PSI Attendees Hear of Chinese Growth

If they didn’t already know it, attendees of the recently concluded Paper Stock Industries Fall Conference heard a presentation by David Clapp, senior economist with RISI, on the impact the Chinese paper industry is having on the world paper stock market.

In his presentation, titled Chinese Capacity Expansions: Impact on North American Markets,” Clapp outlined the changing dynamics of the Chinese paper industry. One key point, Clapp noted in his presentation, is that China is no longer the importer it once was for graphic paper. As an example, he said that there are reduced opportunities for North American suppliers as a larger percentage of the demand is being met by Chinese producers.

Meanwhile, according to his presentation, opportunities for North American paper packaging producers are diminished. There is a displacement of kraft liner by recycled-based grades. Also, more broadly, less demand for packaging in the U.S. due to rising Chinese merchandise imports.

No one can deny that China’s economy has been growing at an incredible rate. The impact of China’s economy is reflected in the paper industry. China’s capacity expansion has had huge effects on fiber markets.

“China is now the leading destination for U.S. recovered paper exports,” Clapp noted.

What is crucial is the availability of high quality North American supplies. Meanwhile, Chinese demand is a major factor in supporting higher U.S. recovered paper prices.

Along with recovered fiber, market pulp demand has been positively affected. However, Clapp adds, “Suppliers outside of North America have been primary beneficiaries of rising demand.”

One of the factors that helped boost export demand in the early stages of the paper stock price rally were the inventory rebuild following strike disruptions and ahead of the start of new recovered paper based machines in China. Also, the improvement in markets was as a hedge against potentially higher ocean freight rates.

While initially, domestic paper stock prices were unchanged as domestic mills worked off inventory levels. However, the need to rebuild inventories soon forced buyers in North America back into the market, and required mills to raise prices.

While the market has benefited from robust buying by Chinese mills, Clapp also noted that stronger consumption will drive the recovered paper market over the next two years.

World demand is set to grow rapidly, he notes. There will be a general rise in paper and paperboard output, with massive investments in new capacity in China that is geared to handle recovered fiber.

Meanwhile, there is scheduled to be significant increases in capacity based on recovered fiber in Europe.

World recovered paper usage is expected to grow by 16 million metric tons by the end of 2005. While world demand will increase, Clapp says that almost 30 percent of the increase will come from new capacity from China.

In conclusion, in his presentation Clapp noted that impacts of Chinese capacity growth will have a strong influence on fiber markets over the next two years. In addition to recovered fiber demand, China will account for almost 40 percent of the growth in world market pulp demand.

Expect another recovered paper inventory build ahead of massive capacity investments in China. This move will be joined by stronger true consumption as demand in North America stumbled forward.

Initially, a weak supply response will give prices plenty of running room. However, he concluded, “Overcapacity and low operating rates, especially in China, will rein in prices.”