Straw on thin ice, turning point on the horizon

2. Demand-side uncertainty: recovery and trade flow direction

1) Whether consumption will pick up is a question

Paper products consumption has a strong correlation with social retail sales. China is a net exporter of paper products, but taking wood pulp paper as an example, the export proportion is less than 5% of the output. The downstream products of pulp are mainly consumed at home. The demand for downstream paper products is related to consumption, wood pulp household paper is directly related to consumption, and packaging paper is often associated with retail entrainment consumption. From the historical data, the apparent consumption of paper products is basically consistent with the trend of social retail and commodity retail in social retail.

But China's willingness to consume is weakening. The total retail sales of consumer goods in November was 3,861.5 billion yuan, down 5.9 percent year-on-year. The decline was 5.4 percentage points higher than the previous month. Retail sales of goods were 3.418 billion yuan, down 5.58% year-on-year. The decline in retail consumption reflects pessimistic expectations about the future in the context of slowing economic growth, and may therefore be more willing to save rather than spend today. Since June this year, the consumer confidence index has been in a downward state, and pessimism about employment and income has led to pessimism in the consumer willingness index, which is bearish. For the full year 2023, Goldman Sachs forecasts that China's economic growth will be about 4.5%, lower than last year's forecast for the full year 2022 economic growth. According to wind's consistent forecast, social consumption needs to recover to the level of around October 2022 by June 2023, so the consumption of paper products in the first half of 2023 May be lower than the consumption in the same period in 2022.

2) The difference in economic growth may lead to a shift in trade flows

The price of pulp in Europe is higher than that in China. In November 2022, the price of needle/Nordic coniferous pulp in the European market was 1420-1450 US dollars/ton, down 20-30 US dollars/ton compared to the previous month, and up 160-190 US dollars/ton compared to November 2021. The price of coniferous pulp in China is basically 930-970 US dollars/ton. Excluding Russian needles that cannot be sent to Europe, the price of pulp in China is still lower than that in Europe. Pulp trade resumes after shipping repairs in 2022, starting with Europe where prices are higher. The reason for the high price of pulp in China is that it is led by the demand of Europe and the United States, and the spot is tight.

However, the poor economic growth rate may cause more global commodity pulp to flow to China, and it is likely to continue. In the third quarter of 2022, China's GDP grew 3.9 percent quarter-on-quarter, compared with 1.42 percent in the United States and 1.9 percent in Europe. In the same period, the share of pulp shipped to China in all world shipments increased by about 1.5% to 30.89%, while Western Europe decreased by 0.75% to 14.16%. Goldman Sachs forecasts that in 2023 the disparity will remain, with GDP growth of 1.1% in the United States, 4.5% in the European Union and 4.5% in China. Although China's economic growth will slow down in 2023, it will still be higher than Europe and the United States. Therefore, the trend of the trade flow of pulp to our country or will still be maintained.

It is worth noting that the shift in trade flows does not equate to more pulp entering the country, nor does it necessarily mean that domestic pulp import prices are expected to fall sharply. World pulp shipments in October 2022 fell by 14.13% month-on-month and 6.29% year-on-year, so the total volume did not rise while the proportion rose.

3) Epidemic: impact on consumption also impact on production

There is a lag in the impact of the epidemic on the demand of paper mills. The epidemic has disturbed production, and the industrial added value in November was + 2.2% year-on-year, the growth rate was lower than that in October. Paper mills are the direct demand end of pulp. Before the outbreak, factories used closed-loop management to ensure production. Factories in Southeast Asia and other countries that experienced the impact of the epidemic earlier than China, as the number of social infections rose, closed-loop management could not guarantee the complete isolation of factory staff, so the number of infections in the factory rose, until the production mode of two or three shifts was difficult to maintain, and the factory cut production or shut down.

The impact of the epidemic also has an impact on downstream consumption willingness. From the previous new data and consumption in Hong Kong, China, the surge in the number of new people in a short period of time will bring about a decline in retail consumption in the month, including books and newspapers. About 4-5 months after the decline in new infections, the consumption level before the dramatic increase will return.

3, supply side uncertainty: maintenance

The expected landing is subject to other factors in 2023. The multiple delays in the Aruaco MAPA project and the eventual cancellation of the Finpulp project illustrate the uncertainty inherent in commissioning. In October 2022, the European economic downturn and the Federal Reserve's interest rate hike inhibited demand, the global pulp shipping volume decreased, the capacity utilization rate decreased, and the global bleaching needle pulp was destocked, and the global inventory fell 0.56 days from the previous month, and the year-on-year decline was 2.11 days to 41.19 days. Therefore, we cannot assume that after the new production capacity is landed, the opening probability of the pulp plant will still maintain the level of 80%-95% this year.