Overseas Pandemic Drags Down Packaging Paper Industry Demand; Waste Paper Prices Weaken

As upstream waste paper recovery recovered rapidly, domestic waste paper prices fell 200-400 from the previous high. With the impact of the overseas pandemic on demand and weakened cost support combined, packaging paper prices also fell by about 200-300 per ton compared with last week. For the full year, we believe that while the spread of the overseas pandemic drags down packaging paper demand, it may also raise the cost of imported foreign waste (difficulty in foreign waste recovery plus a sharp rise in freight), weakening the cost advantage of leading players; meanwhile, the cultural paper segment, with a better industry structure, has stronger price resilience, and leading cultural paper producers' 1H20 profits are also expected to benefit from a widening pulp-paper price spread. We are bullish on Sun Paper.

Packaging paper: the spread of the overseas pandemic plus falling waste paper prices drove paper prices down. 1) The spread of the overseas pandemic drags down the recovery of packaging paper demand: the recovery of domestic demand for packaging paper is relatively slow. Apart from daily necessities and courier orders performing well, other downstream demand is mostly unsatisfactory; at the same time, the rapid spread of the pandemic abroad affects domestic enterprises' foreign trade exports, suppressing external demand for packaging paper. 2) Waste paper prices at the raw material end weakened notably: as upstream waste paper recovery recovered rapidly, domestic waste paper prices fell 200-400 from the previous high, dropping below the average price before the Spring Festival. With the impact of the overseas pandemic on demand and weakened cost support combined, the average price of containerboard was 4,697/ton, down 224/ton from last week; the average price of corrugated paper was 4,040/ton, down 313/ton from last week. Considering that related overseas demand may remain sluggish in the first half of the year, we believe that subsequent price increases for packaging paper will be limited.

Cultural paper: light demand plus continued inventory build-up led the leading coated paper producers to jointly cut production to protect prices. 1) Paper mills have basically resumed work, and coated paper manufacturers plan to jointly cut production: cultural paper mainly includes coated paper and woodfree offset paper. At present, production and logistics at mills for both categories have basically returned to normal, but inventories remain at a relatively high level. To ease supply pressure, the four major coated paper producers recently released production cut plans, expecting to cut 90,000 tons of output in April. 2) Demand remains relatively light and prices are under pressure, but recovery is imminent: at present, downstream distributors still have relatively few orders, causing prices to decline slightly. The average price of woodfree offset paper was 6,571/ton, down 5 from last week, and the average price of coated paper was 6,179/ton, down 50 from last week. However, we believe that as schools in China are about to reopen, downstream demand from textbook printing and other publishing houses is expected to be released successively in late March and April, and the industry's supply-demand situation is expected to recover.

Packaging paper demand for the full year is dragged down by the overseas pandemic, and we remain bullish on leading cultural paper producers. 1) The overseas pandemic disrupts external demand for packaging paper and the cost advantage of leading enterprises: the overseas pandemic is still spreading. We believe there is a possibility that external demand will be “paused”, and packaging paper demand, which is highly linked to external demand, may be significantly affected.

At the same time, we have observed that the overseas pandemic has led to difficulty in foreign waste recovery plus a sharp rise in freight (according to Paper Industry Link, up about 250 US dollars/ton). Against the backdrop of weakening domestic waste paper prices, we believe that rising foreign waste costs has to some extent weakened the cost advantage of large enterprises. 2) We remain bullish on the profit improvement of leading cultural paper producers: we believe that during the pandemic, the cultural paper segment, with a better industry structure, has had stronger price resilience, and we also remain bullish on the profit improvement brought by a widening pulp-paper price spread in the 1H20 cultural paper industry.

We recommend remaining cautious on the packaging paper segment, and we are bullish on Sun Paper-A, which has a certain improvement in gross margin this year and sustained medium-term growth potential.

The impact of the overseas pandemic is intensifying, and domestic demand recovery is falling short of expectations.

——This article is reprinted from China Packaging Network (pack.cn), original link: http://news.pack.cn/show-354903.html