Decline of Pulp Price Paper industry is expected to stabilize and recover

The price of pulp rose sharply in 2022. Recently, Suzano, the world's largest pulp producer and exporter in Brazil, announced to reduce the price of its eucalyptus pulp in China. "Even though the price has been reduced in the past two months, it is still at a high level, and the profits of mainstream pulp mills are still high. It is expected that it will be difficult to have a significant impact on the profits of pulp mills before the official increase of new capacity or the significant decline of overseas demand." Pan Shengjie, a pulp researcher at Galaxy Futures, told China Securities News.


Under the expectation of global economic recession, not only the price of pulp, but also the price of some raw materials of commodity experienced a round of decline in 2022. Many analysts believe that some downstream manufacturing enterprises are expected to benefit from the improvement of China’s demand in 2023. Taking the paper industry as an example, in the second half of 2023, the upstream pulp cost will fall and the Chinese consumption will rise, which is expected to promote the profit recovery of the domestic paper industry.


Decline of Pulp Demand

As one of the "barometer" indicators of the economy, the expectation of global recession has increased the risk of carton demand decline, which has indirectly hit the pulp industry, the raw material for paper making. Suzano, the world's largest pulp producer and exporter in Brazil, recently announced that the price of its eucalyptus pulp in China will be reduced, which is also the first time since the end of 2021.


Since 2022, wood chips and energy supply have been affected by the Russia-Ukraine conflict and the weakening of the North American real estate market. According to relevant data, the cost of chemicals and wood chips in Suzano rose 41% and 19% respectively year on year in the third quarter.


The Chinese paper industry has experienced a year's decline from the most glorious moment in December 2021. Even in this context, analysts believe that Suzano's price reduction of eucalyptus pulp does not mean that pulp enterprises are struggling.


"At present, the profit of mainstream pulp mills is still good. It is expected that it will not have a significant impact on the profit of pulp mills until the new capacity is officially increased or the overseas demand is significantly reduced." Pan Shengjie told reporters.


It is understood that the pulp price has risen sharply in 2022. Even though the price has been reduced in the past two months, it is still at a high level. Pan Shengjie believes that Suzano's reduction in the price of broadleaf pulp is a business strategy to respond to the increase in supply in advance. "In the first quarter of 2023, the global broadleaf pulp market will face the challenges of two new capacity that 2.1 million tons of broadleaf pulp stockpiled by UPM pulp mill in Uruguay and 1.56 million tons of broadleaf pulp from MAPA project of Arauco pulp mill in Chile."


"Arauco's MAPA project and UPM's hardwood pulp project in Uruguay are planned to be put into operation in 2023, which will contribute more than 3 million tons of hardwood pulp capacity, and the future supply of hardwood pulp will increase. At the same time, since October 2022, the stock of wood pulp in European ports has continued to increase, which has increased to 1.33 million tons in November 2022. Combined with the current economic situation in Europe, the risk of demand decline is increasing." Tang Binghua, an analyst of Founder's medium-term futures, told reporters.


"The resistance of Chinese paper mills against the background of low profits and even losses has also led to the reduction of pulp mill prices," Tang Binghua told reporters.


"As of October, the total accumulated losses of the Chinese paper and printing industry reached 18.17 billion yuan, the highest record since 1999. And under the influence of the epidemic, the Chinese paper industry may continue to struggle for several months." Pan Shengjie said, "Fortunately, the current asset-liability ratio of the paper industry is not bad, and the leading enterprises have not hurt their vitality."


In addition, the data shows that from January to November 2022, China's cumulative output of wood pulp reached 16.17 million tons, up 12.4% year on year; The cumulative output of bamboo pulp in China reached 1.73 million tons, a year-on-year increase of 227.2%.


"Stimulated by high profits, not only the domestic pulp output has been significantly increased, but also the finished product inventory has doubled compared with the same period in 2021." Pan Shengjie said, "High profits stimulate high output, which is also what is happening. The global pulp price has been high for a long time, which has a positive impact on stimulating supply growth. However, under the expectation of overseas macroeconomic recession, high profits should be difficult to maintain. "


Paper industry is expected to stabilize and recover

As the demand for packaging paper is distributed in various industries, it has been regarded as one of the "barometer" indicators of the economy in recent years.


"Cartons are used in food and beverage, logistics, daily chemical products, electronic products, home appliances and other terminal fields. In particular, the price change of corrugated paper is relevant and leading to the domestic total import and export volume, domestic non-food CPI, container export freight index and other macroeconomic data, and are truly forward-looking commodities," said Pan Shengjie.


Relevant data show that since 2022, the demand of packaging paper industry has been low. The price of carton paper and corrugated paper has dropped by 10% - 20%, and the price of ivory board has also dropped by 15%.


"The good export situation in the first half of 2022 will support the packaging paper industry, but the European and American economies begin to weaken in the second half of 2022, further exacerbating the plight of the packaging paper industry." Tang Binghua believes that the current pulp price has been at a high level. If the foreign demand follows the economic decline significantly in 2023, and domestic demand cannot improve rapidly, the pulp price will fall at a high risk, especially when the new capacity is put into production as scheduled.


"Judging from the situation in 2022, pulp mills have stronger bargaining power. At the same time, there are still many new paper production capacity in 2023 in China, so the demand for pulp still exists. Whether the factors affecting the supply side will disappear completely is uncertain," Tang Binghua said.


"It is optimistic that the paper industry will stabilize and recover in the second half of 2023. At that time, the decline of the upstream pulp cost and the recovery of domestic consumption are expected to promote the recovery of the profits of the paper industry," said Pan Shengjie.