Prices are starting to recover in China, but market dynamics remains muted in Europe
Inventories remains at (relatively) high levels. China’s pulp inventories at the ports increased 132kt m/m in October to 1,949kt (vs. 0.8Mt historical average and 1.2Mt new normal). China’s port inventories increased again in October and is now close to the highs observed post Chinese New Year in 1Q20. Despite solid China demand recovery, supply has been ample as global production is resilient (especially hardwood) and as producers divert volumes from weaker regions (e.g., Europe) into China. Having said this, we cannot rule out “speculative” stocks building-up (in advance of an eventual pricing recovery). European pulp inventories at the ports are down 9% m/m or -164kt to 1,654kt in September (vs. historical average of ~1.2mt). With European pulp consumption still weak, the inventory declines are probably mainly driven by weaker supply, which is then explained by lower domestic production (maintenance downtime) but also as global suppliers shift more volumes to China (where activity and prices are stronger).
Europe $BHKP prices continue to stand at minimum levels. We believe that Europe $BHKP pulp price at $680/t stands at floor levels ($122/t below its 10y historical average range of $802/t). We shouldn’t see BHKP prices to fall further, as pulp buyers will continue to buy/restock during 2H20 taking advantage of current prices. Consensus and market analysts remain confident on the fundamentals of the pulp market (due to the tight gap between the expected increase in demand and new capacity of BHKP), and they foresee average BHKP prices of $770/t and $805/t in 2021 and 2022, respectively. Our base case is that we expect supply to continue to be resilient in the months to come, and further price momentum from here is really dependent on demand recovery in Europe. We continue to expect pulp prices to post a slow and gradual recovery in 4Q20-late to 2Q21, until new capacity starts to reach the market.
North America P&W shipments down 14% y/y in September (-20% YTD). We are (closely) monitoring P&W market situation in the US (especially freesheet) as risks for the pulp market remain as some of US integrated operations could “disintegrate” temporarily (or permanently) and start adding other grades to the market (including market pulp in a temporary way, and/or containerboard/market pulp). Despite uncertainties, prices have been stable at low levels in Sept/Oct, but some demand improvements have been reported from the bottom in 2Q as the US election and the beginning of the 1H20 school semester could continue to help the recovery.
Graphic paper demand in Europe down 20% y/y in August, -30% YTD. Coated woodfree demand in Europe was down 28% y/y in August while uncoated woodfree demand was down 16% y/y. We believe European woodfree paper demand is poised to decline by >20% in 2020 with the key question being how much of that will recover in 2021 and what is the new normal. While we believe 2Q20 marked the bottom and some recovery might be expected for 2H20, pace and magnitude of recovery seem slower than we expected (risks of a COVID-19 second wave add to uncertainty). Prices were largely stable for the main grades, which we believe is helped by recent capacity shutdowns and as buyers and sellers take a wait-and-see approach on the negotiations.
Biden is positive for the “green” forestry sector? We believe US is now (more) likely to re-enter the Paris Agreement and the international climate diplomacy, where the US plays an important role which is set to improve. Thus, we think the likely US presidential change should imply even stronger near-term opportunities for green and climate-thematic stocks combatting global warming.
