Demand is on the road to a moderate recovery.

CICC Paper Industry Outlook 2024: Moving forward with a moderate recovery
It was learned that CICC issued a research report stating that demand in the paper industry is expected to continue a moderate recovery pace, and the peak period of production capacity release is coming to an end. At the cost end, wood pulp, waste paper, and coal prices are mainly fluctuating moderately, and industry profits are expected to be steadily restored. Under this baseline scenario, we tend to choose a combination with a generous margin of safety and both offense and defense in stock selection.

The following is the core summary:

Demand is on the road to a moderate recovery. The papermaking sector is known as the “barometer of consumption”. In 2023, we have observed that with the recovery of consumption scenes and human traffic, the prosperity of cultural paper has obviously recovered, leading volume, price and profit have been significantly boosted, packaging paper and special Paper demand has also recovered moderately in the low to mid-single digits following physical goods, and product prices and profits have also improved significantly month-on-month in 2H23. Looking forward to 2024, the CICC macro team expects the social sector to continue its moderate recovery trend. We expect demand for cultural paper to increase steadily and slightly in 2024, and demand for packaging paper (container paper, white card) and specialty paper to continue to recover in the mid-single digits.

The release of production capacity is coming to an end, and we are waiting for supply and demand to return to a tight balance. We judge that the industry is at the end of a new round of production expansion peak period (driven by the peak of the economy in 2020-21 and enterprises’ concerns about the difficulty of expansion after the strict “dual carbon” policy), and production capacity expansion will be in 2022-23. This is concentrated in the year (container board and corrugated paper also bear an additional supply impact of about 50% increase in imported paper). In 2024, we expect that the supply and demand balance of cultural paper and some thin specialty papers will be relatively tight, while the new production capacity of boxboard corrugated paper, white cardboard, and some specialty papers will still be in mid-to-high single digits. The supply and demand side will depend on the improvement in demand. However, judging from the progress of existing production capacity, we expect that the pressure on new production capacity will be significantly relieved from 2025 to 2026. If demand is restored faster, the overall supply and demand of the industry is expected to return to a tight balance ahead of schedule.

Costs have moved from a “roller coaster” to a stable one, and the leading diversified + integrated layout has entered the harvest period. Due to certain contradictions between supply and demand, the profits of the papermaking industry will be squeezed by the sharp rise in coal prices and pulp in 2022. Raw materials prices fell sharply in 1H23, and base paper price competition intensified, causing industry profits to suffer. In 2024, the cost-side challenges faced by the industry are expected to be significantly alleviated: We expect that pulp prices may continue to fluctuate around US$600/ton, waste paper prices continue to bottom out, and coal prices are expected to drop slightly. This combination is expected to support the overall profitability of the industry. Toward a moderate recovery. In addition, it is gratifying that in order to smooth cost fluctuations, many leading companies are working hard to promote product diversification and high-end products, and on the other hand, they are actively promoting the integrated layout of forest, pulp and paper. From 2023 to 2024, the diversified products and self-made wood pulp of these companies are expected to Entering the harvest period, we expect to increase the company’s safety margin and growth momentum.