• DWP demand is down around 8% or 600kt: This has forced suppliers to act in order to rebalance the market. LT DWP drivers remain intact with planned viscose fibre (VSF) expansions of c.1mtpa (55% Lycocell and 45% commodity VSF). Additional Lycocel capacity in China would likely require market DWP as unlikely to be integrated.
  • 2020 DWP supply expected to contract by 700kt or 10%: This is mainly driven by swing capacity (-0.4mt) and temporary curtailment (-0.3mt: Cosmo, GP, Sappi). We note Chinese DWP supply is down c.50% this year.
  • FSC certification now a hurdle for RGE: RGE acquired Lwarcel Celulose in Brazil (250ktpa) on the assumption the production had FSC certification. However, this was not the case and meant mills (such as PT RAPP) across the group have lost FSC certification by association. This has forced the group to purchase market DWP.
  • DWP swing capacity ratches up a notch in 2020: This has increased by c.400ktpa to 2.1mtpa in 2020, presumably in China in light of limited contractual arrangements.
  • Global textile chain remains key to VSF and DWP prices recovering: For example, retailers have stockpiled this year with the intention of re-releasing in spring next year. This is likely to weigh on textile order books at factories in Q1 21e.
  • DWP markets need to also factor in global textile dynamics: VSF realised its first meaningful price increase (5%) in September. VSF inventory days have moderated significantly from peaking at 55 days in July to 34 days currently. There remains an oversupply, but current VSF prices remain below the marginal cost. Hawkins Wright think there will be a series of mini cycles, driven by increases in VSF supply as prices recover but appear to be comfortable that DWP is set for a price recovery.
  • DWP prices moving in the right direction, but unlikely to see a full rebound until the end of next year: Hawkins Wright are cautiously optimistic that DWP prices have turned the corner. Whether announced price increases are implemented or not, it is more of a signal to buyers that an inflection point has been reached. Hardwood producers have realised a price increase of c.USD 12/t, while softwood producers are targeting a USD 50/t increase. We note that producer stock reductions and a stronger RMB are supportive of price increases. We caution however, that DWP prices in 2021 and 2022 could come under pressure depending on how Arauco adds its new volumes to the market (good quality at low cost) from its Valdivia mill and as Lenzing (Download Recent Report) reduces its DWP market purchases as it ramps-up its greenfield DWP expansion in Brazil in H2 22e.

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