Financial Services Association, January 11 (Reporter Luo Yichen) Expectations of a recovery in demand have repeatedly failed, forcing the market to re-examine supply-side pressure in the paper industry. A Financial Services Association reporter noticed that this round of production expansion will peak around 2024, and it is estimated that at least 5 million tons of new production capacity will be built within this year. Under the impact of supply pressure, industry recovery has been hampered, and the market's investment logic has quietly changed.

Beginning in 2022, China's paper industry set off a wave of expansion. Paper companies such as Nine Dragons Paper (02689.HK), Sun Paper (002078.SZ), Xianhe Co., Ltd. (603733.SH), and Wuzhou Special Paper (605007.SH) all invested in 10 billion scale projects, pushing the wave of production expansion to the peak. According to the CITIC Construction Investment Futures Report, the round of production expansion from 2022 to 2024 is expected to involve an additional production capacity of 7.8 million tons. Also, according to Zhuochuang News data, at least 5 million tons of paper production capacity will be completed in 2024.

It is worth noting that the above production capacity data are all the planned production capacity of the project. Considering that the papermaking project generally takes about 2 years to reach production, the aforementioned production capacity of 5 million tons cannot be fully implemented this year. However, at a time when demand is weak, supply-side “hustle and bustle” is enough to affect the mentality of downstream buyers, which in turn creates expectations that raw paper is “difficult to rise and fall easily”, increasing pressure on upstream paper companies.

According to an industry veteran, this round of expansion is more about focusing on the future and seizing production capacity targets. “Most of the new production capacity is concentrated in Guangxi and Hubei. It is likely that only these places can get project approval (target).” According to reports, according to the relevant paper companies' statements, these two provinces can cover the South China and East China markets, and both have certain pulp resources. They can support the construction of pulp production lines and combine convenient shipping. It is expected that the project will have a great advantage on the cost side.

However, in the short term, the sudden peak of production capacity release will undoubtedly heighten the market's concerns about the imbalance between supply and demand in the paper industry. A person from a listed paper company told the Financial Federation reporter that some investment institutions have expressed similar concerns, but from the perspective of paper companies, there is a lot of room for regulation on how to control project construction and commissioning progress. “It is unlikely that when market demand is sluggish, companies will concentrate on releasing new production capacity.”

In fact, the continued slump in demand has forced the market to re-examine paper companies that are aggressively expanding production. Many listed companies have experienced a “double kill” in performance and stock prices, while Huawang Technology (605377.SH) is favored by more investors due to its steady performance. Industry leader Sun Paper also admitted during the survey that the industry's overcapacity and concentrated release is one of the negative factors affecting enterprise development. Another adverse factor is the rise in pulp and energy costs.

According to the industry veteran mentioned above, the purpose of this round of expansion for paper companies is to occupy scarce production capacity indicators. Once large-scale projects are approved and implemented, they will gradually establish an advantage in subsequent cost competition, intensify the replacement of old and new production capacity in the region, and prepare for the rise of enterprises in the next boom cycle. What is difficult to avoid, however, is that if the market trough continues, short-term surging supply pressure will increase the risk of business operations.

In fact, this round of expansion in domestic papermaking has also invisibly increased its own cost burden. At a time when the global paper industry is sluggish, China has become the best market for global pulp suppliers. Tian Yaxiong, an analyst at CITIC Construction Investment, said that in 2023, domestic paper companies' rigid inventory demand clearly supported the pulp market. Compared with the European and American markets, the new increase in China's downstream production capacity brought more demand for rigid inventory replenishment, and made domestic pulp prices lead other countries in the world to rebound.