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global pulp and paper industry impacted by china

China's fibre diet

July 2018

The Advisory Board

China’s environmentalism was a key focus of the pulp and paper industry’s recent conference in Shanghai, in which Pictet Asset Management’s Timber Advisory Board participated.

China’s new-found environmentalism is having an impact far beyond its borders – not least in the global pulp and paper industry.

The government’s efforts to switch energy production from dirty sources like coal are likely to affect saw mills and pulp producers, which are energy-intensive. Likewise with water. Official concerns about excess water use are forcing mills to either keep consumption down or close. Already, over the past five years more than 1,000 smaller pulp and paper mills have been shuttered, with more to come. As a result, the sector is likely to consolidate into bigger, more modern plants.

But Beijing has also taken more direct measures. For example, the Chinese government’s new anti-pollution efforts include a ban on imports of mixed waste and increased standards for the quality of recycled paper its willing to accept from abroad. That matters because recycled paper products have been a major source of fibre for Chinese containerboard and cartonboard production, which in turn is essential to the global packaging industry.

The measures are likely to have a major impact on both the domestic and global markets for fibre. In 2017, around a third of all the recycled paper used by Chinese producers was imported. But the new government measures mean that Chinese industry faces an 8 million tonne shortfall in 2018, equivalent to 10 per cent of the previous year’s total demand for recovered paper.

The market for fibre is coming under additional strain from rising demand, not least as environmental considerations and rising oil prices encourage a shift away from plastic packaging. Ever more of that gap will be filled by wood and paper products.

The simultaneous squeeze in both supply and demand is pushing Chinese fibre prices up. In 2017, the price of domestic recovered cardboard, a major source of paper fibre, jumped by 80 per cent, while at the same time the price of imported mixed waste slumped by 30 per cent.

pulp friction

China paper and paperboard waste and scrap imports (m metric tonnes)

China paper and paperboard waste and scrap imports

Source: UN Comtrade. Data as at 01.07.2018

Meanwhile, countries that had exported their paper and mixed-waste to China now have to find something else to do with this surplus. For instance, in the US, mixed waste prices effectively declined to nil, as collectors could not sell inventory and faced a cost for domestic disposal.

Greater concentration in the US recycling industry now looks likely – not least because the US is one of the world’s biggest exporters of recovered paper. China's actions are also bound to make users of paper packaging, particularly e-commerce companies, rethink how they operate. One potential change is for them to start picking up and recycling the boxes they use to deliver goods.

Investors need to be prepared for the impact of China’s environmentalism. In the pulp and paper industry, that means favouring leading companies with Western-quality operating standards. At the same time, Beijing's increasingly tight standards for imports of recycled fibre will reward US firms that have the ability to handle waste paper with the minimum of environmental impact. A consequence of falling sales of recycled fibre to China will be falling prices elsewhere, potentially encouraging demand for the now-cheaper recycled fibre from elsewhere.

High and rising demand for containerboard and boxes in China could drive up costs that are likely to be passed on to consumers. Finally, restrictions on fibre imports are likely to boost Chinese demand for virgin pulp from countries like Brazil.

The pulp and paper industry could prove to be a barometer of China’s commitment to environmentalism – and show quite how global these efforts can be.