Cultural Paper Market Sees a "Weak Peak Season," But Paper Industry's Full-Year Results Still Worth Anticipating

As the back-to-school season and the Mid-Autumn Festival and National Day holidays arrive one after another, the "peak season for culture paper" that the paper industry has been waiting for has officially begun.

Although the industry has just collectively reported very impressive half-year results, the decline in culture paper prices since the second quarter, and the downturn and the bottoming out of prices that even joint industry efforts could not reverse for a time, have imperceptibly added a hint of concern to this traditional peak season, and the industry is strongly in a wait-and-see mood.

"Against the backdrop of the double reduction policy and other factors, this year's peak season performance will be slightly weaker than in previous years and may present a peak season that is not peak," Bai Wenxi, chief economist at IPG China, said in an interview with a Securities Daily reporter. At the same time, however, most industry insiders interviewed still held expectations: "The worst is no worse than this, and we still have confidence in the market ahead."

It is precisely this expectation of fundamentals bottoming out combined with the arrival of the peak season that has recently driven a volatile recovery in paper sector share prices. Among them, Huatai Paper hit the daily limit up twice in the three days from September 8 to 10, while Bohui Paper continued to rise steadily after hitting the daily limit up on September 8.

Bright first-half results

Data from East Money Choice show that 25 A-share paper companies in China achieved total operating revenue of about 93.6 billion yuan in the first half of this year; 23 recorded positive year-on-year growth, and 7 of them saw revenue grow by more than 50% year on year.

Notably, three companies had revenue above 10 billion yuan - Chenming Paper, Sun Paper and Shanying International - all of them above 15.1 billion yuan. Together the three generated about 48.2 billion yuan in revenue, accounting for more than half of the industry's total revenue. Looking longitudinally, the vast majority of companies posted their best-ever first-half revenue this year.

In terms of net profit, all 25 companies were profitable, and as many as 14 companies saw year-on-year growth of over 100% in net profit attributable to shareholders; among them, Sun Paper posted a first-half net profit of 2.232 billion yuan, making it the industry's profit king. Likewise, the four companies with net profit above 1 billion yuan - Sun Paper, Chenming Paper, Bohui Paper and Shanying International - together achieved net profit of 6.771 billion yuan, accounting for 65% of the industry's total net profit of 10.422 billion yuan.

Chenming Paper said that in the first half of this year, improved industry sentiment drove up paper product prices; at the same time, as wood pulp prices continued to rise steadily, this favored large integrated pulp and paper enterprises, and the profitability growth of the paper industry sector was notable.

Sun Paper believes that since the start of this year, under the framework of "carbon peaking and carbon neutrality" rules, the balance of the competitive landscape in China's paper industry has tilted toward leading enterprises, and large-scale, intensive development of the industry has become the trend. Shanying International also said that under the "dual carbon" goals, leading paper companies and some small and medium-sized enterprises have developed differently, which will ultimately force outdated capacity to exit and bring about a further rise in industry concentration.

"Higher concentration is more beneficial than harmful for the industry," Fan Guiwen, sales director of Kumera (China) Co., Ltd., said in an interview with a Securities Daily reporter. Higher industry concentration offers considerable advantages in carbon neutrality, environmental management and other areas, makes government supervision easier, and will also reverse the lose-lose situation of the past, when many players competed maliciously and grabbed market share with low prices and low quality.

The industry is strongly in a wait-and-see mood

However, whether the industry's collective impressive first-half report card can be sustained through the whole year is an open question.

In particular, since entering May and June, culture paper prices led a sharp plunge; although the industry joined forces to "stabilize" paper prices and issued successive price increase letters in late July and early August to boost morale, the downturn could still not be withstood. Interviews with several paper companies showed that the current ex-factory price of culture paper used for writing and printing is about 5,100-5,300 yuan per tonne, a drop of more than 2,000 yuan from the peak of more than 7,000 yuan per tonne in May.

During the interviews, the reporter also found that as the traditional peak demand season for culture paper, the "golden September and silver October," arrives, the current price trend is unclear and the outlook uncertain, with a strong wait-and-see atmosphere across the market.

Pang Fucheng, board secretary of Sun Paper, said that since the second quarter, culture paper has been affected on the supply side by a surge in imports and by "exports diverted to the domestic market," compounded by weaker demand in the off-season for culture paper, causing culture paper prices to fall relatively quickly.

"At present, the industry's profitability is basically at the break-even point, while for small enterprises it is basically at a loss," Pang Fucheng said, adding that with the arrival of the traditional peak season for culture paper, demand for culture paper will pick up somewhat. "Of course, the trend is not that certain and still needs further verification by the market."

A securities analyst also told a Securities Daily reporter that the market now broadly expects culture paper prices to have bottomed out, though doubts remain about whether the peak demand season can trigger a price rise and about the extent of any rebound. "This round of paper price decline was not caused by domestic demand, but by changes in imports and exports on the supply side. Therefore, the key variables determining the upward turning point and magnitude of the next cycle also lie in the suppression from imports on the supply side and when export restrictions will ease."

"It is indeed full of uncertainty, and this is closely related to the full recovery of the domestic economy and the degree of recovery in international trade," Fan Guiwen also told a Securities Daily reporter, saying that for culture paper alone the expectation is fairly neutral, while for packaging, especially food and pharmaceutical packaging, the expectations are good. Industry analysts at Southwest Securities also said that entering the third quarter, the decline in culture paper and ivory board prices exceeded that of pulp prices, while waste paper-based prices remained firm; the profitability of culture paper enterprises is expected to fall quarter on quarter in the third quarter, while packaging paper profitability will be relatively stable.

Paper companies remain confident

Against this backdrop, most of the paper companies interviewed by the reporter remain confident about the industry's trajectory ahead.

Pang Fucheng, board secretary of Sun Paper, believes that although industry sentiment has not yet recovered, there is not much room left for further decline. "The most difficult situation is no worse than this, and our operating rate is still quite normal, which is where our confidence lies."

In addition, the industry's confidence comes not only from the aforementioned further rise in industry concentration and the maintenance of relatively normal operating rates, but also from the accelerated expansion of advantageous capacity and the diversified positioning of leading enterprises with complete industrial chains.

Take the top-ranked Chenming Paper, Sun Paper and Bohui Paper as examples. Chenming Paper laid out an industrial chain integration strategy as early as 20 years ago; the raw material cost advantage of its 4.3 million tonnes of self-made pulp, together with its supporting water and road transport advantages, makes its self-made wood pulp cost several hundred yuan lower than the general market price, and its overall transport costs are also better than those of peers. Sun Paper, which has already built three major bases in Shandong, Guangxi and Laos, will see its pulp and paper capacity exceed 10 million tonnes as the paper and pulp projects at its Guangxi base come on stream successively in the second half of this year. And after being acquired by APP (China), Bohui Paper can enjoy the cost advantages brought by the group's integrated forestry-pulp-paper layout, effectively enhancing its pulp cost advantage and profitability.

At the same time, companies with a coordinated layout across multiple paper grades also have stronger risk resistance. Sun Paper said that although culture paper was affected to some extent, its linerboard prices were relatively stable in the first half, a relatively off-season period, and its dissolving pulp business, through adjustments to its product mix and control of output and supply, achieved a "not-so-off season" turnaround in performance; as the peak season arrives, improving downstream demand is expected to drive the profitability of this business to remain above its historical median.

——This article is reprinted from China Packaging Network (pack.cn). Original link: http://news.pack.cn/show-378243.html