NNEWS CENTER

In 2023, the spot market prices for imported wood pulp experienced a downward trend with fluctuations, related to the volatile trading on the futures market, decreasing costs, and limited improvements in supply and demand. In 2024, the continuous tug-of-war between supply and demand in the pulp market maintains pressure on pulp prices. However, over the long term, amidst the global investment cycle in pulp and paper equipment, the macroeconomic environment’s improvement is expected to boost market expectations, alongside the financial attributes of products serving the real economy, potentially accelerating the healthy development of the paper industry.

Multiple factors contributed to the fluctuating pulp prices in 2023

The spot market price for imported wood pulp in 2023 showed an “M” shaped trend, mainly due to the fluctuating prices of the main futures contracts for pulp on the Shanghai Futures Exchange, international market adjustments, continuous supply increases, and a moderate recovery in demand that did not meet expectations.

For example, the monthly average price for imported softwood pulp continuously declined from January to June, began to rise in July, and reached a high in the second half of the year in October, with a price rebound in November and December. According to SunSirs data, the annual average price for imported softwood pulp in 2023 was 6094 yuan/ton, a 14.67% decrease compared to the previous year. The highest monthly average price was lower by 2.79% compared to 2022’s peak, with the highest price reaching 7399.11 yuan/ton in mid-January and the lowest at 5365.18 yuan/ton in early June, showing a price difference of 2033.93 yuan/ton and a fluctuation rate of 27.49%.

The trend in imported wood pulp prices in 2023 was influenced by factors such as the financial nature of the product, low downstream gross profit margins, cost reductions, and limited improvements in supply and demand.

The spot market for imported softwood pulp typically references the price mechanism of the main futures contracts for pulp on the Shanghai Futures Exchange for price quotations, meaning fluctuations in these futures prices directly affect spot price trends. In the first half of 2023, the futures contracts followed the financial nature of the product, but the spot market adjusted due to high international prices in the second half of 2022, leading to high arrival costs in the first half of 2023. This caused sellers to hold off on selling at low prices, thus widening the basis and causing spot prices to run above futures prices. In the second half of the year, as spot cost pressures decreased and with limited improvements in the pulp market supply and demand, spot prices temporarily dipped below futures, narrowing the basis. Overall, the basis narrowed by 38.08% in 2023 compared to 2022. The link between futures and spot markets remains, compounded by downstream paper mills’ low acceptance of high-priced raw materials, which is unfavorable for high spot market prices.

Low gross profit margins in the downstream raw paper industry dragged down pulp prices

In 2023, the average price of imported wood pulp trended downwards, with prices for different types of pulp falling between 718 to 1302 yuan/ton, a decline of 11.08% to 20.58%. Except for coated paper, which saw a slight increase in average price by 52 yuan/ton (0.94%), the prices for other types of raw paper fell by 125 to 1132 yuan/ton, a drop of 2.01% to 19.34%, indicating limited improvement in the profitability of the paper industry.

Looking at the gross profit margins of the paper industry, the average prices of pulp and paper mostly followed the same trend, with the decrease in the average price of imported wood pulp not effectively translating to improved profitability in the raw paper industry. The theoretical gross profit margins for downstream paper industries operated at low levels in 2023, ranging from -5.62% to 20.27% (with some variation among different types of paper, the highest being for corrugated paper, which uses less pulp and thus is not strongly representative of the downstream paper industry’s gross profit margins). Except for white card paper and corrugated paper, which saw a decrease in gross profit margins compared to 2022, coated paper, double offset paper, and household paper saw increases of 4.55 to 16.22 percentage points. However, with raw paper industry gross profit margins at low levels of around 11% and below, the low volatility of these margins is detrimental to the enthusiasm for raw material procurement among industry players, making low operating margins in the downstream paper industry a major factor dragging down the average pulp market price year-over-year.

Cost reductions intensified the decline in pulp prices

Since it takes 45-60 days for imported wood pulp to be transported to China, theoretical costs need to be calculated based on the international market prices two months prior. For example, using softwood pulp Silver Star as a reference, the cost of softwood pulp in 2023 needed to consider international market prices from November 2022 to October 2023. International prices fell by an average of 121.66 USD/ton, but due to fluctuations in exchange rates, the cost was 6411.43 yuan/ton, a 10.73% decrease year-over-year; the average spot price was 6336.16 yuan/ton, a 10.00% decrease year-over-year. The decrease in costs weakened the support for bottom pulp prices in the market, with prices often inverting, further intensifying the decline in pulp prices.

Steady increases in supply and demand did not significantly improve the supply-demand balance, unfavorable for strong pulp prices

In 2023, the pulp market experienced steady increases in supply, which was unfavorable for strong pulp prices. China’s total pulp supply reached 56.6774 million tons, an increase of 11.87% year-over-year, with the main increase coming from imports of wood pulp into China. According to customs data, China imported 28.1347 million tons of wood pulp in 2023, a 23.39% increase year-over-year. SunSirs analysis indicates that with the successive commissioning of new capacities abroad and the stable release of existing capacities, the increase in China’s wood pulp imports was significant, thus the overall supply of the pulp market continued to be ample, unfavorable for strong pulp prices.

The increase in pulp market demand in 2023 was moderate, making it difficult to effectively support high pulp prices. China’s total pulp demand reached 52.065 million tons, a 6.74% increase year-over-year, with contributions to the increase in demand for pulp from downstream paper industries, mainly concentrated in double offset paper and household paper, related to their substantial new capacities and pulp consumption factors. According to incomplete SunSirs statistics, the combined new capacities for double offset paper and household paper reached 3.006 million tons. Calculating based on the theoretical operating rates of the paper industry after the new capacities were commissioned, just these two types of paper could theoretically increase pulp consumption by over 2 million tons. However, the actual increase in pulp consumption did not meet expectations, related to sudden maintenance on existing paper production lines, limited relief from cost pressures, and delays in the commissioning of new capacities, ultimately affecting the enthusiasm for pulp procurement among industry players. SunSirs analysis indicates that the moderate increase in demand, although not meeting expectations, was unfavorable for high pulp prices.

Looking ahead to 2024, the optimization of China’s pulp supply-demand structure remains relatively limited, with the possibility of continued pressure on pulp prices. Both domestic and international markets are expected to release new capacities for hardwood pulp and chemi-mechanical pulp, with the supply side remaining ample. At the same time, the acceleration of the pulp-paper integration process in China is expected to reduce China’s dependence on imported wood pulp. On the demand side in China, 2024 is within the expansion cycle of China’s paper industry, with the characteristics of pulp-paper integration becoming more apparent and industry concentration continuing to increase. Combined with the uncertainties brought by international and domestic situations, the supply-demand gap is expected to continue to widen, potentially putting pressure on international market prices for wood pulp and thus weakening the support for bottom prices in the spot market.

From a supply perspective, China’s pulp supply in 2024 is expected to be relatively ample. According to incomplete statistics, new pulp capacities both domestically and internationally are expected to exceed 10 million tons in 2024, with international new capacities mainly located in South America and Europe, and their export destinations primarily China, leading to a 5.94% increase in imports and thus an 8.42% year-over-year increase in total supply. Overall, the increase in supply pressure in China’s pulp market is unfavorable for high pulp prices.

From a demand perspective, China’s total pulp demand is expected to grow steadily in 2024. According to incomplete statistics, new capacities in China’s downstream paper industries are close to 10 million tons, but due to the pace and timing of capacity realization, total demand is expected to increase by 7.61% year-over-year. The increase in total demand is beneficial for the pulp market, but since the increase in demand is lower than the increase in supply, the imbalance in the pulp market remains apparent, thus weakening the support for pulp prices.

From a cost perspective, the theoretical cost of imported pulp in China may decrease in 2024. With the advancement of the pulp-paper integration process, China’s dependence on imported wood pulp is expected to decrease. However, due to the limited improvement in the imbalance between supply and demand in China’s pulp market, the possibility of pressure on international market prices for wood pulp remains, which is beneficial for the improvement of profitability in China’s paper industry but reduces the support for bottom prices of imported wood pulp in the spot market.

From a market sentiment perspective, industry players still have differing views on the future trends of the Shanghai Futures Exchange. The fluctuation in the prices of the main futures contracts for pulp on the Shanghai Futures Exchange has a significant impact on the spot market sentiment. The strength of the linkage between futures and spot markets changes in the short term, with futures price fluctuations affecting the spot market sentiment, which in turn influences the futures market.

From other perspectives, the occurrence of sudden uncertainties and their butterfly effects should not be underestimated. Sudden maintenance at foreign pulp mills, changes in maritime shipping conditions affecting shipping costs and the shipping supply-demand structure, changes in pulp mill dispatching patterns, and their impacts on the global pulp and paper market can all periodically affect China’s pulp market.

In summary, both domestic and international markets are expected to release new capacities for hardwood pulp and chemi-mechanical pulp in 2024, with the supply side remaining ample, and the acceleration of the pulp-paper integration process in China expected to reduce China’s dependence on imported wood pulp. However, from another perspective, both supply and demand in China’s pulp market are expected to grow positively. Over the long term, with more than 10 million tons of pulp and paper capacities being put into operation both domestically and internationally in the coming years, the speed of profit transmission along the industry chain may accelerate, potentially balancing industry profits. The role of pulp futures in serving the real industry becomes more prominent, and with the subsequent listing of double offset paper, corrugated paper futures, and pulp options, the healthy development of the paper industry is expected to accelerate.