Pulp Market Enters Bear Cycle Despite Inventory Below Historical Levels
Introduction: As seen from historical data of the past few years, February often marks high inventory. Nevertheless, in February 2023, pulp prices deviated from its regular seasonal path, with the mainstream price dropping continuously. The bearish sentiments played a more important role in China’s market. The downtrend in pulp prices may continue unabated, as new BHK capacity commissioned, together with high inventory in Europe and anticipated BHK arrivals in China between March and April.
February Marked High Pulp Inventory over the Past Five Years
A look at the pulp inventory data in the previous five years reveals how China’s pulp inventory in ports and major areas fell after rising. The pulp inventory began to dip continuously, following the five-year high in February 2020. The medium-level Inventory in 2022 was invited by shipping delays and short supply resulted from events in the world, phased demand decreases and tepid sales due to continuously high pulp prices. The five-year low was reported in January 2018, because Gaolan and Tianjin were not included in the samples, and it was also affected by the supply-demand status back then. All the annual highs of pulp inventory took place in February, apart from 2018, of which the peak occurred in November as a consequence of restocking practices of paper mills.
Remark: Data on the inventory in Gaolan and Tianjin ports began to be pooled after December 2018 and early 2020 respectively.
Pulp inventory in 2022 differed slightly from the conventional seasonality. The wide inventory gap between February and March came from emergencies on the supply side, higher offers from foreign pulp mills and frequent price hike attempts from downstream players. In this sense, wood pulp prices went up, decreasing the inventory.
Pulp inventory in 2023 followed its regular seasonal path, as it rose due to increased goods arrivals and decreased pick-up volume.
Pulp Price Dropped in Conflict with Its Previous Seasonal Performance, As High Prices Hindered Pulp Sales amid the Seasonal Inventory Pile-up
Pulp inventory in February was consistent with its previous seasonal performance. Current pulp inventory is above the medium level. The correlation coefficient between inventory and price was at -0.49 in recent years. Although the inventory conformed to seasonal features, the price deviated from them, as a result of complex and volatile factors in the pulp market. Two major contributing factors are as follows.
Pulp Price Trended under Pressure, Owing to Newly Added BHK Capacity, Together with European High Inventory
Newly added capacity worldwide was released at a faster pace. In Q1, volume from the newly added MAPA BHK project in Chile and UPM BHK project is expected to arrive in port or commission. Since October 2022, inventory in European ports has been above 1,300kt, registering a notable growth Y-O-Y. According to Europulp, inventory in European ports was reported at 1,514.3kt in January, up 13.75% M-O-M and 36.06% Y-O-Y separately. The releasing of newly added BHK capacity and increase in European inventory indirectly ramped up pressure on China’s supply in the future. Thus, pulp prices in China moved under pressure.
Players’ Buying Appetites Dampened by Limitedly Improved Profits on Paper Sales
The glut of paper persists, resulted by the sluggish recovery of end demand from downstream paper mills and relentless weak demand in China in February. Meanwhile, overcapacity in the paper industry loomed larger, with the expansion of new capacity. Paper mills found it hard to improve profits remarkably due to continuous high cost after profit shrinkage in the industry. Profit margins of coated paper and ivory board stood at -13.41% and -11.18%, down 5.51% and 25.37% Y-O-Y respectively. On the other hand, despite positive profit margins, those of uncoated woodfree paper, tissue and liner board grew by less than 4% Y-O-Y. Facing such low profit margins, paper mills showed weak buying appetites for pulp resources from both China and other countries.
Source: SCI
Demand: Q2 marks the off-season for paper. Tepid demand and cost pressure may spoil downstream paper mills’ appetites for high-price pulp imports and spot pulp. Thereafter, pulp purchase appetites play a part in the trend of pulp prices.
Supply: Volume of MAPA BHK project was expected to arrive in port, while some pulp mills and traders in China traded profit for sales. In addition, paper mills showed reluctance to high-price feedstock. All these make for a relatively stable BHK supply. Unit maintenance at pulp mills and wood chip supply from Canada reverberate through the market in the long run, lending support to foreign BSK offers. This represents a brake on pulp price changes. It is predicted that in Q2, there may be a phased pile-up of pulp inventory, consistent with seasonal features of the industry.
Cost: Despite changes in foreign pulp offers, lower exchange rate of RMB added cost pressure on imported spot pulp. In the meantime, limited improvements in high prices of imported wood chips strengthened cost pressure on China-made pulp. In this sense, limited improvements in high pulp cost may curb pulp price decreases.
Sentiment: futures contracts of pulp at Shanghai Futures Exchange yield remarkable financial benefits. Based on basis quotation, they may have much bearing on the phased price trend.
In a nutshell, while pulp inventory follows its seasonal path, prices remain to be fixed in line with supply-demand situation and pricing power. In Q2, players on the demand side tend to force pulp prices down for better profits amid stable supply. It is predicted that the mainstream price of pulp may drop on the whole, benefiting improvements in profits in the paper industry.
All information provided by SCI is for reference only, which shall not be reproduced without permission.
Please click "Read more" for the full article.
