Paper price rally to extend into 2017 amid limited capacity and surging costs
Nine Dragons Paper, the largest packaging manufacturer, will raise the price of its line-board products at least one more time in the first half of 2017, after in February lifting the unit price, by 100-200 yuan per tonne
The high price of paper in China is yet to peak with demand still outstripping capacity, as manufacturers are being left with one a fundamental business problem – how to pass on those raised upstream costs to their downstream users.
Indonesia-based Asia Pulp and Paper Group raised its prices of art paper by 300-400 yuan (US$75-58) per tonne on February 17, Shanghai-listed Yueyang Forest and Paper increased its prices for offset paper by 500 yuan per tonne on February 18, Sun Paper hiked its costs on all its copy paper by 300 yuan per tonne on February 22 and Asia Symbol lifted its prices of electrostatic copy paper by 300 yuan per tone, according to a research report by thinktank China International Capital Corporation.
The prices of main raw materials, mainly recycled paper and coal, have been rising since last year, forcing paper manufacturers to raise their own prices and pass cost down the industry chain.
Nine Dragons Paper, China’s largest packaging paper manufacturers, will raise the price of its line-board products at least one more time in the first half of 2017, after in February lifting the unit price, by 100-200 yuan per tonne, chairwoman Cheung Yan told reporters after announcing its interim results.
UBS analysts Edwin Chen and Felix Liu said in a research report they expect Nine Dragons’ fundamentals to further improve “as we view its industry supply demand improvement as structurally sound”.
“Demand for packaging paper will continue to grow steadily at low-mid single digits a year in China and supply will be getting tighter, with the difficulty of adding new capacity and continuous inefficient closures, especially in coastal markets,” they said.
Thanks to surging volumes and sales prices, Nine Dragons’ net profit in the six months ended December 31, 2016, jumped 51.4 per cent to 1.9 billion yuan, excluding the effects of foreign exchange which dragged down its figures the year before.
The outperformance was partly attributed to the improving supply-demand relationship in the country’s packaging paper sector — the supply discipline, over past 18 months helped Nine Dragons’ profitability recovery, UBS analysts wrote in a report after the company results.
The demand for paper products is currently dominated by the daily consumption of the online shopping sector, but the supply side has been strictly disciplined, Nine Dragon said in the company result.
The Chinese government requires faster closure of outdated and inefficient capacity and much more stringent approval requirements on new capacities, a move to solve over-capacity problem and regulate one of its most heavily heavy-polluting industries.
Limited new capacity and rising prices will also benefit Lee & Man Paper, the second largest player in China, which posted 22.8 per cent year on year rise in net profit for the whole year of 2016.
Mainland listed Sun Paper, meanwhile, is being boosted by the rising price of its major products, including writing paper, which is catching up the rally of pulp prices, according to CICC.
Printing and writing paper has seen rapid and frequent price hikes this year.
“China’s pulp prices hit rock bottom in October, 2016 but have rebounded significantly since and the soaring pulp prices are likely to further boost printing and writing paper price in the first quarter of 2017,” CICC said.
Potential challenges, however, lie ahead before prices can fall.
Johnson Wan, an analyst with despite recent reports predicting a new round of price hikes, said: “We believe it remains to be seen whether they can be sustained at lower levels”.
“Our thinking checks with box makers that have already started destocking since January as they are been seeing a likely freefall in paper prices from mid-March, amid unimpressive demand,” Wan said.
Major paper mill chains started accelerating their plans production plans to 2.6 million tonnes this year, but the radical changes to the industry could even be quickened by then.
If all the major players manage to raise capacity, industry earnings could possibly peak in 2017, before normalising in 2018 to 2019, according to Wan.