Overseas Pandemic and Falling Waste Paper Prices Pressure Packaging Paper; Cultural Paper Leaders Show Resilience

Faster recovery in upstream waste paper collection has pushed domestic waste paper prices down by 200-400 from their previous high. Coupled with weaker demand due to the overseas pandemic and fading cost support, packaging paper prices fell another 200-300 per tonne week on week. For the full year, the overseas pandemic is not only expected to drag on packaging paper demand but may also inflate imported recovered paper costs-collection has become harder and freight has surged-thereby weakening leading producers' cost advantage. By contrast, cultural paper benefits from a stronger industry structure and greater price resilience, and leading cultural paper producers' 1H20 earnings are expected to improve on a wider pulp-paper price spread. Sun Paper remains favored.

Packaging paper: the overseas pandemic and falling waste paper prices combined to pull paper prices lower. First, the pandemic has delayed a demand recovery-domestic packaging paper demand is recovering slowly, with daily necessities and courier orders performing well while most other downstream segments remain lackluster; the rapid overseas spread also hurts Chinese exporters, further suppressing external demand. Second, raw material waste paper prices weakened markedly-after upstream collection recovered quickly, domestic waste paper prices dropped 200-400 from their previous high and fell below the pre-Spring Festival average. With pandemic-hit demand and weaker cost support, containerboard averaged 4,697/ton, down 224/ton week on week, while corrugated paper averaged 4,040/ton, down 313/ton week on week. Given that overseas-related demand may stay sluggish in the first half, further packaging paper price gains are likely limited.

Cultural paper: soft demand and continued inventory build-up prompted leading coated paper producers to cut output jointly to defend prices. Mills have largely resumed operations, and coated paper makers plan coordinated production cuts; cultural paper mainly covers coated paper and woodfree offset paper. Both segments have essentially restored normal production and logistics, yet inventories remain high. To ease supply pressure, the four major coated paper producers recently announced cuts, expected to reduce April output by 90,000 tonnes. Demand remains weak and prices are under pressure, but a recovery is near: downstream distributor orders are still limited, pushing prices slightly lower-woodfree offset paper averaged 6,571/ton, down 5 from last week, and coated paper averaged 6,179/ton, down 50 from last week. As schools in China prepare to reopen, textbook printing and other publishing demand is expected to be released progressively in late March and April, helping the supply-demand balance recover.

Packaging paper demand for the full year is dragged down by the overseas pandemic, while leading cultural paper producers remain favored. As the overseas pandemic continues to spread, external demand may effectively be paused, and packaging paper-whose demand is closely tied to exports-could be significantly affected.

Meanwhile, the overseas pandemic has made foreign waste recovery difficult and sharply increased freight costs (according to Paper Industry Link, up about US$250/ton). With domestic waste paper prices weakening, higher foreign waste costs have partly eroded the cost advantage of large enterprises. We remain positive on earnings improvement at leading cultural paper producers: during the pandemic, the cultural paper segment has shown stronger price resilience thanks to a better industry structure, and a wider pulp-paper price spread in the 1H20 cultural paper industry is expected to support earnings improvement.

For the packaging paper segment, a cautious stance is recommended. Sun Paper-A is favored for its more certain gross margin improvement this year and sustainable medium-term growth potential.

Risks: the overseas pandemic impact is intensifying, and domestic demand recovery is falling short of expectations.

Source: China Packaging Network (pack.cn), original link: http://news.pack.cn/show-354903.html