Imported dissolving pulp enjoys price advantage because of the high cost at domestic producers
As of February 28, the tax-inclusive delivered price of Chinese-made hardwood dissolving pulp was RMB 5,400/mt, and this price had lasted for four consecutive months since November 2019. The main reason was that the pulp price had reached the cost line, and there was no room for pulp mills to adjust the price. The price of imported hardwood dissolvable pulp was stable at $630/s since December 2019, and the average RMB to USD exchange rate was 6.98 from December 2019 to February 2020. Based on the calculation, the delivered price of imported dissolvable pulp was about RMB 5,200/mt, and the imported dissolving pulp resources had an obvious advantage in price, which caused the domestic pulp mills to stop production. In December 2019, the operating rate was roughly 30%, and after two-months of low operating rate, all domestic producers stopped or switched production.
The demand for VSF recovers slowly, while the demand from paper industries is strong.
After the Spring Festival, orders were sparse in the VSF market, and producers were less active in purchasing. Therefore, the dissolving pulp price, which was already at a low level, received little support, and pulp mills opted to stop or switch production. Many of the mills switched to produce paper pulp. SCI reckons that there are several advantages for dissolving pulp mills to produce paper pulp. First, the switch of production is comparatively simple, and the unit is ready for operation after minor adjustments. Secondly, the yield of paper pulp is higher than that of dissolving pulp, which was usually 35%, whereas the yield of chemical paper pulp is usually 50%. Third, the number of paper mills is relatively large, and most dissolving pulp mills have paper mills of their own, not to mention that the demand from the paper industries is higher than the dissolving pulp market.
Outlook
Supply: Dissolving pulp was also included in the tariff exemption list released in February. As one of China’s major dissolving pulp import origins, the favorable cost advantages may push up the dissolving pulp import from the U.S. Thus, in the short-term, imported dissolving pulp will dominate the market supply.
Demand: Affected by issues regarding production resumption and logistics after the Spring Festival, the delivery time of VSF producers was delayed, and most transactions in the VSF market were made on a need-to basis, which led to stable demand for dissolving pulp.
Sentiment: the dissolving pulp price had lingered around the cost line for a long time. According to the annual reports published by some pulp mills in Canada and the U.S., the profit from dissolving pulp production dropped significantly in H2 of 2019, and participants retreated back to the sidelines.
SCI suggests that China's dissolving pulp market is highly dependent on imports, and the dissolving pulp price is not likely to be supported by the decreasing operating rate of domestic dissolving pulp units. Thus, the demand will remain as the major factor affecting the dissolving pulp price. It is expected that the price range of dissolving pulp will trend sideways in March.
