Packaging Paper Downturn Eases, Cultural Paper Price Hikes Fail to Land; Demand Still Key to Paper Industry Outlook

Packaging paper's downward trend temporarily slows, cultural paper price increases hard to implement; the key to the paper industry's future still lies in demand

The continuously declining packaging paper market seems to have seen a turnaround since August: not only has the general downward trend in paper prices begun to stabilize, but some paper mills have also recently issued price-increase letters — though, limited by factors such as market weakness, they can only test the waters with small increases.

On the other hand, past the middle of August, the new round of price increases jointly launched by cultural paper enterprises in early August ultimately could not withstand the weakness of market demand, and paper mills' order fulfillment was obstructed; however, given high costs, paper mills' prices will continue to hold firm.

"August is a month of transition between the off-season and peak season; although demand increases month on month, the increment is limited, and the paper industry's market supply and demand is expected to remain a contest in August," Xu Ling, an analyst at Sublime China Information (SCI), told a Securities Daily reporter.

Looking at the paper industry's future, Everbright Securities' latest research report holds that, at present, on the cost side pulp prices will maintain high-level fluctuation in the short term, with a possible inflection point in the fourth quarter; on the demand side, overseas economic recovery is bringing strong demand, and domestic demand is also expected to improve.

Market supply and demand remains a contest

From August 1 to now, the packaging paper (corrugated and containerboard) market has finally stabilized after July's sharp volatility and decline. In particular, as some large-scale paper mills have recently begun shutting down for maintenance in succession according to previously issued shutdown letters, and as upstream waste paper prices have shown signs of bottoming out and rebounding, the market has entered a "range-bound consolidation" mode.

Data shows that in July the market prices of corrugated and containerboard declined fairly markedly, with leading enterprises cutting paper prices several times and small and medium-sized mills following, for a cumulative reduction of 100 yuan/ton to 300 yuan/ton. The reporter noted that after entering August, as some downstream packaging plants began appropriately restocking and paper mills in some regions saw order volumes increase from earlier, individual paper mills recently began raising ex-factory base paper prices. But the price increases were not large, mostly 30 yuan/ton to 50 yuan/ton, with an obvious sense of testing the waters.

"Because paper prices kept falling, many small and medium-sized mills are on the edge of profit and loss or already losing money; in addition, the waste paper market recently began a full-scale rebound, raising mills' raw material costs — this is the reason for packaging paper mills' relatively strong willingness to hold prices recently," Mr. Zhou, head of a packaging paper mill in Zibo, Shandong, told the reporter, adding that the market is still in the off-season, demand has not turned strong, and the small price increases are also a test of downstream packaging enterprises' reactions.

Xu Ling told the reporter that although large-scale paper mills are successively implementing maintenance plans and output is expected to decrease month on month, initial inventories were relatively large in early August and new capacity was released in August, so overall supply-side pressure still exists. And August is itself a transition month between the off-season and peak season for corrugated and containerboard; with demand not boosted, supply and demand remain in a contest, and the market may mainly fluctuate within a range.

The same supply-demand contest is also evident in the cultural paper market. From August 1, cultural paper enterprises launched a new round of price increases of 200 yuan/ton, but market demand was weak and trading was light, and paper mills' order fulfillment was obstructed. And this situation of price-increase letters being hard to implement has occurred many times against the background of generally weak demand in the cultural paper industry in the first half of this year.

After entering the third quarter, in July a round of price increases by cultural paper enterprises was, boosted by some publishing orders, relatively optimistically implemented at the time. But starting in August, because the traditional off-season for cultural paper arrived, publishing and printing orders entered the wrap-up stage, social orders continued to be poor, and most market distributors also reported weak demand, this round of price increases lacked upward momentum, the situation of inverted production and sales was common, and printing plants basically maintained just-in-time purchasing. "In the short term the upstream-downstream contest in the cultural paper market is prominent, and some industry players, to recover funds, may lower market prices," Zhang Yan said.

Pulp prices are expected to reach an inflection point

The paper industry's half-year reports are about to be disclosed intensively; according to Choice data from East Money, as of now, among the 22 A-share listed companies whose Shenwan level-1 industry is papermaking, 8 have disclosed earnings forecasts, of which 6 companies expect a sharp decline in performance and 2 companies expect their first loss. The industry's plight of being in a trough in the first half of the year is evident.

The recent market conditions of the aforementioned packaging paper industry and cultural paper industry also show that since entering the third quarter, the paper industry still faces considerable supply-demand contradiction pressure. So when can the industry emerge from the trough? When will the inflection point arrive?

"Overall, the cyclical fluctuation of the paper industry's profitability is driven by the difference between paper prices and raw materials," Everbright Securities' latest research report points out. In interviews, many industry analysts also believe that for the industry to achieve a turnaround from difficulty depends, on the one hand, on the subsequent trend of pulp prices and, more importantly, on the recovery of demand.

From the current supply-demand pattern and competitive landscape of the paper industry, Everbright Securities analyzes that demand is recovering both domestically and abroad; comparatively, the momentum of overseas demand recovery is obvious, driving up paper product consumption, with demand in the Middle East and Southeast Asia particularly strong, and overseas supply clearly insufficient; leading domestic manufacturers have increased export efforts, and the year-on-year growth rate of China's paper product exports has continued to rise.

Chenming Paper previously stated in its earnings forecast that in the first half of the year the company seized the opportunity of insufficient overseas market supply and worked hard to develop international markets. Bohui Paper, which is likewise accelerating its international market development, also said that the company's export share is continuously rising.

As for the subsequent recovery of domestic demand, Everbright Securities believes that although domestic demand is generally weak due to the pandemic, it is expected to improve. Looking at sub-sectors, cultural paper demand is weak, and corrugated and containerboard demand will also be weak while consumption has not yet recovered; downstream demand for white card and specialty paper is relatively good.

As for the subsequent trend on the cost side, many institutions judge that pulp prices will still maintain high-level fluctuation in the short term, but an inflection point is expected in the fourth quarter. It is understood that at present the production and sales of major pulp mills worldwide have somewhat recovered, and new capacity is advancing as planned, and pulp supply is expected to gradually increase from the third quarter of 2022. Everbright Securities points out that in a downcycle of pulp prices, the profitability of bulk paper leaders will be significantly repaired.

——This article is reprinted from China Packaging Network (pack.cn), original link: http://news.pack.cn/show-379085.html