Paper Sector Risk Report

• 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, particularly for food-packaging purposes.
• Energy crisis: With electricity and natural gas prices in Europe still above normal levels, the region continues losing competitive advantage versus peers in the US.
• Increased consumption of paper-derived sanitary products: This will be driven by the growing 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 and writing paper.
• Evolution of the housing and construction market in the main wood-demanding economies (US and China) and building renovations in Europe.

Paper packaging: Although business activity was broadly weak in all sub-sectors in 2023, paper packing was resilient, with global capacity increasing by +4% and global demand by +1% y/y. The packaging sub-sector is today valued at around USD940bn and is expected to grow the most in the coming years, boosted by the accelerated development of e-commerce and the packaging transition of other end-markets such as food (which accounts for 33% of packaging demand), which is gradually reducing its reliance on plastics. In fact, paper & board was the most used packaging material in 2023, just ahead of rigid & flexible plastics, with metal being the 3rd and glass the 4th. Although the outlook for the sector suggests limited price increases, packaging has been the best positioned segment in terms of margin protection, thanks to resilient demand.

Freesheet, newsprint, and printing & writing paper: The printing and writing sub-sector is a fragmented market that has been shrinking in size due to digitalization. Both the supply of and demand for printing and writing paper have declined by about -25% from the levels recorded a decade ago, especially in North America (-51%). In 2023, global demand fell by -9.6% y/y, with demand for uncoated mechanical paper falling the most (-18.4% y/y). Newsprint is in the same situation: Global demand decreased by -66% versus a decade ago (and -16% y/y) to around 10mn MT in 2023. Although the decline is visible around the world, Eastern Europe recorded the sharpest drop last year (-28% y/y), followed by Oceania (-23%) and Western Europe (-21%).

Pulp: This market is less fragmented than the other subsectors, as it is a capital-intensive industry with high chemicals' consumption. The majority of companies operating in this segment are located in Brazil, Chile, Canada and Northern Europe, while the most pulp-consuming country in the world is China, which demands around 50% of global pulp production. In terms of pulp trade, around 55mn MT of pulp was shipped across the world in 2023 (+2.5% y/y), of which 59% was bleached hardwood kraft and 41% bleached softwood kraft. We believe that pulp prices should continue to decline in the short-term, given that supply will continue to outpace pulp demand, particularly because of capacity additions coming from Latin American producers.

Forest, wood and timberland: Lumber and wood product prices declined by around -6% in 2023, mostly due to lower demand from the construction sector, which has been struggling since interest rates began to rise on both sides of the Atlantic. Nevertheless, some stabilization could be observed in 2024 as house building activity should start to slowly recover in the second half of the year.