Straw on thin ice, turning point on the horizon

Review 2022

1, the supply side has the right to strong bargaining

Downstream in the pulp and paper industry chain, the overall bargaining power is weak. Traders or finished paper manufacturers can not pass the weak price in the domestic market to the upstream external quotation. In late April this year, the price of coniferous pulp rose significantly, and the exchange rate of the US dollar against the renminbi rose in September. Traders of coniferous pulp import profits from April began to hang upside down, broadleaf pulp import profits from June began to hang upside down, the market price of the domestic pulp market did not rise in the same proportion, downstream profit compression.

Paper mills cannot feed back weak demand for paper products upstream. Since the middle of November this year, the double adhesive paper has a positive price increase of 4.68%, and the output of double adhesive paper only accounts for 12.46% of the finished paper. Prices of other paper products were flat or slightly down. In the same period, coniferous pulp ushered in a wave of rising market, coniferous pulp rose from 7257 yuan/ton to 7621 yuan/ton, an increase of 5%. Therefore, most of the paper gross profit margin is negative, even the head of enterprises are facing the pressure of profit margin decline.

The lack of bargaining power also lays the foundation for the basis regression logic into the delivery month. The base difference of coniferous pulp has been an extreme situation of about 800 yuan/ton, but near the delivery month, the futures price quickly returned to the spot price, and the spot price was basically stable.

2, the transaction is the shock event expectations of the supply and demand sides, rather than the actual gradual change of variables

European benchmark gas futures prices surged as much as 35 per cent on September 2 after Russia announced it would shut down the Nord Stream 1 pipeline, which supplies gas to Europe, indefinitely. The geopolitical uptick sent European spot gas prices soaring 9 per cent. During the same period, the price of Northern bleached cork kraft paper (NBSK) pulp on the Norwegian Pulp and Paper Exchange increased by 18% this year.

On November 20, local time in the United States, the American Railroad Workers Union decided to reject the provisional agreement and began a strike. The strike ended on December 1, when the House of Representatives, the Senate, and President Biden each signed legislation making the strike illegal. Within 10 days, the main pulp contract rose from 6898 yuan/ton to 7200 yuan/ton, an increase of 4.37%.

In terms of pure expected transactions, these two major supply chain disruptions are expected to bring about an increase in energy costs and transportation costs on the supply side, thus leading to an increase in the price of pulp futures. However, the subsequent decline in WTI prices did not reflect the decline in pulp prices brought about by the contraction of the cost side as scheduled; From the long-term trend, pulp prices do not rise steadily with the labor compensation index. The depth of market trading has covered gradient variables, roller coaster changes trading for sudden shortages.

2023 Outlook: Deterministic production, uncertain disturbance

1. Definite production

Pulp 2023 capacity is determined from expected production, expected production and production reduction in line with the overall supply easing expectations.

Overseas pulp plant projects are also expected to usher in production in 2023. UPM's Uruguay project, for example, began collecting timber in mid-December and is expected to begin production in early 2023. The total pulp is expected to be put into production of 10.617,800 tons, excluding 1.7 million tons of bleached sulfate pulp due to conversion or permanent shutdown, 2023 is still expected to have 8.917,800 tons of new capacity.

In November 2022, China produced a total of 5.559 million tons of white cardboard, whiteboard paper, double copper paper, double adhesive paper and household paper. According to the existing project production plan, the main source of new production capacity is 2.82 million tons of cultural paper, 4.7 million tons of white cardstock, and a small amount of household paper 830,000 tons, accounting for 33.77%, 56.28% and 9.7% of the new production in 2023, respectively. The increase in pulp consumption mainly comes from the production of cultural paper and white cardboard. The distribution of paper varieties is similar to the trend of industrial capacity increment in the past 10 years. In 2023, according to the company's announcement, at least 8.53 million tons of new paper mill capacity will enter the market.

If only the upper limit of new capacity is considered, the new capacity of world pulp is basically the same as that of China's new paper capacity. However, we cannot therefore deduce that 2023 supply and demand must be significantly biased towards the direction of supply tightening, and conclude that 2023 pulp will reach a historic high. If we take into account other disturbing factors, we may even come to the opposite conclusion directly. The new pulp and paper mill capacity only shows that the pulp consumption side has a stronger ability to cope with sudden demand shocks.