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Bleached softwood pulp market outlook under the global economic recovery

The topic of the report I bring to you today is the market outlook for bleached needle pulp. Under the turbulent and gradual recovery environment of the global economy, what will be the development trend of the bleaching needle pulp market? My report is divided into three parts, one part is looking to the future, especially after the new crown epidemic, what are the new changes and trends in the long-term market development of commercial wood pulp? Secondly, under the background of global economic recovery, the short-term market development situation of commercial pulp, especially bleached needle pulp, is analyzed. Finally, I would like to share with you the latest progress of Metsä Fibre's investment projects. Regarding the long-term development trend of commercial pulp, this is the market structure of the main raw material pulp of the global paper industry

Regarding the long-term development trend of commercial pulp, this is a market structure analysis of the main raw material pulp of the global paper industry. The total global demand for paper pulp is about 410 million tons, of which virgin wood pulp accounts for 44%, or about 180 million tons, and recycled pulp accounts for 54%, or about 220 million tons. If we plan the non-wood fiber and dissolving pulp, the ratio of virgin wood pulp to recycled pulp is 45:55. About 60% of the virgin wood pulp is produced by integrated mills, that is, especially outside China, many large paper mills There is self-made pulp, and this part accounts for about 110 million tons. The total use of commercial pulp circulating in the market is about 70 million tons, accounting for 39% of the total wood pulp. Commercial pulp includes hardwood pulp, soft-leaf pulp, and high-yield pulp, namely chemical mechanical pulp, etc. The market size of coniferous commercial pulp is about 26 million tons, and the market size of hardwood pulp is larger, at about 38 million tons. The long-term development trend of these two parts of commercial pulp still has a certain growth. The market growth rate of hardwood pulp will be higher, with an annual growth rate of about 3%, and the growth rate of softwood pulp is about 1.3%.

If you look at all the commercial pulps together, the net increase is about 1.6 million tons per year, which is equivalent to the current annual capacity of a large new pulp mill. According to the investment rate of adding a large pulp line every year, the new supply is basically consistent with the growth of market demand, among which the annual growth of softwood pulp market demand is about 330,000 tons.

In the next five years, if you look at the production capacity trend of bleached needle pulp, there will be not many increments. In the past few years, some pulp lines have been converted to dissolving pulp or uncolored pulp. In the future, there will be some bottlenecks in supply. The investment projects aimed at solving the bottleneck problems will bring certain increments. The largest incremental project is Metsä Metsä Fibre will put into operation a new softwood pulp line in the second half of 2023, which will bring about 800,000 tons of new production capacity. In the next few years, the supply increment of the whole bleached needle commercial pulp market is limited. According to the analysis just now, the annual growth of the demand for bleached needle pulp is about 330,000 tons, so the change between the demand and supply of needle pulp will keep the operating rate of needle pulp mills or the ratio of demand and supply at a relative comparison. high level.

01Global Economy

The operating conditions of our industry are inextricably linked with the global economy, so analyzing the future development trend of the market is inseparable from the prediction of the entire economic level. In general, the global economy is gradually recovering and rebounding from the epidemic, but the recovery process has gradually become more differentiated. I will also discuss it with you in detail.

First of all, including the World Bank and the IMF (International Monetary Fund), have recently raised the global economic growth rate in 2021 and 2022 in their latest economic forecasts, which means that at the macro level, economists have The recovery of the economy is still relatively confident. Especially after the first quarter, the global stock market, especially the European and American stock markets, maintained a fairly strong and upward trend. Since April, we have also seen that many large companies have also released their first-quarter quarterly reports. These quarterly reports basically confirm the stock market's confidence in the recovery of corporate profitability and turnover, and have not disappointed the market.

At present, it is generally believed that the economic recovery has a very high correlation with the two most direct factors: one is the speed of vaccination, and the other is the effectiveness of the economic stimulus policies adopted by various countries. Because these two points can be most directly reflected in these consumption-led economies.

Let's look at China again. The IMF's forecast is that China will achieve GDP growth of more than 8% this year and return to the range of a long-term growth trend of 5.6% next year. U.S. GDP shrank by 3.5% last year and is forecast to grow by 6.4% this year, which is a pretty high growth rate.

If we take China and the US together, the two largest economies in the world account for more than 40% of total global GDP. If these two economies can grow at such a rate, it should be said that it will be very beneficial to the global economic recovery.

The recovery in the euro area is relatively slow, and it will not fully recover this year to make up for the decline caused by the economic contraction last year. By the end of 2022, it will almost return to the level of 2019.

Overall, the general trend of economic recovery is relatively clear.

02New crown vaccination

As mentioned earlier, the speed and scale of economic recovery is directly related to vaccination. Here's a look at how vaccination affects social and economic activity, using the UK as an example. As we all know, the UK's anti-epidemic took a detour last year, but in terms of vaccination, it should be said that this round has done quite well. From December last year, until April 18 this year, statistics show that a total of 43 million doses of vaccines have been vaccinated in the UK, of which 33 million are the first doses, and about 10 million people have completed two doses of vaccination. By April 18, the national vaccination rate in the UK had reached 50%.

So, what is the relationship between the speed of vaccination and the development of the new crown epidemic? If we use the 7-day average to make a comparison, compare the situation in the UK in April and January this year: in April, the number of new infections of the new crown dropped by 96% compared with the peak in January, from almost 60,000 per day. The number of new crown infections has dropped to just over 2,000. For the government, the biggest relief comes from lower hospitalizations and deaths. The UK saw a 94% drop in hospitalisations and a 98% drop in deaths over the period.

This also proves that vaccination has played a decisive role in the control of the new crown epidemic, especially the current vaccination rate is only 50% - it has not yet reached such a proportion of more than 70% required by our so-called herd immunity - the population The number of infections and the number of hospitalized deaths has dropped significantly. The decline of these two indicators is decisive for the government to open up society and re-invigorate social and economic activities. In other words, as many experts have said, with the popularization and effectiveness of vaccines in the future, the new crown may become an annual flu. If we can control its mortality, then the impact on social life and economy will be reduced faster.

Although we believe that vaccination has a great impact on the economic recovery, due to various reasons, the global vaccination rate is still very uneven. So far (the end of April), the country that is generally recognized as doing well is Israel. Now the number of vaccination doses per 100 residents has reached 120, which means that many people have completed two doses of vaccination.

The United Kingdom and the United States are also relatively fast, achieving more than 60 inoculation doses per 100 inhabitants. Now the world average is around 12-13, which means that about 12 doses of the vaccine are vaccinated for every 100 inhabitants. The gap between countries is still quite large. Therefore, the speed of vaccination in various countries can also be used to predict the speed of economic recovery in various countries to a certain extent.

03 The pull of consumption to the economy

Next, whether some countries may achieve herd immunity this summer, or some countries may not achieve herd immunity until this winter or next spring, realizing the overall opening of the entire society. After opening up, the biggest boost to the recovery of economic development comes from consumption.

We can also imagine what kind of pull will be brought to our pulp end products after the opening of the society? First of all, especially in these economies outside China, it should be said that the new crown epidemic has suppressed consumption for a long time. Especially in these consumption-oriented economies, 70-80% of their gross national product comes from consumption, and the new crown has suppressed a large proportion of this part of consumption.

From another angle, it depends on whether the household has expenditures that can be used for consumption? Although the epidemic has also brought some problems such as unemployment and other income reductions, overall, this picture is a recent analysis by Moody's. The new crown pandemic for more than a year has brought a considerable scale of household savings. , which is additional savings on top of normal savings. By comparing the additional growth in household saving with GDP, in the United States, the additional saving of these households can account for 12% of the entire GDP. That is to say, in American households, a lot of extra consumption potential that has not been released has been accumulated. Here are the forecast values for different countries. The projected increase in household saving, the global average, is about 6% of GDP. (Picture 4)

In other words, in fact, ordinary people have a lot of money to consume. The key is whether this part of consumption can be effectively realized with the reduction of epidemic control measures. As for the impact on our pulp application products, we can imagine that if we return to work, schools resume classes, etc., because after business and social activities gradually normalize, will there be demands for writing and office work, as well as some advertising printing, etc. certain recovery.

In addition, after the opening of offices, shopping malls, theaters, airports, public facilities, etc., it will also bring a certain growth to the consumption of household paper other than households. In addition, the recovery of tourism catering will bring about an increase in demand for disposable paper packaging, food packaging, and especially alternative plastic products. Therefore, especially for these consumption-centered economies, their economic recovery will bring a certain positive demand growth to the end products of our industry.

04 Changes in demand for commercial pulp

Let's take a brief look at the overall changes in commercial pulp last year. The overall demand increased by 3%. From the perspective of varieties, the demand for softwood pulp has declined, and the growth rate of broadleaf pulp is the highest.

From a regional perspective, in the softwood pulp market last year, the decline in demand in Western Europe was the most severe, and the growth in China was the strongest. In North America, the demand for the entire commercial pulp increased by 6.5% last year, which was beyond everyone's expectations. On the whole, if the European market will recover in 2021, the overall demand for commercial pulp is relatively optimistic in 2021.

Next, we introduce some of the variables of concern to our analysis of the bleached needle commercial pulp market.

On the one hand, look at the supply situation from the perspective of pulp suppliers. Everyone is very familiar with the challenges of logistics. In a while, our COSCO SHIPPING President Chen will give you a detailed report, so I won't go into details. In the first quarter of this year, some pulp mills experienced some unplanned shutdowns, so the entire supply of softwood pulp in the first quarter, from mill production to customer delivery, was affected to some extent.

In terms of end users, we just did a more in-depth analysis; in terms of demand, the Chinese market remains relatively healthy, and the European and American markets will resume some growth with the opening of epidemic prevention measures.

Of course, the challenge that everyone is generally facing now is the increase in upstream costs, how to transfer prices to downstream products through price increases - this is still in the process of implementation, which has an impact on downstream demand and other aspects, and we must continue to observe and track .

In the relationship between supply and demand, the inventory of bleached needle pulp in the entire industry chain is relatively healthy, especially from the perspective of suppliers. With the limited production volume and the delivery situation in the past few months, the inventory of the entire supplier is still relatively healthy. remain in a relatively normal state. We believe that all links in the supply chain are in a relatively healthy state.

With reference to the external announcement of Metsä Fibre in the fourth quarter of 2020, Metsä Fibre's business is loss-making. On April 28 this year, we announced the first quarterly report. Metsä Fibre achieved profitability, and its operating profit reached a level of about 12.5%. Therefore, softwood pulp has achieved a relatively normal profit at the current market price. state.

Globally, China is now leading the rise in pulp prices, followed by North America and Europe. The price of commercial pulp in Europe, in May, softwood pulp suppliers have raised another 100 US dollars, which means that the face price of softwood pulp is above 1200 US dollars / ton. Everyone is familiar with the situation in China. Now, if the spot market price is used to judge the North Bleaching Needle Pulp, Asia is still leading, and the spot market price in Europe and North America is slightly lower than that in Asia. This is the overall situation now.

The trend of bleaching needle pulp and bleaching pulp in the Chinese market, in this round of changes, the prices of both pulps have a relatively rapid and relatively large increase. However, the price difference between pulp seeds has not narrowed, and it is still expanding. From last year's 100-120 US dollars, it is now almost 200 US dollars. This situation is still determined by the supply and demand relationship of the two pulp species.

In China's softwood pulp futures market, the forward-looking changes in the supply and demand relationship of the market are also clearly reflected in the changes in futures market prices.

In addition, climate governance may indirectly have a certain impact on the intake of raw materials after commercial pulp due to the carbon absorption of forests and the diversified application of wood. Through the analysis of the production capacity of needle and hardwood pulp, we believe that the supply and demand relationship of bleaching needle pulp will maintain a trend of tightening in the next few years, which will lead to the price difference between needle and hardwood pulp may continue to remain for some time. This is a trend change that we have rarely seen in the commercial pulp market before.

In the short term, the consumption-driven global economic recovery will still be beneficial to the end products of the paper industry, especially the demand for commercial pulp, especially outside China, in the next 6 months to the end of the year. The market will get a recovery.