North American pulp prices, which have fallen about 6 per cent since August, could be in for a bit more softening in the next couple of months before staging a modest recovery, analysts say. Forecasts of lower prices in the near term were reinforced Friday by news of another rise in North American and Scandinavian inventories, which climbed to 1.68 million tonnes, an increase of 20,000 tonnes from November. But analysts expect prices to rebound this spring, sending some relief to investors in Tembec Corp.,Pope & Talbot Inc. and SFK Pulp Fund,companies whose fortunes depend heavily on fluctuations in the price of pulp. Last week, Weyerhaeuser Co., the world's largest pulp producer, said it was lowering the price of its northern bleached softwood kraft (NBSK) pulp deliveries into the U.S. market by another $10 (U.S.) to $480 a tonne. The latest discount, which took effect Dec. 1, followed a $20 price reduction in November. In August, pulp fetched $510 a tonne. Analysts say Weyerhaeuser was reacting to the fact that NBSK prices in Europe have fallen to $445 a tonne from $490. While they expect the downward momentum to continue for another couple of months, analysts believe prices will soon start to recover. "I think prices will fall by another $20 in January and February, stabilize at that level and then start moving up," said Patricia Mohr, vice-president of Scotia Economics in Toronto. Ms. Mohr said prices have fallen because of uncertainty about global paper consumption and expectations that inventories will continue to rise unless companies such as Weyerhaeuser are prepared to take the necessary production cutbacks. The widely watched North American and Scandinavian inventories are a reflection of the amount of pulp that is held in storage in Canada, the United States, Finland and Sweden. However, if prices are to recover, market watchers will want to see more than just supply curtailments. They'll want tangible proof that paper demand is starting to pick up. In a recent report, UBS Warburg analyst Richard Schneider said there have been some positive trends in European and North American writing paper markets. "European shipments of graphic paper hit an all-time high in October while U.S. shipments continue to show year-over-year improvements," he said. "If these favourable trends continue, it could ultimately support pulp markets as printing and writing papers, in addition to tissue, are the key end uses of market pulp." Another factor that could help to support a rebound in prices is increasing demand from China. Analysts say prices have fallen in part because Chinese trading houses, which can account for up to 8 per cent of world demand, backed out of the market when prices fell to $435 a tonne in April. "When they sense that there is a weakness in the market, they pull back and live off the inventories that they have built up," said Kevin Mason, an analyst with Equity Research Associates in Sechelt, B.C. China's return to the market will play a key role in any future rally, said Mr. Mason, who expects NBSK prices to rebound to about $570 a tonne by the end of 2003. There were reports that Chinese buyers began to tiptoe back into the market in late November, buying pulp on the spot market for $390 a tonne. However, those reports have yet to be reflected in reported statistics, analysts say. Still, if investors are prepared to be patient, there is not much downside left in the price of the stocks of pulp makers. Mark Bishop, an analyst with Raymond James in Vancouver, said the recent correction has been priced into the value of pulp stocks, such as Tembec, Pope & Talbot and SFK Pulp Fund. SFK is the income trust that recently was spun off by Abitibi-Consolidated Inc. to hold the NBSK mill at St-Felicien, Que. Mr. Bishop said Tembec remains his top pick among forestry stocks, because he believes pulp will outperform other commodities, such as lumber. He has an "outperform" rating with a target price of $15 (Canadian) on Tembec, which rose 20 cents to $10.85 Friday on the Toronto Stock Exchange. Mr. Bishop also rates Pope & Talbot and SFK as "outperform." His target price for the SFK trust units is $12. The units closed unchanged at $9.90 on the TSX Friday. He expects Pope and Talbot to reach a target of $17. The stock closed Friday at $11.70 (U.S.), up 10 cents, on the New York Stock Exchange. While Canfor Corp. has major pulp operations, Mr. Bishop is more cautious on the outlook for the stock, which he said is much more influenced by developments in the lumber sector. Canfor shares rose 5 cents (Canadian) Friday to $7.90 on the TSX. Analysts also worry that Canfor will face competition for customers from NWBC Timber & Pulp Ltd.,which owns the former Skeena pulp mill at Prince Rupert, B.C. NWBC has indicated that it will reopen the 350,000-tonnes-per-year Skeena operation on May 1, just when the expected recovery in prices is beginning to take hold. "Having that extra supply coming on board is not good news for other producers," said Equity Research's Mr. Mason.