Pulp prices have hit consecutive low points, and downstream demand is weak during the off-season of consumption

Affected by the oversupply of pulp, pulp futures surged last year, but this year they have not been able to continue their upward trend. Since the beginning of 2023, pulp futures prices have been on a downward trend, with a decline of 22% in less than 6 months. On June 8th, the pulp futures 2309 contract hit a low of 4926 yuan/ton in the intraday trading, with a decrease of 0.79% on the same day and closing at 4998 yuan/ton.

Meanwhile, due to the impact of pulp import data, the spot price of pulp in Shandong Province was reported at 5150.00 yuan/ton on June 8th, a 152.00 yuan/ton increase compared to the main futures price. In the face of the fluctuation of pulp prices, leading companies in the paper sector have responded to investors' inquiries on the interactive platform. Chenming Paper (000488. sz) said on the interactive platform that at present, homemade pulp still has certain advantages over imported commercial pulp.

May saw a surge in pulp imports

On June 8th, the pulp futures price hit a low of 4926 yuan/ton, which is now the lowest point since the beginning of this year. The spot price of futures has also declined. On June 8th, the spot price of Eastern Russia's coniferous pulp was quoted at 5000 yuan/ton, a decrease of 50 yuan/ton compared to the previous day. The reason for the new low in the spot price is due to the pulp import data in May. The pulp import in May was 3.156 million tons, a year-on-year increase of 17.1%, "Wu Xinyang, a futures analyst at CITIC Securities, told China Times The reporter stated during an interview.

Mr. Li, who has been engaged in pulp spot trade for a long time, told reporters that changes in the import volume of pulp spot have significant guidance on the unilateral price of pulp. Due to the huge import volume of pulp in May, if the high growth continues, the import volume of coniferous pulp in pulp imports will also maintain a high growth rate, which will further lead to a decline in spot prices.

Wu Xinyang stated that this year, several factories such as the new pulp plant of UPM Group (hereinafter referred to as "UPM") were put into operation as scheduled, objectively increasing the supply of broadleaf pulp. The Finnish Xinkai Rice Pulp Factory is expected to be put into operation in the second half of this year, and there are still plans to put coniferous pulp into operation in 2024. So in the context of the overall trend of production, the price of pulp in the distant months has weakened.

However, the reporter found that compared to the surge in pulp futures from 2021 to September 2022, pulp futures prices have been in a downward trend since the beginning of this year. In response, Wu Xinyang believes that the surge in 2021-2022 was the result of a combination of multiple factors. The US interest rate hike led to a decrease in real estate starts and permits, resulting in a decrease in demand for coniferous wood sawn timber. Pulp is small caliber coniferous wood or sawn wood scraps, resulting in a decrease in production, leading to higher costs for North American coniferous wood chips.

Meanwhile, strikes at North American ports and railways have led to restrictions on pulp shipments in North America. At that time, the price of pulp in Europe was higher than that in China, and the value of pulp was relatively low compared to other goods. Therefore, after resuming work, the first goods to be shipped for repair were from Europe or other countries around the world, as pulp supply was tight at that time.

However, the decline in pulp prices since the beginning of this year is due to the increase in pulp supply, and more precisely, to the increase in imports of coniferous pulp. In response, Li Qing, an analyst at CITIC Futures, stated in an interview with a reporter from China Times that based on the match between the operating results of pulp futures and supply and demand data, it can be seen from historical patterns that the unilateral drive of needle pulp futures mainly comes from two dimensions: the marginal change in import volume year-on-year and the accumulation/destocking cycle of the industrial chain.

Li Qing stated that the underlying logic behind this round of decline (which began in October last year) is that after the decline in European consumption, the transfer of pulp to the Chinese market has led to a significant increase in China's imports of coniferous pulp. In addition, the high inventory in the European market has also led to a further decline in pulp prices. At the same time, macroeconomic data is also in a downward trend, and from the current supply and demand situation, there is no sign that this downward cycle is about to end. Therefore, pulp futures prices have fallen since the beginning of the year.

Weak downstream demand during the off-season of consumption

From a demand side perspective, except for the good performance of household paper, other paper varieties are currently facing overcapacity issues. For example, the price of white cardboard has dropped to around 4500 yuan/ton, and downstream paper mills have seen profits decline and losses leading to a slowdown in upstream demand. Overseas pulp mills have also lowered prices. Arauco Company has announced a new round of offers, with needle pulp silver star trading at $680/ton, which was once around $900 at the beginning of the year Zhao Xiaojun, the current manager of Zhongda Capital, said in an interview with our reporter.

Meanwhile, Zhao Xiaojun stated that at the beginning of this year, downstream paper mills were able to stock up normally. As prices declined, demand was weak, and paper mills lacked confidence, they showed a wait-and-see trend. Some paper mills reduced their stock up cycle from one month to half a month, leading to further price declines. After taking the initiative to restock in March and April, there was a slight restocking in May, and the broad-leaved pulp rebounded slightly, narrowing the price difference between needle and broad-leaved pulp. However, as the demand for early stocking of 618 began to slow down, prices weakened again.

With the continuous increase in pulp supply, domestic pulp inventory is also increasing. Li Qing stated that domestic pulp inventory is approximately 2.3 million tons, while European port inventory is 1.8 million tons. In absolute terms, both domestically and internationally are at high levels of inventory. In history, the highest recorded value of domestic inventory was around 2.43 million tons, while overseas inventory was around 2 million tons. It can be seen that the current inventory level is very close to the highest level in history.

Li Qing said that currently, the procurement situation of pulp needs to be divided into pulp types. There has been a continuous replenishment purchase of broadleaf pulp since early May, and a large amount of replenishment once led to a tight supply of domestic broadleaf pulp circulation. And the standard product of futures contracts, needle pulp, has never experienced such a situation. Basically, procurement is still based on demand, and transactions are relatively sluggish.

Faced with the continuous decline in pulp prices, the operating rate of paper mills is also a focus of market attention. The reporter inquired about the construction progress of some paper mills. It is understood that the operating rate of downstream papermaking enterprises is currently at a normal level, with little difference from normal years, but there is a significant increase compared to last year (excluding Packaging Paper). Since the second quarter, with seasonal changes, the demand for downstream paper has entered the off-season, and there have been clear signs of continuous decline in operating rates during this period. However, the magnitude of the downward trend has historically been considered normal.

However, Li Qing stated that as pulp prices continue to bottom out, attention needs to be paid to downstream centralized replenishment and pulp factory maintenance. If there is a large-scale centralized replenishment of downstream goods in China, it will also have a significant driving effect on the absolute price of the stage. If the number of pulp mill inspections continues to increase due to low prices, it will also affect the overall balance of supply and demand for coniferous pulp. In addition, in the long term, once the demand for coniferous pulp in Europe increases, resulting in a decrease in the quantity of coniferous pulp flowing to the Chinese market, the driving force behind the decline in coniferous pulp futures disappears.

Institutions claim that the pulp sector may benefit

According to a research report released by Minsheng Securities, the demand for Cultural Paper is highly deterministic, mainly due to the rigid demand of red publications and teaching materials. Packaging paper is more dependent on the recovery of downstream consumption, and in the context of stable growth and continuous acceleration, it is optimistic that the demand for packaging paper will reverse. Against the backdrop of low profitability in the industry, paper companies are generally delaying their capital expenditure progress, and potential supply pressure is gradually being released.

At the same time, in terms of costs, the pulp prices in the second quarter are still in a downward trend, coupled with the depletion of high priced pulp inventory. We are optimistic about the continuous optimization of profits for wood pulp paper products, and focus on cultural paper enterprises with strong demand certainty; At the same time, pay attention to the profit elasticity of packaging paper enterprises under the expectation of improving demand. Relevant stocks include Sun Paper (002078. SZ), Yueyang Forest Paper (600963. SH), Chenming Paper (000488. SZ), Bohui Paper (600966. SH) and Shanying International (600567. SH).

China China Galaxy Securities Research News said that the paper sector as a whole was under pressure. In the process of price increase and capacity expansion of finished paper, the revenue of pulp and paper series and Specialty Paper achieved steady growth, while the stock price was at a high level, resulting in a sharp decline in profitability; The weak downstream demand for waste paper has led to a continuous decline in the price of finished paper, and the profitability is at a low level. Revenue has increased slightly, and profits have shifted from profit to loss.

Looking ahead, with the release of global pulp production capacity and a rapid decline in pulp prices, considering the impact of inventory cycles, it is expected that the profit elasticity of Q2 pulp and Special Paper series will be released; The core contradiction of the waste paper system is still terminal demand, and it is expected that with the improvement of demand in the future, it will be expected to build a foundation and rebound.

With the fluctuation of pulp price, Chenming Paper said on the interactive platform on June 7 that the price of imported pulp is affected by many factors, such as supply and demand, international freight, RMB exchange rate, and that it still requires a certain cost to convert the purchased commodity pulp into liquid to enter the papermaking production line. At present, homemade pulp still has certain advantages over imported commercial pulp.

Xianhe Group also stated on the interactive platform that the company's current production and operation are normal, and the production and sales situation is good. The decline in pulp prices is beneficial for the cost savings of the company's pulp products. The price of pulp is influenced by various factors and changes, and the company will take corresponding measures in a timely manner to mitigate the impact of fluctuations in raw material costs and maintain stable company performance.

The fluctuation of the RMB exchange rate is influenced by various factors. The company has always been paying attention to the changes in foreign exchange rates and will take various measures to prevent exchange rate fluctuation risks based on the actual situation of exchange rate changes. The depreciation of the RMB has a dual impact on the company. On the one hand, the company imports pulp mostly in foreign exchange for settlement, and the depreciation of the RMB will increase the company's production and operating costs. On the other hand, it will improve the company's competitiveness in exporting.

Zhao Xiaojun told our reporter that the decline in pulp prices has played a certain role in promoting the profit recovery of downstream enterprises, but it still needs to be based on the acceptance strength of end products. If demand continues to recover, low raw materials will inevitably significantly increase profits. If the recovery is slow, the replenishment will be intermittent and still affect the normal operation of the enterprise.

At present, pulp prices are close to the historical low range and still in the process of bottoming out. We need to wait for fundamental changes, such as a slowdown in pulp mill production capacity, a decrease in exports, and a sustained recovery in downstream demand, in order to gradually break out of the bottom range, "Zhao Xiaojun said.

In addition, Wu Xinyang stated that a decrease in pulp prices can reduce the costs of paper mills. In the papermaking cost, according to the annual reports of some listed companies, the raw material cost accounts for 60% -80% of the papermaking cost, and the Bargaining power of the enterprise itself needs to be taken into account. Even during the process of pulp price decline, whether the price of end products follows or there is a delay determines whether the company can achieve higher profits while reducing costs.

Regarding the later trend of pulp futures, Li Qing stated that this cyclical downturn is already approaching the mid to late stage. At present, there is no driving force for sustained upward movement of pulp futures, but judging from the absolute price, coniferous pulp prices below 5000 yuan/ton are not overestimated varieties. In terms of expectations, the target for this round of downward trend may fall to around 4800 yuan/ton, which is not too far from the current market situation. However, there is no core driving force for an increase, and prices may still enter a weak oscillation or bottom seeking stage in the later stage.