Corrugated Paper Market Outlook: H2 2021 Seen Firm as Supply Tightens

I. A Quick Look at China's Corrugated Paper Production

Corrugated paper serves packaging applications across home appliances, logistics and express delivery, electronics, daily chemicals, food and beverages. Containerboard and corrugated paper offer a paper-based alternative to wood and plastic, and they can be recycled, making them a green packaging material with promising prospects. In 2020, pandemic disruption led to uneven downstream demand: home appliance output edged up steadily, beverage and frozen processed product output fell sharply, while express delivery stood out. After a steep demand decline early in the year, strong second-half momentum helped full-year demand post modest year-on-year growth. Consumption reached 27.76 million tons, a record high, while output rebounded noticeably to 23.9 million tons. At the same time, the ban on foreign waste paper could tighten domestic raw material supply, lifting both volumes and prices in China's corrugated paper market.

In 2018, policy changes on imported waste paper put domestic papermakers under pressure. Mills generally raised quality standards for domestic waste paper procurement and adopted zero tolerance for impurities. This collective move pushed up recycled paper quality across the country, with purity improving by more than 80%. Even so, domestic waste paper still lacked a clear price advantage over imported material. Although domestic waste paper recovery kept growing, it could not close the import gap in the short run. As a result, waste paper pulp is set to become a main raw material for containerboard and corrugated paper. Since waste paper pulp currently costs far more than imported waste paper, costs for containerboard and corrugated paper producers will rise further, likely pushing future prices higher.

II. Competitive Landscape

Paper packaging remains a regionally fragmented industry. Small local players expand by offering lower prices and leveraging strong local order acquisition, while many tertiary plants buy board externally and make boxes with small equipment. Because small equipment has low capital and technical barriers, numerous small enterprises have long existed and together hold most market share. The top three corrugated paper companies are Nine Dragons Paper, Rongcheng Paper and Golden Phoenix Paper. The second tier mainly includes containerboard and corrugated paper producers with relatively strong capacity in specific regions but no nationwide footprint, with total capacity between 300,000 and 1.5 million tons.

The third tier consists of players with small local capacity, and the vast majority of small capacity falls into this group. As environmental rules tighten and the global economic landscape shifts, imported paper will become one of the stable sourcing options for packaging companies. Imports and domestic output will reach a new equilibrium, while small and medium-sized domestic containerboard and corrugated paper producers are likely to be consolidated or shut down. Looking ahead, deeper supply-side reform should further reduce the number of corrugated paper enterprises and raise regional industry concentration. On cost alone, mills with less than 200,000 tons of capacity are more likely to be squeezed out in future competition.

III. How Imports and Exports Shape Corrugated Paper

After China issued the 2017 Implementation Plan for Prohibiting the Entry of Foreign Garbage and Advancing Reform of the Solid Waste Import Management System, domestic waste paper took a growing share of papermaking raw materials. In 2019, domestic waste paper consumption was 5.75 times imported waste paper consumption, accounting for 83% of total waste paper consumption. China's waste paper imports that year totaled about 10.75 million tons, down 36.9% year on year. Under the plan, waste paper imports would essentially stop after 2020. Tightening controls on waste paper have continuously reduced imports of this key input. Imported waste paper is an important fiber source for recycled paper in China, including containerboard and corrugated paper, grey-backed white board and newsprint.

Tightened domestic waste paper import policy, combined with fast-growing downstream demand for corrugated paper, has driven China's corrugated base paper imports up rapidly since 2017. In 2020, explosive demand growth in express delivery, home appliances and other sectors pushed corrugated paper imports to 3.89 million tons. China's containerboard and corrugated paper production costs currently rank high globally. Given this cost gap, overseas containerboard and corrugated paper continue to flow into the Chinese market. China's high cost is mainly due to elevated fiber costs, while other cost items such as labor, energy and chemicals are comparatively low worldwide.

By origin, imported kraft containerboard mainly comes from the United States, Russia and Australia, while recycled products, including recycled containerboard and corrugated paper, mainly come from Asia, especially Southeast Asia. With plastic substitution demand in play, China's corrugated paper supply-demand gap is expected to widen further. The cost advantage of imported paper will persist in the near term, so imports are likely to stay high. Starting January 1, 2020, the Tariff Commission of the State Council applied interim import rates below the MFN rate to more than 850 commodities, including corrugated paper, paperboard and some printed materials. This should further stimulate corrugated paper imports.

IV. Market Outlook for Corrugated Paper

The main factor holding up corrugated paper supply-demand fundamentals today remains strong packaging paper demand from the logistics sector, led by express delivery. Nonetheless, by the end of 2022, postal and express outlets in Beijing, Shanghai, Jiangsu, Zhejiang, Fujian, Guangdong and other provinces and municipalities will be among the first to ban non-degradable plastic packaging bags and disposable plastic woven bags, and to reduce non-degradable plastic tape. By the end of 2025, postal and express outlets nationwide will ban non-degradable plastic packaging bags, plastic tape and disposable plastic woven bags. Papermaking is a classic cyclical industry, where supply and demand determine paper prices and profits.

Downstream demand comes mainly from consumer goods, a sector with relatively mild cyclicality. However, capacity supply lags by 1-1.5 years, and the mismatch between capacity release and demand causes cyclical swings in paper prices and papermakers' earnings. Inventory cycles also affect paper prices and short- to medium-term profits, with the inventory cycle centered at around half a year. Lagging capacity supply raises the risk of oversupply, meaning the corrugated paper market structure faces a new round of consolidation.

V. Second-Half Outlook: Volatility with an Upward Bias

For the second half of 2021, the corrugated paper market is broadly expected to stay firm, with the trading center potentially fluctuating upward. The main reasons are as follows:

First, raw material waste paper supply is expected to tighten, supporting stronger paper prices. After the zero-import policy for waste paper took effect on January 1, 2021, tight supply was not obvious in the first half, but the expected shortage may emerge in the second half. Therefore, raw material waste paper prices are forecast to rise steadily in the second half. In addition, the coal-to-gas policy continues to advance, and South China has a clear implementation timetable, which is expected to raise regional production costs. From the raw material side, this supports a firmer corrugated paper trend in the second half.

Second, first-half import data shows that China imported about 1.3061 million tons of corrugated paper from January to May 2021, up 2.18% year on year. In the second half, imported paper will still face rising ocean freight and tight shipping schedules. As a result, the impact of imports on domestic paper prices will weaken, easing competitive pressure on domestic prices.

Finally, the second half is the traditional peak consumption season, with demand release points relatively concentrated. The market is fairly optimistic about demand released by e-commerce festivals such as the Mid-Autumn Festival, Spring Festival, Double 11 and Double 12. Whether that demand meets expectations will be a key focus in the second half.

In summary, the overall corrugated paper market is expected to remain firm in the second half. The average price of China's AA-grade corrugated paper is forecast to fluctuate within RMB 3,800-4,080/ton, with a second-half average of about RMB 3,922/ton, up 4.98% from the first half and up 16.73% year on year.

— Source: China Packaging Network (pack.cn), original link: http://news.pack.cn/show-377946.html