Mercer International, the global pulp and wood products giant, delivered a strong Q1 2024 performance, surpassing analyst expectations. Increased pulp prices, record production levels, and lower costs painted a rosy picture for the company. Yet, buried within the seemingly routine details of the earnings call lies a potential catalyst that could propel Mercer's profitability to unprecedented heights: a looming Canadian railway strike.

While the threat of a strike was acknowledged, the true magnitude of its potential impact may have slipped under the radar. Juan Carlos Bueno, Mercer's President and CEO, cautioned that a significant strike could disrupt the company's ability to transport products from its Canadian mills to market. He outlined mitigation strategies, but the underlying reality is stark: Mercer heavily relies on Canadian railways for its supply chain, and a prolonged strike could cripple its operations.

However, this is only half the story. What hasn't been widely discussed is how a strike could dramatically tighten pulp supply, creating the perfect storm for Mercer's bottom line. Let's delve into the numbers.

Mercer's Q1 pulp sales volume reached a robust 566,000 tons. A significant portion of this output originates from their Canadian mills, Peace River and Celgar. A railway strike would directly impede the flow of this production, constricting an already strained global supply.

Recall that global softwood pulp production has already been reduced by roughly 1 million tons due to permanent or indefinite mill closures. Add to this the ongoing impact of the Finnish transport strike and significant unplanned downtime at a major Finnish mill, and the picture becomes even more constrained.

Now, imagine a Canadian railway strike adding fuel to this fire. The already tight supply chain would constrict further, exacerbating the upward pressure on pulp prices. Mercer, with its remaining mills operating at near-record production levels, would be perfectly positioned to capitalize on this price surge.

Potential Impact on Pulp Prices

The following chart illustrates a hypothetical scenario of how a Canadian railway strike could impact pulp prices.

Here's the hypothesis: a prolonged Canadian railway strike, lasting several weeks or even months, could potentially double or even triple current pulp prices. While this might seem outlandish, consider the historical precedent. During the 2021 British Columbia port strike, which lasted only a few weeks, Celgar, Mercer's BC mill, was forced to curtail production for 26 days. The impact on global supply was immediate and significant, contributing to a rapid escalation of pulp prices.

A railway strike, with its broader scope and potential duration, would likely dwarf the impact of the port strike. The result? A windfall for Mercer, as they leverage the production capacity of their unaffected mills, Rosenthal and Stendal, to meet the surging demand at significantly inflated prices.

Of course, predicting the exact outcome of a potential strike is impossible. The duration, severity of disruption, and market response remain uncertain. However, the potential for a seismic shift in Mercer's profitability is undeniable.

It's a scenario few analysts seem to be considering, yet it's one that could redefine the company's trajectory. Could this be the hidden catalyst that makes Mercer the biggest winner in a turbulent market? Only time will tell. But one thing is certain: the unfolding drama on the Canadian railways is worth watching closely, as it could unlock a treasure trove of hidden value for Mercer International.

"Fun Fact: Mercer International is known for its commitment to sustainability. They have even partnered with fashion giant Stella McCartney to develop a new sustainable viscose fiber made from wood pulp!"