Only time will tell. However, their calculated risk-taking, coupled with their track record of strategic maneuvering, suggests that the company is not merely reacting to market conditions, but actively shaping them to their advantage. The potential for record profits is undeniably on the table, and Mercer seems determined to play their hand to the fullest.

"Fun Facts:"

- Mercer is one of the world's largest producers of green energy from biomass.

- The company holds approximately 35% of North American mass timber production capacity.

- Mercer's lignin extraction pilot plant is a significant step towards commercializing lignin as a sustainable alternative to fossil fuel-based products.