Guotai Junan: Paper industry demand costs resonate, profit elasticity can be expected.

Guotai Junan released a research report stating that the paper industry is entering a peak demand season. Previously, the rise in pulp prices, catalyzed by end-demand, production shutdown events resonating together, frequent price increases in paper products, combined with port pulp inventory replenishment, cost increases, and production shutdowns, it is expected that paper prices will gradually increase. As low-priced wood pulp consumption increases in the industry, profitability can be expected. Meanwhile, leading domestic companies have accelerated their integration layout of wood, pulp, and paper since 2024, which is expected to further solidify their cost competitiveness and smooth out raw material price fluctuations. Guotai Junan's main points are as follows: Port pulp inventory replenishment, cost increases, and production shutdowns jointly drive continuous pulp price increases On January 24, 2025, Suzano announced a $20 increase in the Asian market for February (a $20 increase had already been announced in January). On February 5, 2025, Arauco announced a $20 price increase for Radiata Pine, Bleached Eucalyptus Kraft Pulp, and unbleached kraft pulp. The continuous increase in pulp prices is the combined impact of inventory replenishment, costs, and supply. 1) From the perspective of demand and inventory, according to UTIPILP and Europulp, European wood pulp stocks in December 2024 were 694,000 tons, up 3% from the previous month, with port stocks at 1,445,000 tons, up 1% from the previous month, and European wood pulp consumption of 727,000 tons, up 1% from the previous month. In China, in December 2024, imports of broadleaf pulp and coniferous pulp were 1,697,000/738,000 tons, up 25%/12% month-on-month, with the broadleaf pulp price bottoming out in the fourth quarter, and manufacturers actively stocking up. As of February 10, inventories at Qingdao, Changshu, and Ningbo Zhoushan Port have significantly increased, reaching their highest levels in recent years. 2) From the supply perspective, Suzano announced production cuts for the first quarter of 2025. Since coniferous trees are limited by new capacity resources, coupled with closures/reductions (such as Canfor Prince George, Paper Excellence Ashdown, Stora Enso), the supply-demand fundamentals remain strong. With broadleaf pulp at a record price differential with conifers and supply constraints due to production cuts and maintenance shutdowns, prices are expected to moderately increase in Q1 2025. 3) From a cost perspective, the cost of wood chips in Finland and Sweden has been continuously unilateral since 2021, and the production cost of coniferous trees in Europe continues to rise. Pulp price increases, catalyzed by end-demand, and resonating production shutdown events, frequent paper product price increases From February 10-11, 2025, Shandong Sun Paper, APP, and Asia Pulp and Paper successively announced a price increase of 200 yuan for wood pulp-based paper products starting in March. On February 7, ND PAPER announced a price increase of 50 yuan for cardboard products at its Dongguan base starting on February 17. 1) In terms of cultural paper, price increases are driven on one hand by wood pulp costs and on the other hand, the traditional peak season for cultural paper is from March to May. With the tendering of autumn textbooks and teaching aids, end-demand is improving. Additionally, from the supply side, disruptions caused by the shutdown at Chenming are ongoing. As of January 23, 2025, normal production has resumed at Chenming's Huanggang base and one cultural paper production line and one mechanical pulp production line at its Shouguang base have already resumed production, accounting for 23.23% of the total capacity. 2) In terms of cardboard packaging, on the supply side, paper mills have resumed production after the holiday, with supply somewhat weak. Shipments before the New Year were mainly from existing inventory, with a noticeable decrease in inventory and slight price fluctuations. On the demand side, there has been no significant increase in purchasing demand from paper packaging companies and end markets after the holiday. Most paper mills are still fulfilling orders from before the New Year, with the market maintaining just-in-time purchasing. Investment recommendation: It is recommended to invest in comprehensive integrated leading companies (002078.SZ), as well as specialized players in the industry like Wuzhou Special Paper Group (605007.SH), Xianhe Co., Ltd. (603733.SH), Hangzhou Huawang New Material Technology (605377.SH), Shandong Bohui Paper Industry (600966.SH), Shanying International Holdings (600567.SH). Risk warning: Downstream demand lower than expected, intensified industry competition, and lower-than-expected implementation of price increases.