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A sluggish demand recovery but the worst is over

Last update – July 2024

Sector rating 


SENSITIVE RISK FOR ENTERPRISES

Strengths & weaknesses

  • Increasing demand for boxes and paper packaging, thanks to the exponential development of e-commerce
  • Further growth potential in the medium and long term, driven by expectations of exponential population growth
  • Greater environmental awareness will continue to promote the use of paper packaging instead of plastic, especially in the food and pharma industries
  • Increasing digitalization: With remote working becoming the “new normal”, digital connections and communication will continue to increase, resulting in reducing use of notebooks, paper sheets and printed books in the future
  • Deforestation: the excessive use of land for planting and felling trees represents a great reputational risk for the sector
  • Vulnerability to energy and chemicals access and prices: higher input costs are damaging the margins of the pulp subsector, particularly in Europe

Sector overview

What to watch ?

  • Evolution of e-commerce: The packaging segment is highly correlated to online sales as e-commerce is the main market for selling cardboard boxes and corrugated cartons.
  • New regulations for packaging: Governments, notably in Europe, have been encouraging a greater use of paper and cardboard to replace plastic packaging, particularly for food-packaging purposes.
  • Energy crisis: With electricity and natural gas prices in Europe still above normal levels, the region continues losing competitive advantage versus peers in the US.
  • Increased consumption of paper-derived sanitary products: This will be driven by the growing population in developing countries and government aid seeking to generate more access to essential household products in developed countries.
  • Increasing digitalization: This will continue to reduce the use of printing and writing paper.
  • Evolution of the housing and construction market in the main wood-demanding economies (US and China) and building renovations in Europe.

2023 was a tough year for the pulp & paper sector. Revenues fell by around -15.2% y/y on average (five-year historical compound annual growth rate: +5.7%), driven by the contraction in both prices and volume sparked by the global economic slowdown, on one hand, and China's reopening on the other, which increased global paper capacity, adding to the existing oversupply.

The global deterioration in demand caused paper prices to drop, making the sector one of those that lost the most pricing power last year. However, there were differences between sub-sectors. While newsprint saw the biggest contraction in demand (-16% y/y), pulp was the only one to record volume growth (+2.5% y/y).

By revenue, the market share of each subsector has not changed from last year. As of today, wrapping and packaging is the largest (53%), followed by printing & writing paper (23%), sanitary (12%), newsprint (5%) and others (7%). By geography, the top five pulp & paper producers remain China, the US, Japan, Germany, Canada and Sweden.

Overall, the pulp & paper sector is energy and raw materials intensive, notably dependent on chemicals and natural gas for transforming raw wood into pulp and then into other derived sub-products. Unfortunately, many chemicals producers in Europe reduced or stopped the production of certain products in 2023 due to the huge amounts of natural gas needed to operate. As a result, companies in the pulp & paper sector were forced to source from other chemicals suppliers in China, the US and Canada, which reduced profitability. Operating margins moved from a five-year historical average of 8.9% to only 5.3% in 2023. The margin deterioration was particularly exacerbated in Europe by the above-average prices of natural gas and electricity. We do expect operating conditions will start to improve gradually in the second half of 2024 as cost pressures continue easing from 2023 levels. Yet, energy and transportation costs have lately proven to be very volatile as geopolitical tensions persist, which could ultimately put the margin recovery at risk.

We expect revenues to remain weak this year, increasing by only +1.2% y/y, followed by +5.1% in 2025. This small improvement should be supported by the fact that destocking is ending in many end-markets, and consumer spending will gradually start to improve as inflation is moderating. Improvements in inflation should also lead to interest rates cuts, which should also help the housing market to gradually recover, supporting demand for timberland and wood.

Subsectors

Paper packaging: Although business activity was broadly weak in all sub-sectors in 2023, paper packing was resilient, with global capacity increasing by +4% and global demand by +1% y/y. The packaging sub-sector is today valued at around USD940bn and is expected to grow the most in the coming years, boosted by the accelerated development of e-commerce and the packaging transition of other end-markets such as food (which accounts for 33% of packaging demand), which is gradually reducing its reliance on plastics. In fact, paper & board was the most used packaging material in 2023, just ahead of rigid & flexible plastics, with metal being the 3rd and glass the 4th. Although the outlook for the sector suggests limited price increases, packaging has been the best positioned segment in terms of margin protection, thanks to resilient demand.

Freesheet, newsprint, and printing & writing paper: The printing and writing sub-sector is a fragmented market that has been shrinking in size due to digitalization. Both the supply of and demand for printing and writing paper have declined by about -25% from the levels recorded a decade ago, especially in North America (-51%). In 2023, global demand fell by -9.6% y/y, with demand for uncoated mechanical paper falling the most (-18.4% y/y). Newsprint is in the same situation: Global demand decreased by -66% versus a decade ago (and -16% y/y) to around 10mn MT in 2023. Although the decline is visible around the world, Eastern Europe recorded the sharpest drop last year (-28% y/y), followed by Oceania (-23%) and Western Europe (-21%).

Pulp: This market is less fragmented than the other subsectors as it is a capital-intensive industry with high chemicals consumption. The majority of companies operating in this segment are located in Brazil, Chile, Canada and Northern Europe, while the most pulp-consuming country in the world is China, which demands around 50% of global pulp production. In terms of pulp trade, around 55mn MT of pulp was shipped across the world in 2023 (+2.5% y/y), of which 59% was bleached hardwood kraft and 41% bleached softwood kraft. We believe that pulp prices should continue to decline in the short-term, given that supply will continue to outpace pulp demand, particularly because of capacity additions coming from Latin American producers.

Forest, wood and timberland: Lumber and wood product prices declined by around -6% in 2023, mostly due to lower demand from the construction sector, which has been struggling since interest rates began to rise on both sides of the Atlantic. Nevertheless, some stabilization could be observed in 2024 as housebuilding activity should start to slowly recover in the second half of the year. 

Contact 

Maria Latorre
Allianz Trade
+33 1 84 11 50 50
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