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Pulp & Commercial Paper Trends

Industry Insight

COVID-19 Industry Brief

EFFECTS OF THE CORONAVIRUS ON THE Pulp & Commercial Paper INDUSTRY Updated November 17, 2020

  • Direct COVID-19 Impacts: : In the U.S. the pulp and paper workforce, which falls under the forest products industry, was considered an essential critical infrastructure workforce during the nationwide shutdowns that occurred in early 2020. Internationally, the pandemic has been a demand shock, and market expectations are uncertain as second and third waves of infections are causing new rounds of lockdowns across the U.S and Europe.
  • Pricing Sentiment: Mixed paper pricing, at a U.S. average of $29 per ton for November, has reached pricing levels not seen since January 2018. Additionally, pricing has increased in both the domestic and export mixed paper markets for the fifth consecutive month, according to data published by analytics organization Fastmarkets RISI. U.S. mixed paper pricing increased in every U.S. region in early November by a range of $3 to $5 per ton, as steady, strong demand met soft supplies across the country. Mixed paper exports and pricing have been strong for shipments to India, Indonesia, Malaysia, South Korea, Taiwan and Thailand, as mills there continue to produce recycled pulp for Chinese containerboard production. Additionally, India is expected to generate steadily increasing demand at higher prices going forward for U.S. recovered fiber.
  • Valuation Outlook: Inventory appraisal values for pulp and paper will likely be impacted from a pricing perspective to the extent that market pricing is volatile in the coming months. On a mark-to-market basis values should hold up in the immediate future. Pricing for most grades of printing paper have been stable over the course of the year despite large volume drop offs in in the spring. Pricing is currently soft for printing paper and not expected improve soon. Pulp pricing, despite some strength in the spring when there were supply shocks, has been drifting lower on a year-over-year basis and is comparable to the levels it was at the beginning of 2020. Kraft and liner board prices have been stable all year and, given demand trends, are unlikely to weaken soon. Boxboard prices have been similarly stable but shows signs of strengthening as the economy recovers and supply remains tight.

Inventory

COVID-19: Industry Brief Meter - Pulp and Paper Inventory
 


Machinery & Equipment

COVID-19: Industry Brief Meter - Pulp and Paper Machinery & Equipment

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Date November 2020

Pulp and paper – Project Values meter

Current Trends

  • A 25% tariff still applies to imports of many Chinese paper products, although the 20% tariff on U.S. recycled paper pulp shipments into China was temporarily lifted through February 2021.
  • E-commerce sales increased total box shipment growth to 37% between 2015 and 2019 and is expected to reach 43% in 2020 due to increased online shopping and deliveries related to the COVID-19 pandemic.
  • Inventory appraisal values for pulp and paper could be impacted from a pricing perspective to the extent that market pricing dips in the coming months, but on a mark-to-market basis values should maintain.

Approximate net recovery on cost

Synopsis

Mixed Paper Pricing Strong but Mill Capacity Down: Mixed paper pricing, at a U.S. average of $29 per ton for November, has reached pricing levels not seen since January 2018. Additionally, pricing has increased in both the domestic and export mixed paper markets for the fifth consecutive month, according to data published by analytics organization Fastmarkets RISI. U.S. mixed paper pricing increased in every U.S. region in early November by a range of $3 to $5 per ton, as steady, strong demand met soft supplies across the country.
 

Mixed paper exports and pricing have been strong for shipments to India, Indonesia, Malaysia, South Korea, Taiwan and Thailand, as mills there continue to produce recycled pulp for Chinese containerboard production. Additionally, India is expected to generate steadily increasing demand at higher prices going forward for U.S. recovered fiber. Though up from lows seen from May through July, average paper industry capacity utilization has dipped in 2020 compared to 2019 with the October Federal Reserve Board capacity utilization for U.S-based paper mills running at 83.5 percent of capacity versus 85.3 percent in October 2019. By comparison, current capacity is running lower than the average trailing 10-year utilization rate of 84.5 percent.
 

Corrugated Packaging Demand Skyrockets During Pandemic: In the U.S. the pulp and paper workforce, which falls under the forest products industry, was considered an essential critical infrastructure workforce during the nationwide shutdowns that occurred in early 2020. Internationally, the pandemic has been a demand shock, and market expectations are uncertain as second and third waves of infections are causing new rounds of lockdowns across the U.S and Europe.
 

The ongoing challenges of the pandemic are expected to affect full-year 2020 economic growth across the globe. However, as consumer habits changed with nationwide shutdowns beginning in March and April, e-commerce sales skyrocketed around the world driving sales of corrugated packaging up significantly. Many regular e-commerce consumers increased their online purchases to include basics like groceries and household supplies.
 

Additionally, many consumers found themselves ordering online for the first time, accelerating e-commerce growth exponentially beginning in the second quarter. Once representing a small portion in box demand, the use of corrugated packaging for e-commerce shipping has increased correspondingly during the pandemic. The category increased total box shipment growth to 37 percent between 2015 and 2019 and is expected to reach 43 percent in 2020 according to research published in early November by Fastmarkets RISI.
 

Industry-wide U.S. box shipments hit their highest ever four-month total from June through September based on data from corrugated industry non-profit organization Fibre Box Association. Actual shipments for the third quarter of 2020 were up approximately 4 percent over the same period in 2019 and were up 6.7 percent over second-quarter shipment levels.
 

On an adjusted basis, U.S. e-commerce sales as reported by the Census Bureau increased 31.8 percent for the second quarter of 2020 over the first quarter and increased 44.5 percent over the same period in 2019. E-commerce sales accounted for 15.1 percent of total sales for the second quarter, with expectations they may comprise as much as 20 percent by the end of the year. Despite the uncertainty that comes with the ongoing pandemic-fueled recession, these figures bode well for packaging sales for the balance of the year and into 2021.
 

Ongoing Chinese Tariffs and Recycled Paper Ban: Importers of paper products from China saw tariffs raised in May 2019 through the Trump administration’s executive action and the section 232 tariff process. Many categories of paper were impacted when tariffs were increased from 10 percent to 25 percent on $200 billion worth of Chinese goods, further escalating the U.S.-China trade war that began in early 2018. Categories hit with tariffs include wood pulp products as well as imported newsprint, writing paper, carbon paper, self-adhesive paper, cigarette paper, envelopes, paper tablecloths and handkerchiefs, folders and toilet paper.
 

After the signing of the phase one trade agreement with China in February 2020, old corrugated containers (OCC) and other recovered fiber shipments to China still faced a 25 percent tariff, and recycled paper pulp was subject to a 20 percent tariff when exported from the U.S. However, in March the Chinese government began to consider exempting tariffs on OCC and other recovered fiber on a company-by-company basis. According to research firm China Briefing, the exemption process “is considered the most substantial tariff relief offered by Beijing by far.” Additionally, the 20 percent tariff on U.S. recycled paper pulp shipments into China was lifted through February 2021.
 

In addition to ongoing tariffs, the industry has faced headwinds for recycled paper exports since China first threatened to ban solid waste imports including recovered paper in 2017. In early 2018, China banned mixed paper and announced all recovered fiber grade imports from the U.S. will cease in 2021. Over the past three years, China’s imports of global recovered fiber have been reduced by almost 20 million tons, with licenses for 2020 nearing 6.75 million tons in total. In a sign this trend may be turning, data from the U.S. Census Bureau recorded that China, which is the largest purchaser of OCC from the U.S., purchased 446,403 tons in August 2020, representing the single largest monthly purchase since December 2018. Although clearly an improvement, at its peak prior to the commencement of the U.S. China trade war China was purchasing on average approximately 1.1 million tons per month of U.S. recovered paper.
 

As we approach a new U.S. presidential administration in 2021, it remains to be seen how future trade policy will change tariff rates and recovered paper exports. President-elect Joe Biden has pledged to continue working with U.S. allies to strengthen trade policy, and “is seen as unlikely to roll back his predecessor’s tariffs on imported steel, aluminum, and Chinese and European goods any time soon” per recent reporting by Reuters. “[Biden’s] top economic priority will be to revive an economy slammed by the coronavirus pandemic, so trade agreements will likely take a back seat to stimulus efforts and infrastructure development.”
 

Valuation Outlook: Inventory appraisal values for pulp and paper will likely be impacted from a pricing perspective to the extent that market pricing is volatile in the coming months. On a mark-to-market basis values should hold up in the immediate future. Pricing for most grades of printing paper have been stable over the course of the year despite large volume drop offs in in the spring. Pricing is currently soft for printing paper and not expected improve soon. Pulp pricing, despite some strength in the spring when there were supply shocks, has been drifting lower on a year-over-year basis and is comparable to the levels it was at the beginning of 2020. Kraft and liner board prices have been stable all year long and, given demand trends, are unlikely to weaken soon. Boxboard prices have been similarly stable but shows signs of strengthening as the economy recovers and supply remains tight.
 

The impact on equipment assets in the space will depend on how the recovery from COVID-19 plays out over the next six months given increased spikes in global infection rates. Prior to the COVID-19 pandemic, there was already surplus equipment in the printing marketplace, and it is unlikely the disruption will positively impact the marketplace on a short-, medium- or long-term basis. Prior to the COVID-19 outbreak, the pulp market had been soft due to economic sluggishness in Asia and Europe.