At the end of past years, due to market demand, paper prices have risen to varying degrees. According to the law of different season, the probability of corrugated and cardboard prices rising in December is greater than the that of falling. However, the situation in this year is different from previous years.

From the perspective of current terminal consumption, the overall increase of downstream demand is limited, and the support for New Year's Day, Christmas and other holidays is not enough. The policies of Replacing Plastic with Paper and Ban on Abolishment, which had supported the industry's development, fell into a downturn under the double pressure of high cost and weak demand. From the beginning of December, under the leadership of Nine Dragons Paper and ShanYing Intl, some packaging paper enterprises even launched the second round of large-scale downtime for maintenance in the year.

On December 4, ShanYing Intl announced that 17 paper machines in five production bases in China would stop for 10 to 29 days from January 6 to February 3, 2023. According to the designed capacity, it is estimated that the output will be reduced by about 312,000 tons, most of which are corrugated paper and cardboard. Following the announcement at the beginning of this month that some paper machines in Tianjin, Quanzhou and Dongguan bases will be shut down in December, Nine Dragons Paper released the Spring Festival shutdown schedule for Dongguan and Taicang bases on December 19, the earliest shutdown time will be January 5, 2023.

After the announcement of the downtime for maintenance, according to the changes of price adjustment, the shutdown is more concentrated in South China. And some paper mills have raised the price by 20 yuan to 50 yuan each ton. As ShanYing Intl and Nine Dragons Paper just announced price increases, they have announced it again in recent days, which is known as a small but frequent way to increase prices in the industry. Following the shutdown and price increase of upstream paper mills, many news has also been sent from packaging and printing industries around the country. Hunan packaging enterprises announced that the price of cardboard had risen by 3%, and several packaging enterprises in Dongguan, Wenzhou and other places issued the notice of the Spring Festival holiday, which will stop receiving orders from December 31.

Since the demand is limited, why can the paper mill raise the price frequently?

It is generally believed that the current industry faces the triple dilemma of weak demand, high cost and shortage of raw materials. The profit per ton and valuation level are at the bottom of the last decade, and the extent of further decline is limited. However, on the whole, the demand recovers slowly, new orders are not enough, and there is limited support for the market before the Spring Festival.

ShanYing Intl and Nine Dragons Paper are both in the midstreams of the paper industry, and the upstream is mainly the pulp industry. Because China's pulp is highly dependent on foreign countries and the international pulp price rose sharply in the first half of this year, some paper enterprises that overwhelmed by the cost pressure announced price increases one after another. As of May, ShanYing Intl has raised the price for four consecutive times, with an increase of more than 200 yuan each ton.

The main business of ShanYing Intl is the production of cardboard, fluting paper, special paper, cardboard and paper product packaging. The main products are various packaging paper, special paper, cardboard, and other paper products with ShanYing label, which are widely used in consumer electronics, household appliances, chemical, light industry and other consumer and industrial products industries. It has built five paper bases in Maanshan, Anhui, Jiaxing, Zhejiang, Zhangzhou, Fujian, Jingzhou, Hubei and Zhaoqing, Guangdong. The existing landing capacity is about 6 million tons, ranking the first three in the industry. The company will develop the packaging sector in economically developed areas along the river and sea, close to the gathering place of leading customers in the industry, with an annual output of more than 2 billion square meters, ranking the second in China. 

In the first half of this year, the company's operating performance was under significant pressure, with an operating income of 16.667 billion yuan, and a net profit attributable to the owners of the parent company of 128 million yuan, down 87.25% year on year, and the profit after deducting non recurring profit and loss was only 64.08 million, down 91.09% year on year. At the report in third quarter, the improvement expected by ShanYing Intl did not realize in the second half of the year. Instead, there was a trend of deterioration. In the first three quarters, the company achieved an operating revenue of 25.449 billion, up 5.80% year on year; The net profit attributable to equity holders of the listed company was 54.89 million, down 95.80% year on year; The profit loss after deducting non recurring profit and loss was 69.3 million yuan; That is to say, in the third quarter, the company suffered a large loss, with a net loss of 73.13 million yuan in a single quarter and a profit after deducting non recurring profit and loss of 133 million yuan. The main reason for the loss was the increase in raw material cost and the decrease in gross profit margin in the reporting period compared with the same period last year.

Market Price of Paper in 2022

The situation of Nine Dragons Paper is similar. The company is the largest producer of carton paper in Asia, mainly engaged in the production of packaging paperboard products. As of June 30, its annual designed capacity of fiber raw materials is 850,000 tons; That of papermaking is 18.17 million tons; The annual design capacity of downstream packaging plants exceeds 2.4 billion square meters.

On September 27, Nine Dragons Paper released its annual results as of June 30, 2022. According to the data, it achieved a revenue of 64.538 billion yuan in this year, up 4.8% year on year, which is a record high; The net profit attributable to the parent company was RMB 3.275 billion, down 53.9% year on year. In the case of slight increase in revenue, the net profit attributable to the parent company dropped sharply because the gross profit margin of the company decreased from 19% in 2021 to 10.8% in 2022, reflecting a sharp decline in the profitability of Nine Dragons Paper during the period.

Since October 31, Hong Kong paper stocks have suddenly changed from their previous sluggish situation to a strong counterattack as the market recovered. By the middle of December, it had risen by more than 50%, Nine Dragons Paper had risen by more than 64% to become the industrial leader, Lee & Man Paper had risen by nearly 50%, and Sunshine Paper, ChenMing Paper, etc. were all rising dramatically.

The reason for the surge in paper stocks is that the price of wood pulp of upstream companies has shown signs of decline recently. Overseas large factories have successively lowered the price of needle pulp by 30 dollars to 940 dollars and 930 dollars per ton. In addition, spot prices in the China’s market have also accelerated to decline, especially some products in Shandong have fallen by more than 350 yuan per ton from the high price in October. Looking forward to the future trend, many institutions have judged that the turning point of paper industry profit is expected to come.

CITIC Securities pointed out that in the downward phase of pulp price, the paper price with stronger consumption attribute is more stable, the bonus from decrease of raw material prices is more obvious, and the profit improvement is more resilient. Everbright Securities also said that, in view of the decline of the pulp price, the special paper and tissue industry profits are expected to be repaired. GuideFuture.com also said that the inflection point of the current pulp price decline was clear. In the fourth quarter, especially in December, China’s paper mills were able to purchase domestic spot pulp with low price, and the net profit of leading enterprises exceeded expectations.

Looking forward to 2023, the paper mill is expected to start enjoying a low-cost pulp cost dividend in February to March, and the profit elasticity in the 2-3 quarters may continue to show on a month-on-month basis; If the decline in pulp prices continues to exceed expectations, there will be room for supermarket expectations for special cardboard blocks in 2023.