Pulp Market 2022 Outlook: Downstream Restocking Seen as Demand Bright Spot

The pulp market in 2021 was characterized by brief rallies and a long downtrend. Available data put the year's index contract high at the end of February, around 7,627 yuan/mt, and the low at the end of October, at 4,750 yuan/mt. Between March and October, prices produced only one comparatively strong rebound; the rest of the period was mostly split between declines and sideways movement. In the author's view, the demand side has limited room for further contraction, and the current pulp price is not overvalued, suggesting a bottom has likely formed. Meanwhile, destocking pressure on finished products will cap pulp prices in H1 2022, with the price center expected to rise only in H2.

Global softwood pulp supply remains structurally tight over the long run

Facility operating rates are already near full

Global softwood pulp capacity is expected to stay broadly flat from 2020 to 2025, with average annual growth below 1%. For 2022 specifically, capacity is forecast to rise just 0.4% from 2021. Supply assessment requires looking at operating rates as well as capacity. The global softwood pulp operating rate already stood at 91% in 2020. Analysts expect that with demand growing naturally at 2%-3%, softwood pulp operating rates will move higher, approaching 92% in 2022. With no new facilities and existing plants running near full rates, softwood pulp supply cannot expand substantially.

Hardwood pulp is the main source of incremental supply in the market pulp sector. Absolute figures differ by statistical scope, but it is certain that three new facilities will start up between late 2021 and mid-2022. Brazil's Bracell project and Chile's Arauco MAPA project, both planned for late 2021, have combined capacity of 4.1 million mt/year. In mid-2022, UPM's new 2.1 million mt/year facility in Uruguay is also scheduled to come online. As a result, hardwood pulp supply growth in 2022 is clear. Compared with 2020, hardwood pulp capacity is expected to rise 19% by 2025, with growth of 6% in 2022 and 5% in 2023.

Chart: Global softwood and hardwood pulp capacity growth rates

A phased supply increase is expected in early 2022

Pulp shipment volumes may also alter the supply rhythm. Softwood pulp shipments are mainly shaped by two factors:

First, hardwood pulp competes for shipping capacity. From 2017 to 2020, global softwood and hardwood pulp shipments moved in opposite directions. That pattern changed in 2021, when shipments of both declined because global shipping capacity fell. The lower total volume masked the competition for freight capacity between the two. Looking to 2022, more new hardwood pulp facilities will require stronger logistics, and whether shipping capacity recovers or not, softwood pulp shipment growth will remain limited.

Chart: Global softwood and hardwood pulp shipments

Second, softwood pulp inventories have climbed to a high level. As of September 2021, global softwood pulp mill inventories reached 45 days, the highest in 10 years of recorded data. Pulp mills face urgent destocking needs, and the release of that pressure will inevitably come with a phased rise in shipments. Based on a similar situation in August 2020, softwood pulp shipments may edge higher for 3-6 months. Softwood pulp supply is therefore expected to increase notably in early 2022.

Chart: Global softwood pulp mill inventories

China's import share remains relatively stable

More than 90% of China's softwood pulp is imported, so import volumes indicate current supply levels. China's pulp imports declined in 2021. Through September, cumulative softwood pulp imports fell 0.8% year on year, while cumulative hardwood pulp imports dropped 3.9%. For the full year, imports of both softwood and hardwood pulp in 2021 followed a high-to-low trend.

Since 2019, global softwood pulp shipments have gradually declined, while China's softwood pulp imports as a share of global shipments have remained relatively stable. This indicates, first, that China faces no extra competition for resources, and second, that China's softwood pulp supply largely tracks the global market. Based on the shipment outlook above, domestic softwood pulp imports will rise in early 2022 but stay stable for the full year.

Chart: China's softwood pulp imports as a share of global shipments

Chart: Domestic softwood pulp imports

The market has yet to show strong consumption potential

Cultural paper was extremely weak in 2021, as shown by both absolute prices and domestic output. In Q3, spot prices of woodfree offset paper and coated paper fell to seven-year lows. Meanwhile, from January to October, cumulative woodfree offset paper output declined 3.5% year on year, and coated paper output fell 15%. Three factors explain this. First, net imports of cultural paper increased in 2021. Second, certain policies weighed on cultural paper consumption: printing demand linked to the 100th anniversary of the founding of the Communist Party of China, which had been steadily released, was halted after May; and the student double reduction policy hit the after-school tutoring market, reducing demand for supplementary teaching materials and textbooks. Third, domestic end-user demand recovered less than expected in 2021, as repeated COVID-19 outbreaks kept economic activity below pre-pandemic levels.

Cultural paper had few consumption highlights in 2021, and coated paper was constrained by digitalization and occasional restrictions on commercial gatherings. The decline in the coated paper market that year far exceeded changes in the domestic economy, with weak domestic demand and export constraints likely the main causes. In 2022, if the pandemic and logistics bottlenecks ease, coated paper demand could recover toward normal levels.

Compared with coated paper, demand for woodfree offset paper is expected to improve in 2022. First, extremely high sea freight rates hurt domestic book exports, and this bearish effect will fade as freight rates fall. Second, end users and distributors have generally completed raw material destocking, so demand will not be reduced by inventory liquidation. Third, the 20th National Congress of the Communist Party of China will be held in Beijing in H2 2022, and publicity and study activities will create some printing demand. Finally, the double reduction policy saw some adjustments in Q4 2021.

Previously, online academic tutoring institutions in China did not need a school operating license. After the double reduction policy was advanced, they must obtain such a license to conduct training, and online academic tutoring for compulsory education students must be registered as non-profit. Offline academic tutoring institutions will also receive a separate license before the end of 2021, namely the license for non-profit status. Once licenses are issued, demand for tutoring materials and textbooks, which was cut off entirely in Q3 2021, will recover to some extent. In addition, student book standards were set in Q4 2021, which will also lift end-user demand somewhat.

Overall, the cultural paper market was hit hard in 2021. Demand has momentum to recover in 2022, but without event-driven catalysts the rebound will not be large. Given high inventories, the cultural paper market is expected to perform better in H2 than in H1.

Chart: Woodfree offset paper output

Chart: Woodfree offset paper inventory

In tissue paper, the market has maintained natural growth, but in recent years growth in most years has not exceeded the previous 5% level. Association statistics show consumption growth of 1.2% in 2018 and 3.2% in 2019. In 2020, COVID-19 pushed consumption growth up to 7.1%, while in 2021 it may even turn negative. Zhuochuang data show that from January to October 2021, domestic tissue paper output fell 4% year on year cumulatively, and from Q2 onward the operating rate was generally around 50%.

The sharp slowdown in tissue paper consumption growth in 2021 may have resulted from demand pulled forward by stockpiling. Tissue paper consumption growth is expected at 2%-3% in 2022 because domestic consumption has not changed significantly. Supply in the tissue paper market remains excessive, and for most of 2022 the supply chain will be at break-even or even in loss. Some capacity will still be added in the future, and the plans seen so far are mostly medium and large mill projects. As a result, when processing margins along the supply chain are calculated using large jumbo roll sales prices in Shandong, the outlook is not optimistic.

Packaging paper and specialty paper performed relatively better. In recent years, demand growth for these grades has been fairly stable, especially after the plastic restriction order and the waste import ban. From January to September 2021, cumulative packaging paper sales rose 7% year on year, and cumulative white board paper sales rose 6.7%. Compared with the other two paper grades, packaging paper and specialty paper had a solid year in 2021. The plastic restriction order and waste import ban began strict enforcement in early 2021, and their benefits for packaging paper and specialty paper will continue in 2022, supporting high sales growth for both.

Chart: Tissue paper output

Chart: White card paper output

Although downstream finished paper consumption has limited highlights, restocking in 2022 deserves attention. At the end of 2021, the downstream finished paper market was likely characterized by high supply-side inventories but low inventories at end users and in channels. In terms of the price-inventory relationship, high visible inventories do not mean prices will keep falling; once destocking starts, finished paper prices will rise. Pulp futures prices are usually more sensitive to downstream product price changes, while the impact of marginal output shifts is secondary.

Looking ahead to 2022, it can be expected that

Cultural paper producers have shown a willingness to stabilize profits through low operating rates, which is bearish for pulp in terms of actual consumption. During this process, however, cultural paper prices and profits may improve. Since pulp futures were listed, changes in cultural paper prices have had the most visible impact on the pulp market. Based on the expected pace of cultural paper demand recovery, the cultural paper market is more likely to turn bullish in H2 2022.

Rising tissue paper prices can only add to pulp market strength, not drive it. In Q4 2021, tissue paper channel destocking was already complete, as reflected in October price trends. However, given severe oversupply, restocking along the supply chain is unlikely to be sustained. Higher operating rates at tissue paper mills tend to appear during price upturns. Cultural paper production is dominated by small mills, and higher operating rates there will bring periodic purchasing, which can support pulp demand to some extent in peak season or when raw material prices rise, but it will not dictate market sentiment.

White card paper and white board paper are highly concentrated in production and help set the market tone. With foreign waste paper no longer allowed into China, domestic waste paper prices have remained firm, raising packaging paper costs. However, packaging paper uses a relatively small share of wood pulp, so changes in packaging paper prices must first transmit to other white paper grades and then to pulp.

Overall, after three consecutive quarters of price declines across paper grades, midstream and downstream channel inventories are no longer high, with industry inventories mainly concentrated at paper mills. Downstream restocking is a bright spot for demand in 2022 and is more likely to begin in H2.

Chart: Apparent consumption of imported wood pulp

In summary, global softwood pulp output is broadly stable on the supply side; even if it grows in 2022, total volume will be limited, and destocking pressure will be greater in H1 than H2. On the demand side, sales will edge up marginally: H1 sales will be low on a high base and high inventories, while H2 will be supported by restocking and peak season. Based on the above, pulp prices are forecast to range from 4,500-5,200 yuan/mt in H1 2022 and rise to 4,800-5,500 yuan/mt in H2. Risks to watch include larger-than-expected global macroeconomic volatility and larger-than-expected maintenance or shutdowns at softwood pulp mills.

——This article is reprinted from China Packaging Network (pack.cn). Original link: http://news.pack.cn/show-378722.html