Cultural Paper Peak Season Underwhelms, but Full-Year Paper Industry Outlook Remains Positive

As the back-to-school period and the Mid-Autumn Festival and National Day holidays follow one after another, the paper industry's traditional culture paper peak season has officially started.

Although the sector has just released a set of highly impressive half-year results, culture paper prices began to slide in the second quarter. Even joint efforts to stabilize prices could not stop the market from testing a bottom for a time, casting a shadow over the traditional peak season and leaving sentiment cautious.

Bai Wenxi, chief economist at IPG China, told Securities Daily that under policies including the “double reduction” initiative, this year's peak season will be slightly weaker than previous years and may turn out to be a “peak season that is not peak.” Still, many industry insiders interviewed remain hopeful: “The toughest point is likely behind us, and we are still confident about the market ahead.”

Expectations that fundamentals have bottomed out, combined with the arrival of the peak season, recently drove a volatile recovery in paper-sector share prices. Huatai Paper hit the daily limit up twice in the three trading days from September 8 to 10, while Bohui Paper continued to climb steadily after its September 8 limit-up.

Strong first-half performance

East Money Choice data show that 25 A-share paper companies in China recorded total first-half revenue of about RMB 93.6 billion; 23 posted year-on-year growth, and seven grew revenue by more than 50% year on year.

Three companies surpassed RMB 10 billion in revenue—Chenming Paper, Sun Paper and Shanying International—all exceeding RMB 15.1 billion. Their combined revenue reached about RMB 48.2 billion, more than half of the industry total. Historically, most companies achieved their best-ever first-half revenue this year.

On profitability, all 25 companies were in the black, and 14 saw net profit attributable to shareholders rise by more than 100% year on year. Sun Paper led the industry with first-half net profit of RMB 2.232 billion. The four companies with net profit above RMB 1 billion—Sun Paper, Chenming Paper, Bohui Paper and Shanying International—together earned RMB 6.771 billion, or 65% of the industry's total net profit of RMB 10.422 billion.

Chenming Paper said stronger industry sentiment in the first half lifted paper product prices; meanwhile, steadily rising wood pulp prices benefited large integrated pulp-and-paper producers, driving notable profit growth in the paper sector.

Sun Paper believes that under the “carbon peaking and carbon neutrality” framework, the competitive landscape in China's paper industry has shifted toward leading players this year, with scale and intensive development becoming the trend. Shanying International also noted that under the “dual carbon” goals, leading paper makers and some smaller enterprises are diverging, which will ultimately push outdated capacity out and further raise industry concentration.

Fan Guiwen, sales director of Kumera (China) Co., Ltd., told Securities Daily that higher concentration brings more benefits than drawbacks. It supports carbon neutrality and environmental management, makes government oversight easier, and can reverse the lose-lose situation created by malicious competition and low-price, low-quality market grabbing.

Wait-and-see mood remains strong

Yet whether the industry's impressive first-half performance can last through the full year remains uncertain.

In particular, since May and June, culture paper prices led a sharp decline. Although the industry joined forces to stabilize prices and issued successive price increase notices in late July and early August, the downturn could not be reversed. Interviews with several paper companies showed that ex-factory prices for writing and printing culture paper are currently around RMB 5,100–5,300 per tonne, down more than RMB 2,000 from the peak of more than RMB 7,000 per tonne in May.

The reporter also found that as the traditional “golden September and silver October” demand season for culture paper arrives, the price trend remains 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 hit on the supply side by surging imports and “exports diverted to the domestic market,” compounded by weaker demand in the off-season, causing prices to fall relatively quickly.

Pang said industry profitability is now basically at the break-even point, while small companies are mostly loss-making. With the traditional culture paper peak season arriving, demand will recover somewhat, but the trend is not certain and needs further market verification.

A securities analyst told Securities Daily that the market broadly expects culture paper prices to have bottomed out, but doubts remain over whether the peak season can trigger price increases and how strong any rebound will be. “This price decline was not caused by domestic demand but by import-export changes on the supply side. Therefore, the key variables for the next upward turning point and its magnitude lie in when import pressure eases and export restrictions are relieved.”

Fan Guiwen also said uncertainty is indeed high and closely tied to the full recovery of the domestic economy and international trade. For culture paper alone, expectations are relatively neutral, while packaging—especially food and pharmaceutical packaging—has favorable prospects. Analysts at Southwest Securities said that in the third quarter, culture paper and ivory board prices fell more than pulp prices, while waste paper-based prices remained firm; culture paper makers' profitability is expected to decline quarter on quarter in Q3, while packaging paper profitability should be relatively stable.

Paper companies still confident

Against this backdrop, most paper companies interviewed remain confident about the industry's next moves.

Sun Paper board secretary Pang Fucheng believes that although industry sentiment has not yet recovered, there is limited room for further decline. “The worst situation is no worse than this. Our operating rate remains normal, and that is where our confidence comes from.”

In addition, confidence is supported by the accelerated expansion of advantageous capacity and the diversified positioning of leading companies with complete industrial chains, along with higher industry concentration and relatively normal operating rates.

Take leading players such as Chenming Paper, Sun Paper and Bohui Paper. Chenming Paper began pursuing industrial chain integration two decades ago; its 4.3 million tonnes of self-made pulp, supported by water and road transport, gives it a wood pulp cost several hundred yuan below general market prices and overall transport costs better than peers. Sun Paper has already built three major bases in Shandong, Guangxi and Laos; as its Guangxi pulp and paper projects come on stream in the second half of this year, its pulp and paper capacity will exceed 10 million tonnes. After being acquired by APP (China), Bohui Paper can leverage the group's integrated forestry-pulp-paper layout to improve pulp cost advantages and profitability.

Companies with coordinated layouts across multiple paper grades also tend to be more resilient. Sun Paper said that although culture paper has been affected, its linerboard prices remained relatively stable in the first half, a comparatively off-season period. Its dissolving pulp business, through product mix adjustments and output control, achieved a “not-so-off-season” performance turnaround. As the peak season arrives, improving downstream demand is expected to keep this business's profitability above its historical median.

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