- Global Printing & Board (P&B) production is expected to decline by 7% in CY 20e: This equates to a decline of 27mt, in line with the global financial crisis. Graphic Paper to be hit the hardest (-13%), followed by Packaging (-7%), while Tissue demand (+4%) is likely to be in the green across all regions.
- 2020 bleached chemical pulp (BCP) demand has been mainly comprised of Tissue (42%); UWF (16%) and Packaging (9%): Pulp demand has surprised to the upside (+4.6% y/y); however, we caution that H1 19A demand was weak, helping boost YTD growth. Hardwood (HW) is up 13% y/y or 2.1mt, while softwood (SW) has been under pressure declining by 3.8% y/y or -650kt. China has been robust (+8%), while Western Europe has been under pressure (-4.9%). Demand has also benefitted from consumer restocking and substitution by integrated supply (slowing pulp lines and procuring pulp from the open market) in China. Displacement of integrated supply will be a ST feature of the pulp markets until the marginal cost threshold is crossed.
- P&W regional differences to impact market pulp demand, with Western Europe (WE) having a big impact on pulp shipments: WE market pulp consumption likely to drop by 25% to 3mt this year. North America demand for market pulp is less pronounced due to integration of producers (c. 750kt this year).
- Upside to pulp demand from China’s National Sword policy initiative (eliminate wastepaper imports): This has widened China’s fibre deficit further and is likely to benefit unbleached virgin HW grades at the margin. The policy has also given rise to increased demand (cumulative imports c.3mt) for unbleached recycled pulp (URP). According to Hawkins Wright, the theoretical cash cost of URP in China is around
USD 500/t (fibre & conversion costs) compared to the cost of virgin pulp of USD 450/t. - Chinese HW chip imports, a proxy for the health of Chinese pulp production: Chinese operating rates appear to be supressed as HW chip imports are down 2.5%, (prices -10%), despite three new pulp lines (2mtpa) added in China last year.
- China could end 2020 well with Consumer restocking an important pillar for demand: China is holding 400-500kt of stock above balanced levels (6-7 days of consumption in China). As of June 2020, Producer stocks declined by 2.1mt y/y (24%) to 6.8mt. Conversely, Consumer Stocks have increased by 1.8mt y/y (+58%) to 4.9mt.
- Pulp supply has been resilient (+1.5%: SW -1.4% & HW: +6.6%), despite prices having been below the marginal cost: As flagged in our Suzano Q2 20A Insights Report, we believe Suzano is trying to flush out high cost producers. YTD HW supply has increased by 600kt, of which c.500kt is attributable to Suzano. This means the burden of downtime is left in the hands of marginal cost producers. We note that there have only been 2 permanent closures this year, removing 0.5mtpa of SW in Canada.
- Pulp price at a possible inflection point: Hawkins Wright appear to be more bullish on the pulp demand outlook and are cautiously optimistic that market conditions are improving. However, in their view, the supply/demand balance is not yet meaningful to drive a material pulp price recovery. Pulp prices have fared “relatively well” as it was already below the marginal cost level before COVID. Q4 20e likely to be supportive of prices on the back of seasonal strength in Chinese P&B production, global downtime (maintenance: tough to estimate), cost inflation and a weaker USD. So far, there has been a series of SW price increases, while the HW front has been quiet (but the Chinese benchmark price has started to tick up). With the SW/HW spread in China over USD 130/t, consumers are likely to be incentivised to substitute in favour of HW. We also caution that SW producer stocks remain elevated and the potential impact of further COVID infections and lockdowns.
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