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New consumption patterns, digitalization and environmental awareness are reshaping the market

S

SENSITIVE RISK for entreprises

  • Fragmentation

  • Internationalization

  • Capital Intensity

  • Profitability

  • Fragmentation

  • Internationalization

  • Capital Intensity

  • Profitability

  • Increasing demand for boxes and packaging made of cardboard and paper with the exponential development of e-commerce
  • Further growth potential in the medium and long term, driven expectations of exponential population growth
  • Greater environmental awareness will continue to promote the use of paper packaging instead of plastic, especially in the food industry
  • Digitalization: With remote working becoming the “new normal”, digital connections and communication will continue to increase, resulting in reducing use of notebooks, paper sheets and printed books in the future
  • Deforestation: the excessive use of land for planting and felling trees represents a great reputational risk for the sector
  • Vulnerability to energy and chemicals access and prices: higher input costs are damaging the margins of the pulp subsector, particularly in Europe
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What to watch ? 

  • Evolution of e-commerce: The packaging segment is highly correlated to online sales as e-commerce is the main market for selling cardboard boxes and corrugated cartons.
  • New regulations for packaging: Governments, notably in Europe, have been encouraging a greater use of paper and cardboard to replace plastic packaging.
  • Energy crisis: Electricity and natural gas prices in Europe remain above normal levels, eating into the competitive advantage of European players versus their peers in the US.
  • The war in Ukraine: The conflict continues to affect supply and demand flows of paper and is also hindering the sector's supply chains.
  • Increased consumption of paper-derived sanitary products: This is the result of the increasing population in developing countries and government aid seeking to generate more access to essential household products in developed countries.
  • Increasing digitalization: This will continue to reduce the use of printing paper.
  • Evolution of the housing and construction market in the main wood-demanding economies (US and China) and building renovations in Europe.
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As of today, the market share (by revenue) of each subsector is as follows: wrapping and packaging (53%), printing and writing paper (23%), sanitary (12%), news print (5%) and others (7%). By geography, the top five pulp & paper producers are China, the US, Japan, Germany and Canada.

The pulp & paper sector is energy and raw materials intensive, notably dependent on chemicals for transforming wood into pulp and then into other derived sub-products. Margins in the sector, especially in Europe, have been deteriorating throughout 2023 as natural gas and electricity prices remain above levels seen before the invasion of Ukraine. As it is difficult to predict when and how this conflict will end, there is much uncertainty over the length and effect of Europe's energy crisis.

Many European chemicals companies have reduced or stopped the production of certain products due to the huge amounts of natural gas needed to operate. As a result, some players in the pulp & paper sector have been forced to source from other chemicals suppliers from China, the US and Canada. Only few companies have been able to continue passing on part of these higher production costs, depending on the subsector they are in and the country. Overall, Q1 and Q2 2023 saw sharp drops in both revenues and earnings for the entire sector, and a similar performance can be expected for Q3 and Q4, with a recovery expected in the first half of 2024.

By sub-sector, we believe that companies in the packaging segment have a better outlook than those in the pulp and wood categories. On one hand, the rise in online purchases together with greater demand for paper and cardboard for food packaging and transportation are two key factors that will keep demand high in this category. On the other hand, the rise in pulp prices in Europe is making trade flows shift to other countries, such as the US and China. Regarding wood, we expect prices to remain weak due to decreasing demand, especially from the construction/housing industry, as recession fears persist.

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Paper packaging: This sub-sector is valued today at around USD930bn and the global demand for containerboards has increased by +28% when compared to ten years ago, thanks to the increasing utilization of paper and cardboard in the food & beverage industry (replacing plastics and cans) and the huge development of e-commerce (revenues of online sales providers are expected to jump by +35% in 2024).

Freesheet, newsprint paper and specialty paper: The printing and writing sub-sector is a fragmented market that has been shrinking in size due to digitalization. Both demand and supply of printing and writing paper have been decreasing by -21% from the levels observed a decade ago, especially in North America, where the decline has been sharper (-51%). In parallel, global newsprint paper demand has decreased by -63% to around 11.9mn MT per year, also compared to ten years ago. The decline has been observed in all continents. However, Asia (especially China) continues to be the world's largest consumer of newsprint paper (3.6x the amount demanded by North America).

Pulp: This market is less fragmented than the other subsectors as it is a capital-intensive industry with high chemicals consumption needs. The majority of companies operating in this segment are located in Brazil, Chile, Canada and Northern Europe. In terms of trade, 50mn MT of pulp were shipped around the world in 2021, of which 54% was bleached hardwood kraft and 46% bleached softwood kraft. The largest consumer is China, which demands around 38% of the global pulp production. Pulp producers are currently suffering because of increasing energy and chemical prices (extremely necessary for transforming the pre-shredded wood into pulp). However, some companies are self-sufficient in energy. The absence of capacity increases will perhaps see pulp prices remaining high.

Forest, wood and timberland: Lumber and wood product prices have been declining after jumping during the beginning of 2022. The wood market is correlated to the construction industry, which is not currently at its best since housing starts have been declining in the US.  

Contacts

 
Allianz Trade Economic Research
research@allianz-trade.com
Maria Latorre
Sector Advisor
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