Cultural Paper Profit Dropped to a Record Low in H1 2022
Introduction
In H1, 2022, market prices of cultural paper decreased easily. Although the upstream pulp prices were still high, and the industry profits constantly narrowed, the downstream demand was still tepid, resulting in the hard increase of cultural paper prices. In H2, 2022, paper mills intend to rise prices, while the expectation of demand growth is not clear. Players hold wait-and-see attitudes, and it is predicted that the market prices of cultural paper will have a slight upward trend month by month by RMB 200-500/mt.
Cultural paper prices were stable after slightly increased in H1
In H1, 2022, the market prices of cultural paper were stable after slightly Increasing. Specifically, the highest price of wood pulp uncoated woodfree paper was RMB 6,250/mt in April, while the lowest price was RMB 5,600/mt in January, dropped by 11.61%. The highest price of coated paper was RMB 5,680/mt in April, while the lowest price was RMB 5,380 /mt in January, down 5.58%. According to SCI, in H1, 2022, the average market price of uncoated woodfree paper was RMB 6,019.98/mt, down RMB 528.28/mt or 8.07% Y-O-Y. The average market price of coated paper was RMB 5,537.1/mt, down RMB 1,117.38/mt, or 16.79% Y-O-Y.
In H1, the market trend can be split into two phases. First of all, the market transaction activity was not high due to the Spring Festival holiday from January to February. Most players operated flexibly, and prices were stable. In March, participants in large-sized paper mills actively implemented price hikes during the traditional peak season under cost pressure, and medium and small-sized paper mills followed suite. Therefore, the mainstream market price rose narrowly before stabilizing. Secondly, in Q2, logistic transport was limited affected by uncertain factors, and orders for tutorial books were fewer compared with previous cultural paper peak seasons. Thus, market mentality was bearish, and prices trended down.
From the perspective of cost: In H1, imported wood pulp spot market prices declined after rising, and the average price was higher than that in last year. According to SCI, the high prices of imported wood pulp showed in May and June, while the low one showed in early January. The spread between high and low prices were RMB 708.33/mt and RMB -1,664.77/mt, or 11.63% and 32.69%.
In H1, 2022, the average price of imported SWP was RMB 6,914.77/mt, up 17.91% M-O-M and 2.28% Y-O-Y. The average price of imported HWP was RMB 6,002.45/mt, up 28.18% M-O-M and 14.42% Y-O-Y.
The main factor affecting market prices was still the weak demand. Before and after the Spring Festival, market prices narrowly increased due to the cost support and the bullish expectation of traditional peak season. However, the cultural paper demand continued to be tepid in the traditional peak season, because logistics was restricted by uncertain factors, and teaching material and exhibition promotion orders were fewer compared with previous years. Besides, there were production cuts or even shutdowns at printers because the market demand was tepid during the traditional peak season. Thus, the market price hardly increased, and operating losses were common within the industry.
On the supply side, in January and February, the operating rate of cultural paper industry was relatively low due to the Spring Festival holiday, and paper mills’ inventory dropped because the downstream players actively restocked before the holiday. After the Spring Festival, prices narrowly increased, and paper mills resumed production as scheduled in March. However, the demand was tepid, because the inventory held by distributors was relatively high, and the logistics in many areas was restricted. Besides, the newly added capacity released in Guangdong, and the inventory pressure on paper mills accumulated to high level in Q2, as well as some production line in East China were under relocation process, so the operating rate dropped to around 50%. Until late June, inventory held by distributors was consumed to a normal-to-low level, and paper mills posted prices increase notices, resulting in an increase in restocking activities. Thus, the paper mills’ inventory trended down.
In H1, 2022, prices of uncoated woodfree paper lacked upward momentum, while the cost was high, so the gross profits dropped to negative, and the pressure on paper mills’ profits was heavy. The operating rate declined, while the output slightly increased, mainly because the newly added capacity in Guangdong affected the market supply. From January to May, the import volume obviously dropped, and the impact of imported paper on domestic market weakened.
The operating rate of coated paper increased compared with last year, mainly because most paper mills operated normally in Q1. In H1, the average gross profit dropped to -11.82%, which was the lowest in recent years. From January to May, the exported volume increased compared with previous years, which was bullish for paper mills to sell. However, domestic consumption declined Y-O-Y, and the demand support was insufficient.
In H2, it is predicted that market prices of uncoated woodfree paper may slightly increase, and market prices of coated paper may be still in a stalemate, while prices in some regions may inch up.
From the perspective of supply, in H2, some newly added capacity of uncoated woodfree paper is expected to be released at the end of 2022, and the production line relocation project in East China may finish. The release of newly added capacity may affect the supplies in East and South China, and the market supply pressure may slightly increase.
From the perspective of demand, in H2, orders from tutorial book printers are placed on a need-to basis. It is difficult to improve the declining situation of teaching material orders, while the exhibition promotion orders may slightly increase. Thus, it is estimated that the demand will inch up in H2, despite that the increase is limited.
From the perspective of cost, in H2, spot market prices of imported wood pulp are expected to widely fluctuate, and the pressure of pulp new capacity may not be obvious in Q3. Also, cost pressure on paper mills may increase due to the arrival of high-priced wood pulp at the end of Q3, and the acceptance of high-priced feedstock may reduce. Therefore, it is expected that pulp prices will change under the pressure due to the release of new capacity and the decline of profits.
Overall, under the premise of high cost in H2, paper mills intend to increase prices, while the expectation of demand growth is not clear. The market stalemate may continue, and the rebalance between the upstream price-increasing intention and downstream demand is expected to limitedly improve, so market prices may not rise drastically. It is predicted that the market price may slowly increase month by month within the range of RMB 200-500/mt.
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