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New consumption patterns due to digitalization and environmental awareness are negatively reshaping the sector

Last update – October 2022

Sector rating 


SENSITIVE RISK FOR ENTERPRISES
Fragmentation

Internationalization
Political risk
Capital Intensity

Political risk
Profitability
Commercial risk

Strengths & weaknesses

  • With the exponential development of e-commerce, we expect an increase in the demand for boxes and packaging made of cardboard/paper.
  • Further growth potential in line with the expectations of continuous population growth, which will induce a greater demand for sanitary/hygiene products.
  • Greater environmental awareness will continue to promote the use of paper packaging instead of plastic (especially in the food industry).
  • Digitalization: new pandemic-induced practices, such as home-office and home-schooling, have created a dependency on digital, giving priority to the use of computers and tablets. Fewer notebooks, paper-sheets and printed books will be used in the years to come.
  • Deforestation: the excessive use of land for planting and felling trees represents a great reputational risk for the sector.
  • Vulnerable to energy and chemicals access and prices: higher input costs are damaging the margins of the pulp subsector.

Sector overview

What to watch ?

  • Evolution of e-commerce: the packaging segment is highly correlated to online sales as it represents a huge market for selling cardboard boxes and corrugated cartons.
  • New regulations for packaging: Through new laws, governments (notably in Europe) will begin to encourage greater use of paper and cardboard to replace plastic packaging.
  • Energy crisis in Europe: Rising electricity and natural gas prices on the continent will make European players lose competitive advantage to their peers in the US.
  • The length of the war in Ukraine: A longer-than-expected conflict could further deteriorate inflation in different geographies, reducing the purchasing power of households and therefore reducing the demand for certain products (especially in the sanitary segment: napkins, toilet paper, sanitary towels, cleaning paper, hankies etc.)
  • Printing paper: The trend will continue towards digitization. As a result, we expect a downsizing of this market.
  • Evolution of the housing market in the main demanding economies (US and China) and building renovations in Europe as this is a driver for timberland and wood-products demand.

As of today, the market share (by revenue) of each subsector is the following: wrapping and packaging (53%), printing and writing paper (23%), sanitary (12%), news print (5%) and others (7%). By geography, the top five pulp & paper producing countries are: China, the US, Japan, Germany and Canada.

The pulp & paper sector is energy- and raw-material-intensive, being notably dependent on chemicals for transforming wood into pulp and then into other derived sub-products. As a result, we expect the margins of the sector to deteriorate, especially in Europe, as natural gas, electricity and chemical prices have been soaring. It is difficult to predict when and how the conflict in Ukraine could end, so there is much uncertainty as to how deep and long the current energy crisis in Europe will be. Many chemicals companies in the region have already announced that they have reduced or stopped the production of certain products due to the huge amounts of natural gas needed to operate. As a result, some players in the pulp & paper sector have been forced to source from other chemicals suppliers in China, the US and Canada. Part of these higher costs will be reflected in the price of all the other products derived from paper and cellulose, though this will not be easy to do for all companies. That said, we believe that the good financial performance observed in the past year (mainly explained by higher-than-expected post-pandemic demand) will erode in the short-term.

By sub-sector, we believe that companies in the paper-packaging segment have a better outlook than those in the pulp and wood category. On one hand, the rise in online purchases together with greater demand for paper and cardboard for food packaging and transport are two key factors that will keep demand high in this category. On the other hand, the rise in pulp prices in Europe will cause trade flows to turn to other geographies such as the US and China. Regarding the wood subsector, we expect prices to decline from the high levels observed last year due to decreasing demand, especially from the construction industry in the US, as recession fears and inflation are deteriorating the housing market.

Subsectors

Paper packaging: This sub-sector is valued today at around USD930bn and the global demand for containerboards has increased by +28% when compared to ten years ago, thanks to the increasing utilization of paper and cardboard in the food & beverage industry (replacing plastics and cans) and the huge development of e-commerce (revenues of online sales providers are expected to jump by +35% to 2024).

Freesheet, newsprint paper and specialty paper: The printing and writing sub-sector is a fragmented market that has been shrinking in size due to digitalization. Both demand and supply of printing and writing paper have been decreasing by -21% from the levels observed a decade ago, especially in North America, where the decline has been sharper (-51%). In parallel, global newsprint paper demand has decreased by -63% to around 11.9mn MT per year, also compared to ten years ago. The decline has been observed in all continents. However, Asia (especially China) continues to be the world's largest consumer of newsprint paper (3.6x the amount demanded by North America).

Pulp: This market is less fragmented than the other subsectors as it is a capital-intensive industry with high chemicals consumption needs. The majority of companies operating in this segment are located in Brazil, Chile, Canada and Northern Europe. In terms of trade, 50mn MT of pulp were shipped around the world in 2021, of which 54% was bleached hardwood kraft and 46% bleached softwood kraft. The largest consumer is China, which demands around 38% of the global pulp production. Pulp producers are currently suffering because of increasing energy and chemical prices (extremely necessary for transforming the pre-shredded wood into pulp). However, some companies are self-sufficient in energy. The absence of capacity increases will perhaps see pulp prices remaining high.

Forest, wood and timberland: Lumber and wood product prices have been declining after jumping during the beginning of 2022. However, prices will remain above the pre-pandemic historical average. The wood market is correlated to the construction industry, which is not currently at its best since housing starts have been declining in the US. As a result, we expect wood demand to slow.

Contact 

Maria Latorre
Allianz Trade
+33 1 84 11 50 50
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