Downstream pulp restocking a bright spot for demand in 2022

In 2021, the pulp market saw short-lived rallies and prolonged declines. Data so far show that the highest price of the index contract during the year occurred at the end of February, at about 7,627 yuan/tonne; the lowest price occurred at the end of October, at 4,750 yuan/tonne. From March to October, pulp prices staged only one relatively large rebound; for most of the rest of the time, prices either fell or moved sideways. The author believes that there is little room left for further contraction on the demand side, and the current pulp price is not considered overvalued - it can be seen as having bottomed out. At the same time, destocking pressure on finished products on the supply side will weigh on pulp prices in the first half of 2022, and only in the second half is the price center expected to shift upward.

Global softwood pulp supply is tight over the long term

Capacity is already running near full

Global softwood pulp capacity is expected to be stable from 2020 to 2025, with an average annual growth rate of less than 1%. Of that, 2022 will grow only 0.4% over 2021. To assess the increase or decrease in supply, operating rates must be considered in addition to capacity. The global operating rate of softwood pulp facilities already reached 91% in 2020. Analysts expect that, as demand maintains a natural growth rate of 2%-3% in the future, the operating rate of softwood pulp facilities will rise accordingly, approaching 92% in 2022. With no new facilities and old facilities running near full capacity, softwood pulp supply cannot increase substantially.

Hardwood pulp is the main growth contributor in the market pulp market. Absolute figures vary across different statistical scopes, but what is certain is that three new facilities will come on stream between the end of 2021 and mid-2022. Brazil's Bracell facility and Chile's Arauco MAPA facility, both planned to start up at the end of 2021, have a combined capacity of 4.1 million tonnes/year. In mid-2022, UPM's new 2.1 million tonnes/year facility in Uruguay is also scheduled to start up. Therefore, the supply increment for hardwood pulp in 2022 is obvious. In addition, compared with 2020 data, hardwood pulp capacity is expected to grow 19% by 2025. Of that, capacity growth in 2022 and 2023 is expected to be 6% and 5%.

△ The chart shows the capacity growth rates of global softwood and hardwood pulp

A phased supply increment will take shape in early 2022

Pulp shipments may also change the pace of supply. Softwood pulp shipments are affected by two major factors:

First, hardwood pulp competes for shipping capacity. From 2017 to 2020, global softwood and hardwood pulp shipments moved in opposite directions, with the two fluctuating inversely. However, this phenomenon changed in 2021, when shipments of both softwood and hardwood pulp declined. The reason was a decline in global shipping capacity. The drop in total volume masked the underlying competition between the two for shipping capacity. Looking ahead to 2022, there will be more new hardwood pulp facilities requiring stronger logistics, and whether or not shipping capacity recovers, the increase in softwood pulp shipments will be limited.

△ The chart shows global softwood and hardwood pulp shipments

Second, softwood pulp inventory levels have reached a high. As of September 2021, global softwood pulp mill inventory had reached 45 days, the highest level in the 10 years for which data have been recorded. Destocking by pulp mills is imminent, and the release of destocking pressure will certainly be accompanied by a phased increase in shipments. Based on a similar situation in August 2020, softwood pulp may see a marginal rise in shipments for 3-6 months. It can be expected that softwood pulp supply will inevitably increase in volume in early 2022.

△ The chart shows global softwood pulp mill inventories

The share of domestic imports remains relatively stable

More than 90% of China's softwood pulp relies on imports. The volume of imports determines the volume of supply in the current period. In 2021, China's pulp imports declined somewhat. As of September, cumulative softwood pulp imports fell 0.8% year on year, and cumulative hardwood pulp imports fell 3.9% year on year. For the full year, imports of both softwood and hardwood pulp in 2021 followed a pattern of high in the first half and low in the second half.

Since 2019, global softwood pulp shipments have declined slowly, while the share of China's softwood pulp imports in global shipments has remained relatively stable. It can be seen that, first, China faces no additional competition for resources; second, China's softwood pulp supply basically follows the global market. Based on the above assessment of shipments, domestic softwood pulp imports will increase in early 2022, but for the full year they will remain stable.

△ The chart shows the share of China's softwood pulp imports in global shipments

△ The chart shows domestic softwood pulp imports

The market has not shown much consumption potential

In the case of cultural paper, the market was extremely weak in 2021, reflected mainly in absolute prices and domestic output. In the third quarter, spot prices of woodfree offset paper and coated paper both hit seven-year lows. In addition, from January to October, cumulative output of woodfree offset paper fell 3.5% year on year, and cumulative output of coated paper fell 15% year on year. Three reasons account for this phenomenon. First, net imports of cultural paper rose in 2021. Second, some policy measures in 2021 were unfavorable to cultural paper consumption. Printing demand that had been steadily released for the 100th anniversary of the founding of the Communist Party of China was halted after May. The "double reduction" policy for students hit the after-school tutoring market, reducing demand for supplementary teaching materials and textbooks. Third, domestic end-user demand recovered less than expected in 2021. With repeated COVID-19 outbreaks in China, economic activity had not fully returned to pre-pandemic levels.

In 2021, the cultural paper market had few consumption highlights, with coated paper constrained by digitalization and occasional restrictions on gatherings for commercial activities. The decline in the coated paper market during the year far exceeded the change in the domestic economy; weak domestic demand and limited exports were probably the main reasons. In 2022, if problems such as the pandemic and logistics bottlenecks ease, coated paper demand is expected to recover toward normal levels.

Compared with coated paper, demand for woodfree offset paper is expected to improve in 2022. First, extremely high sea freight rates affected exports of domestic books, and as freight rates decline, this bearish effect will fade. Second, end users and distributors have generally cleared out their raw material inventories, so there will be no demand reduction from destocking. Third, the 20th National Congress of the Communist Party of China will be held in Beijing in the second half of 2022, and publicity and study activities will generate some printing demand. Finally, the "double reduction" policy saw some policy adjustments in the fourth quarter of 2021.

Previously, online academic tutoring institutions in China did not need a school operating license; after the "double reduction" policy was advanced, they must obtain a school operating license to hold training sessions, and online academic training for students in the compulsory education stage must be registered as non-profit institutions. For offline academic training institutions, a separate license will also be issued before the end of 2021, namely the license for converting for-profit institutions into non-profit ones. Once licenses are issued, demand for tutoring materials and textbooks, which was cut off across the board in the third quarter of 2021, will recover somewhat. In addition, standards for student books were formulated in the fourth quarter of 2021, which will increase end-user demand to some extent.

It can be said that the cultural paper market was hit hard in 2021, and there is momentum for demand to recover in 2022, but in the absence of event-driven catalysts, the extent of recovery will not be large. Considering the problem of high inventories, the cultural paper market is expected to perform better in the second half than in the first half.

△ The chart shows woodfree offset paper output

The chart shows woodfree offset paper inventory

In the case of tissue paper, the market has maintained a natural growth rate, but in recent years growth in most years has not exceeded the previous 5% rate. According to association statistics, consumption growth was 1.2% and 3.2% in 2018 and 2019; in 2020, due to the pandemic, consumption growth rebounded to 7.1%; in 2021 it will even enter negative territory. Zhuochuang data show that from January to October 2021, domestic tissue paper output fell 4% year on year cumulatively, and from the second quarter onward, the operating rate was basically around 50%.

The sharp decline in tissue paper consumption growth in 2021 may have been caused by stockpiling that pulled forward demand. Tissue paper consumption growth is expected to be 2%-3% in 2022, because domestic consumption has not changed significantly. Supply in the tissue paper market remains in surplus, and for most of 2022 the supply chain will remain at break-even or even at a loss. In the future, some capacity will still come on stream, and the plans seen so far are mostly projects of medium and large paper mills. Therefore, when calculating processing margins along the supply chain using the sales price of large jumbo rolls in Shandong, the outlook is not optimistic.

In the case of packaging paper and specialty paper, market performance was relatively better. In recent years, demand growth for packaging paper and specialty paper has been fairly stable, especially after the plastic restriction order and the waste import ban. From January to September 2021, cumulative sales of packaging paper rose 7% year on year, and cumulative sales of white board paper rose 6.7% year on year. Compared with the other two paper grades, the performance of packaging paper and specialty paper in 2021 was already good. The plastic restriction order and the waste import ban began to be strictly enforced in early 2021, and their positive effect on packaging paper and specialty paper will continue in 2022, with sales of both maintaining high growth.

△ The chart shows tissue paper output

△ The chart shows white card paper output

Although downstream finished paper consumption has few highlights, stocking in 2022 deserves attention. At the end of 2021, the downstream finished paper market structure is likely to feature high inventories on the supply side and low inventories at end users and in channels. As for the relationship between price and inventory, high visible inventories do not mean prices will continue to fall; once destocking begins, finished paper prices will rise. Usually, pulp futures prices are more sensitive to changes in downstream product prices, while the impact of marginal changes in output is secondary.

Looking ahead to 2022, it can be expected that

Cultural paper producers have already shown a willingness to stabilize profits through low operating rates, which is bearish for pulp in terms of actual consumption. However, in the process, cultural paper prices and profits may improve. Judging from the patterns of movement since pulp futures were listed, changes in cultural paper prices have the most obvious impact on the pulp market. Based on the projected pace of demand recovery for cultural paper, the cultural paper market is more likely to turn bullish in the second half of 2022.

Rising tissue paper prices can only add to the pulp market's strength, not drive it. In the fourth quarter of 2021, destocking in tissue paper channels was already complete, as can be seen from the price trend in October. However, given the severe oversupply, restocking activity along the supply chain is unlikely to be sustained. Increases in tissue paper producers' operating rates tend to occur during price upturns. Cultural paper production is dominated by small mills, and higher operating rates there will bring periodic purchasing, which can boost pulp demand to some extent during peak seasons and when raw material prices are rising, but this will not sway market sentiment.

Production of white card paper and white board paper is highly concentrated, and these grades set the tone. With foreign waste paper no longer able to enter China, domestic waste paper prices have remained firm, pushing up packaging paper costs. However, the packaging paper sector uses a small proportion of wood pulp, so changes in packaging paper prices need to be transmitted first to other white paper grades and then to pulp.

Overall, after three consecutive quarters of declines in the prices of various paper grades, inventories in midstream and downstream channels are no longer large, and industry inventories are mainly concentrated at the paper mill level. Downstream stocking is a bright spot on the demand side in 2022, and is more likely to begin in the second half of the year.

△ The chart shows apparent consumption of imported wood pulp

In summary, on the supply side, global softwood pulp output is basically stable; even if it grows somewhat in 2022, the total volume will not be large, and destocking pressure will be greater in the first half than in the second half. On the demand side, sales will grow marginally, with first-half sales low on a high base and high inventories, while the second half will be supported by restocking and the peak season. Based on the above analysis, it can be forecast that the pulp price range in the first half of 2022 will be 4,500-5,200 yuan/tonne, rising to 4,800-5,500 yuan/tonne in the second half. In this process, there are also risk factors that cannot be ignored, including larger-than-expected global macroeconomic volatility and larger-than-expected maintenance and shutdowns at softwood pulp mills.

——This article is reprinted from China Packaging Network (pack.cn). Original link: http://news.pack.cn/show-378722.html