Pulp: Fourth Round of Overseas Softwood Price Cuts; Delayed School Opening at Home; Beware of Seasonal Demand Being Disproved in the Paper Industry

Delivery game: the 2109 contract is constrained by the volume of deliverable warehouse receipts, and funds have notably supported prices during the delivery month. On recent spot prices, among the 12 delivery brands on the Shanghai Futures Exchange, most prices remained unchanged, but suppliers of several other brands cut prices by 20-30 US dollars per tonne.

Fourth round of price cuts for Canadian softwood: the price of northern bleached softwood kraft (NBSK) is USD 820-860 per tonne, and the price of Nordic NBSK is USD 800-860 per tonne; compared with last week, both fell by USD 20.

Industry observation: the rapid expansion of China's ivory board industry has run ahead of the upgrading of demand.

China's pulp imports in August were 2.5 million tonnes, versus 1.74 million tonnes in July.

Source: CITIC Jiantou Futures Research

Over the past half month, domestic pulp price increases came to nothing; this week Chenming Paper cut culture paper prices by another 200 yuan per tonne. The main reason the price increases have not gone smoothly is the continuous decline in overseas prices, while the pick-up in domestic demand remains to be seen. The industry as a whole still reads current prices as being at a high level within a long cycle, and downstream willingness to restock is limited.

The same situation is playing out overseas. Influenced by the sharp drop in wood prices and by the sentiment of weak feedback from Chinese consumption, Canadian softwood pulp has seen its fourth round of price cuts in the recent period, down to CFR USD 840-860 per tonne; yet judging from how the futures market is trading, the tone remains on the strong side, reflecting expectations of a future demand recovery.

According to Fastmarkets RISI statistics, about 3.79 million t of new market pulp capacity is planned globally in 2021 (including some capacity shared between paper pulp, dissolving pulp and fluff pulp), of which hardwood pulp accounts for nearly 90% of the new capacity; this capacity will begin to come on stream in the second half of 2021.

Therefore, the later divergence lies in whether the market trades actual demand again or future seasonal expectations. Current shipping conditions (high freight rates and arrivals that may be forced to be postponed) do lend support to bullish expectations, but the reality is not optimistic.

From a medium-term perspective, we have also noted changes on the supply side of the industry - the capacity expansion of ivory board.

Source: CITIC Jiantou Futures Research

Ivory board is a paper that is white on both sides, with high smoothness, good stiffness, strong uniformity of ink absorption, and folding endurance; it is a single-layer or multi-layer combined paper made entirely from bleached chemical pulp and fully sized, suitable for printing and product packaging, generally with a basis weight above 150 g/m2.

If the paper industry has a hierarchy of contempt, ivory board should be upstream. Ivory board is called "white" board because of its whiteness requirements - grade A whiteness is no lower than 92%. It is usually used for commodity packaging, backing liners and the like, and can also be used directly to print business cards, greeting cards and so on. From 2016 to 2020, China's ivory board output showed an overall upward trend, rising from 6.92 million tonnes in 2016 to 9.02 million tonnes in 2020. As of the end of 2020, China had 21 ivory board producers and 32 ivory board production lines, with annual capacity of about 13 million tonnes.

According to the industry's earlier consensus on the plastics restriction order, demand for paper packaging products represented by ivory board, white kraft paper, linerboard and corrugated paper will grow substantially, and paper products will become the backbone of the substitution for plastics.

Based on estimates of substitution demand for non-degradable plastic packaging in the food delivery and supermarket retail sectors, the market expects that by 2025, ivory board's substitution of single-use plastic tableware in food delivery could reach 2.34 million tonnes, and its substitution of non-degradable plastic bags in retail sectors such as supermarkets and pharmacies could reach 1.17 million tonnes.

Favored by the plastics restriction order and the Food Safety Law, the industry expects that total substitution demand for plastics by ivory board will reach as much as 3.5 million tonnes in 2025.

Driven by favorable demand expectations and the industry's earlier high profits, the industry is accelerating the construction of new capacity. According to industry data, new capacity over the next five years is estimated to reach more than 17 million tonnes, 1.3 times the existing capacity at the end of 2020.

Source: compiled from public information, CITIC Jiantou Futures Research

Although paper categories represented by ivory board will benefit from future substitution for plastic products, demand release is still rather slow, and expectations for new capacity still carry uncertainties. Taking the current market as an example, data show that the downstream papermaking and paper products industry is suffering its worst profit level for the same period in at least five years: the industry's July profit was only 4.54 billion yuan, versus 6.99 billion yuan in June and 6.32 billion yuan in the same period last year. We understand this to be the main reason paper mills have recently stepped up large-scale maintenance shutdowns.

Judging from the current market game, and taking into account global bleached softwood pulp capacity constraints and the significance of future forest carbon sinks - mainly reflected in the extremely long growth cycle of bleached softwood pulp raw materials such as spruce, Douglas fir, Korean pine, larch and radiata pine, whose height growth within 10 years of planting is very limited and which cannot achieve rapid growth in the short term - we remain optimistic about bleached softwood pulp going forward.

The short-term market game depends heavily on pessimistic expectations of falling overseas wood raw material prices and on the realization of seasonal demand at home and abroad. Overall, however, the high social inventory of paper products will limit the height of any short-term rebound, and the industry has already shown the notable feature of an inventory cycle switch (from active restocking to passive inventory build-up). We remain cautious about the rebound at this stage and attach importance to the risk of demand stalling and a peak season that is not peak.

——This article is reprinted from China Packaging Network (pack.cn). Original link: http://news.pack.cn/show-378245.html