Paper Prices Test a Rebound as Cultural Paper Hikes Stall: Demand Still Holds the Key

Packaging Paper Decline Pauses as Cultural Paper Price Hikes Fall Short: Demand to Set the Paper Industry’s Next Move

Since August, the long-weak packaging paper market has shown signs of a turn: the broader price decline has begun to steady, and several mills have recently issued price-increase notices. Yet, constrained by soft market conditions, the increases have been limited and largely exploratory.

Meanwhile, with August past its midpoint, the new round of price hikes jointly pushed by cultural paper producers in early August has failed to overcome weak demand, and order execution at mills has been blocked. Still, with costs high, mill quotations are expected to stay firm.

Xu Ling, an analyst at Sublime China Information (SCI), told Securities Daily that August marks the transition between the off-season and peak season. Although demand rises month on month, the gain is limited, and supply-demand bargaining is expected to continue in the paper market during the month.

For the road ahead, Everbright Securities’ latest research report expects pulp prices to fluctuate at high levels in the near term on the cost side, with a possible inflection point in Q4; on the demand side, overseas economic recovery is supporting strong demand, while domestic demand is also expected to improve.

Supply and Demand Remain Locked in a Tug-of-War

From August 1 to now, the packaging paper market — corrugated and containerboard — has stabilized after July’s sharp volatility and decline. As some large mills began maintenance shutdowns in line with earlier shutdown notices, and upstream waste paper prices stopped falling and rebounded, the market moved into range-bound consolidation.

Data shows that corrugated and containerboard prices fell notably in July, with leading producers cutting prices multiple times and small and medium-sized mills following, for cumulative reductions of 100 yuan/ton to 300 yuan/ton. After entering August, some downstream packaging plants began moderate restocking, and mills in certain regions saw orders improve from earlier levels; individual mills recently raised ex-factory base paper prices. The hikes were modest, mostly 30 yuan/ton to 50 yuan/ton, clearly serving as a test.

Mr. Zhou, head of a packaging paper mill in Zibo, Shandong, told the reporter that sustained price declines have pushed many small and medium-sized mills to the edge of profit or into losses. In addition, a broad rebound in the waste paper market has raised raw material costs, strengthening packaging paper mills’ willingness to hold prices. But the market remains in the off-season and demand has not turned strong, so the small increases are also a test of downstream packaging enterprises’ response.

Xu Ling said that although large mills are carrying out maintenance plans and output is expected to fall month on month, early August inventories were high and new capacity was released during August, leaving overall supply pressure in place. August is also a transition month between the off-season and peak season for corrugated and containerboard. With demand not yet boosted, supply-demand bargaining continues and the market is likely to fluctuate within a range.

The cultural paper market shows the same clear supply-demand contest. From August 1, cultural paper enterprises launched another round of price increases at 200 yuan/ton, but weak demand and light trading blocked order execution at mills. Against generally weak cultural paper demand in the first half, such failed price-increase notices have occurred repeatedly.

After entering Q3, a July round of price increases by cultural paper enterprises was implemented relatively optimistically thanks to some supportive publishing orders. But from August, as the traditional off-season for cultural paper set in, publishing and printing orders entered their wrap-up stage, social orders remained poor, and most distributors reported weak demand. This round of increases lacked upward momentum, production-sales inversion was common, and printing plants largely maintained just-in-time buying. Zhang Yan said that in the short term, upstream-downstream bargaining in cultural paper is prominent, and some players may lower market prices to recover funds.

Pulp Prices May Be Approaching an Inflection Point

Half-year reports for the paper industry are about to be disclosed intensively. According to East Money Choice data, as of now, among the 22 A-share listed companies classified at Shenwan level-1 as papermaking, 8 have released earnings forecasts: 6 expect sharp performance declines and 2 expect first-time losses, highlighting the industry’s first-half trough.

The recent conditions in both packaging paper and cultural paper also show that since the start of Q3, the paper industry still faces considerable supply-demand tension. When the industry will emerge from the trough and when the inflection point will arrive are key market questions.

Everbright Securities’ latest report notes that, overall, cyclical swings in paper industry profitability are driven by the spread between paper prices and raw materials. In interviews, several industry analysts also said that a turnaround from the downturn depends partly on future pulp price trends and, more importantly, on demand recovery.

Looking at the current supply-demand and competitive landscape, Everbright Securities believes demand is recovering both at home and abroad. Overseas recovery is notably strong, driving higher paper product consumption, with demand especially brisk in the Middle East and Southeast Asia, while overseas supply is clearly insufficient. Leading domestic manufacturers have stepped up exports, and China’s paper product export volume has continued to post rising year-on-year growth.

Chenming Paper previously said in its earnings forecast that in the first half it seized the opportunity created by insufficient overseas supply and worked to expand international markets. Bohui Paper, which is also accelerating international market development, said its export share has continued to rise.

On the recovery of domestic demand, Everbright Securities expects improvement ahead despite overall weakness caused by the pandemic. By segment, cultural paper demand is weak; with consumption not yet recovered, corrugated and containerboard demand is also weak overall; downstream demand for white card and specialty paper is relatively better.

On the cost side, multiple institutions judge that pulp prices will remain high and volatile in the short term, with an inflection point possibly appearing in Q4. Global pulp mills’ production and sales have somewhat recovered, and new capacity is advancing as planned; pulp supply is expected to gradually increase from Q3 2022. Everbright Securities points out that during a pulp price downcycle, the profitability of bulk paper leaders will be significantly repaired.

— Reprinted from China Packaging Network (pack.cn); original link: http://news.pack.cn/show-379085.html