Consumption off-season downstream demand is weak, is there an investment opportunity in the paper sector?

Affected by the oversupply of pulp last year, pulp futures rose sharply, but this year, pulp futures failed to extend the rising market. Since the beginning of 2023, pulp futures prices have been in a downward trend, falling 22% in less than 6 months. On June 8, 2309 paper pulp futures contracts also hit a low of 4926 yuan/ton, down 0.79% on the day, closing at 4998 yuan/ton.

At the same time, affected by pulp import data, the spot price of pulp in Shandong on June 8 was 5150.00 yuan/ton, compared with the premium of 152.00 yuan/ton for the main price of futures. In the face of the volatility of pulp prices, leading companies in the paper sector have responded to investor inquiries on the interactive platform, Chenming Paper (000488.sz) said on the interactive platform that the current self-pulping than imported commodity pulp still has a certain advantage.

Pulp imports surged in May

"On June 8, the pulp futures price hit a low of 4926 yuan/ton, and now this price is the lowest point this year." Futures spot prices fell synchronously, June 8 East Russia coniferous pulp spot offer 5000 yuan/ton, compared with the previous day down 50 yuan/ton, the reason for the new low spot and May pulp import data, May pulp imports of 3.156 million tons, +17.1%." Citic construction investment futures analyst Wu Xinyang told the China Times reporter in an interview.

Mr. Li, who has long been engaged in the spot trade of pulp, told reporters that the change in the spot import volume of pulp has a significant guide to the unilateral price of pulp. As the overall import volume of pulp in May is huge, if the next high growth continues, the import volume of coniferous pulp in pulp imports will also maintain a high growth rate, which will lead to a further decline in spot prices.

Wu Xinyang said that this year UPM UPM Group (hereinafter referred to as "UPM") new pulp plant and other plants put into operation on schedule, objectively increasing the supply of broadleaf pulp. The new Kemi pulp plant in Finland is expected to start production in the second half of this year, and there are still plans to start production of coniferous pulp in 2024. Therefore, under the background of the general trend of production, the price of pulp in the far month is weakening.

However, the reporter found that compared with the wave of pulp futures skyrocketing from 2021 to September 2022, pulp futures prices have been in a decline this year. In this regard, Wu Xinyang believes that the skyrocketing in 2021-2022 is the result of a combination of factors, the interest rate hike in the United States led to a decline in real estate starts and permits, and the demand for softwood sawn timber declined, while the pulp is small caliber softwood wood or sawn wood scraps, and the production also declined, resulting in a higher cost of softwood chips in North America.

At the same time, port and rail strikes in North America have led to restrictions on pulp shipments in North America. At that time, European pulp prices were higher than in China, and the value of pulp was low relative to the value of other goods. Therefore, after the resumption of work, the first to achieve shipment repair is Europe, or other global goods, because the pulp supply is tight at that time.

However, the decline in pulp prices this year has come from the growth of pulp supply and, more seriously, from the growth of coniferous pulp imports. In this regard, Li Qing, an analyst at CITIC Futures, said in an interview with the China Times that according to the matching of the operation results of pulp futures with supply and demand data, it can be seen from the historical law that the unilateral drive of conifer pulp futures mainly comes from two dimensions: the marginal change of import volume compared with the same period last year and the accumulation/removal cycle of the industrial chain.

Li Qing said that the underlying logic of 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 Chinese softwood pulp imports. In addition, high inventories in the European market have also led to further declines in pulp prices. At the same time, macroeconomic data is also in a downward state, and from the current supply and demand situation, there is no sign that this downward cycle is coming to an end. As a result, pulp futures prices have fallen since the beginning of the year.

Weak downstream demand in off-season consumption

"From the demand side, in addition to the current good performance of household paper, other paper are facing the problem of excess capacity. If the price of white cardboard has fallen to about 4500 yuan/ton, downstream paper mill profits decline, losses lead to a slowdown in upstream demand, overseas pulp plants have also cut prices, Arauco company announced a new round of offer, coniferous pulp silver star flat reported to 680 US dollars/ton, at the beginning of the year near 900 US dollars." Zhao Xiaojun, manager of Zhongda capital period, said in an interview with our reporter.

At the same time, Zhao Xiaojun said that at the beginning of this year, downstream paper mill enterprises normal storage, with falling prices, weak demand, lack of confidence in paper mills, showing a wait-and-see situation, some paper mills from a month's storage cycle reduced to half a month, resulting in further price declines. After taking the initiative to go to the warehouse in March and April, a small restocking in May, broadleaf pulp has warmed up, and the needle width spread has narrowed, but as the demand for 618 stocks in advance has begun to slow down, the price has weakened again.

As pulp supply continues to climb, domestic pulp stocks are also growing. Li Qing said that the domestic pulp inventory is about 2.3 million tons, and the European port inventory is 1.8 million tons. In absolute terms, inventories are at high levels both at home and abroad. Historically, the highest value of domestic inventory is about 2.43 million tons, and overseas is about 2 million tons. It can be seen that the current inventory level is very close to the record level.

Li Qing said that at present, the purchase of pulp should be divided into pulp types, and there has been a sustained replenishment purchase of broadleaf pulp since the beginning of May, and a large number of replenishment warehouses once led to the current tight supply of domestic broadleaf pulp. That has not been the case with coniferous pulp, the standard for futures contracts. Basically, it is still based on demand procurement, and the transaction is relatively depressed.

In the face of continuous decline in pulp prices, the operating rate of paper enterprises is also the focus of market attention. The reporter asked about the start of some paper enterprises. It is understood that the operating rate of downstream paper enterprises is basically at a normal level, with little difference from normal years, but compared with last year, there is a significant increase (except for wrapping paper). Since the second quarter, with seasonal changes, from the demand season of downstream paper into the demand off-season, the operating rate in this period there are obvious signs of continued decline. But the magnitude of the decline is also historically normal.

However, Li Qing said that as pulp prices continue to bottom out, the next need to pay attention to downstream centralized replenishment and pulp plant maintenance. If there is a large area of downstream concentrated replenishment in China, it will also have a significant pulling effect on the absolute price of the stage. And if the number of pulp mill maintenance due to low prices continues to increase, it will also change the overall supply and demand balance of coniferous pulp. In addition, in the long term, once the demand for coniferous pulp in Europe has increased, resulting in a decrease in the amount of coniferous pulp flowing into the Chinese market, the driver of the decline in coniferous pulp futures has disappeared.

The agency says the pulp sector may benefit

According to a research report released by Minsheng Securities, the demand for cultural paper is strong, mainly from red publications and teaching materials, and the wrapping paper depends more on the recovery of downstream consumption, and under the background of steady growth, the demand for wrapping paper is optimistic. In the context of low profitability in the industry, paper enterprises generally delay the progress of capital expenditure, and the potential supply pressure is gradually released.

At the same time, in terms of cost, the price of pulp in the second quarter is still in the declining channel and the inventory of high price pulp is exhausted, and we are optimistic about the continuous optimization of profit of wood pulp paper products, focusing on cultural paper enterprises with strong demand certainty; At the same time, pay attention to the improvement of demand expectations, the profitability of packaging paper enterprises. Related stocks are Sun Paper (002078.SZ), Yueyang Lin Paper (600963.SH), Chenming Paper (000488.SZ), Bohui Paper (600966.SH), Mountain Eagle International (600567.SH).

China Galaxy Securities research report said that the paper sector as a whole under pressure, pulp and paper and special paper in the finished paper price increase and capacity expansion, revenue to achieve steady growth, while inventory pulp prices at a high level caused a sharp decline in profitability; The downstream demand for waste paper is weak, resulting in a continued decline in the price of finished paper, and profitability is at a low level, with a small increase in revenue and profit from profit to loss.

Looking forward to the future, with the global pulp production capacity, pulp prices are rapidly declining, taking into account the impact of the inventory cycle, it is expected that Q2 pulp and paper and special paper profit elasticity will be released; The core contradiction of waste paper is still the terminal demand, and it is expected that the subsequent improvement in demand will be expected to bottom out.

With the fluctuation of pulp prices, Chenming Paper said on the interactive platform on June 7 that the price of imported pulp is affected by various factors such as supply and demand, international freight, and the RMB exchange rate, and the conversion of purchased commodity pulp into liquid into the paper production line still requires a certain cost. At present, home-made pulp still has certain advantages over imported commercial pulp.

Xianhe shares also said on the interactive platform that the company's current production and operation are normal, and production and marketing are in good condition. The decline in pulp prices is conducive to the cost reduction of the company's pulp products. Pulp price is affected by a variety of factors and changes, the company will also make corresponding measures in time to smooth the impact of raw material cost fluctuations, to maintain the stability of the company's performance.

The fluctuation of RMB exchange rate is affected by various factors. The Company always pays close attention to the fluctuation of foreign exchange rate and will take various measures to prevent the risk of exchange rate fluctuation according to the actual situation of exchange rate fluctuation. The depreciation of RMB has a dual impact on the company. On the one hand, the company's imported pulp is mostly settled in foreign exchange, and the depreciation of RMB will increase the company's production and operation costs; on the other hand, it will improve the company's export competitiveness.

Zhao Xiaojun told our reporter that the decline in pulp prices has played a certain role in promoting the profit repair of downstream enterprises, but it also depends on the strength of the finished products. If demand continues to recover, low raw materials are bound to boost profits sharply. If the recovery is slow, the replenishment is intermittent, and it will still affect the normal operation of the enterprise.

"At present, pulp is close to the historical low price range, and it is still in the process of finding the bottom and grinding the bottom, and it is necessary to wait for fundamental changes, such as the slowdown of pulp mill capacity, the reduction of exports, and the continued recovery of downstream demand, so that it is possible to gradually exit the bottom range." Zhao Xiaojun said.

In addition, Wu Xinyang said that the decline in pulp prices can reduce the cost of paper companies. In the cost of papermaking, according to the annual reports of some listed companies, the cost of raw materials in the cost of papermaking accounts for 60%-80%, which also needs to consider the bargaining power of the enterprise itself. Even in the process of pulp price decline, whether the price of the end product follows, or whether there is a delay, these factors determine whether the company can reduce costs at the same time, achieve higher profitability.

For the late trend of pulp futures, Li Qing said that this round of cyclical downward has been close to the middle and back. At present, there is no driving force for the continuous reversal of pulp futures, but from the absolute price determination, the price of coniferous pulp below 5000 yuan/ton does not belong to the overvalued varieties. From the expected point of view, the downward target of this round may fall to about 4800 yuan/ton, and the current disk is not too far away, but there is no rise in the core drive, the later price may still enter a weak shock or find the bottom of the link.