Facing plight and moving forward by VSF-supply shock

China's economic development is facing triple pressure of demand contraction, supply shock, and weakening expectation—by Premier Li Keqiang at the Fifth Session of the National People's Congress on Mar 5, 2022.

Premier Li summed up the current pressure on economic development and accurately predicted the current situation of the manufacturing industry, which is also the status quo of VSF industry. When we review the market changes in the first five months of 2022, the core elements basically rely on the three points.

Supply shock

It is an obvious impact on VSF. The market was not optimistic at the beginning of 2022 when paper pulp was falling and there was huge price gap of around $350/mt between dissolving pulp and paper pulp. Although Stora Enso planned to withdraw from dissolving pulp business, there was 2 million tons/yr new capacity in Brazil to come on stream, so the overall supply was relatively optimistic.

But judging from the actual operation of the first five months, the situation is quite different from expectations. Firstly, the outbreak of the Russia-Ukraine conflict and the reduction in the output of Russian forest resources have caused concerns about the supply of global pulp products. At the same time, the sharp rise in energy prices also pushed up the cost of pulp products. Dissolving pulp prices are pushed up by surging paper pulp.

Secondly, "black swan events" frequently occurred in dissolving pulp market this year, and Stora Enso has withdrawn from the market as planned. South Africa and Brazil in the southern hemisphere have been hit by heavy rainfalls since Apr, large-scale pulp mill was caught fire and there are more overhauls of European pulp mills. According to customs data, dissolving pulp import of Chinese mainland amounts to 1.48 million tons in the first five months of 2022, down 6.82% year on year, of which non-acetate-grade dissolving pulp decreased by about 7.9%.

The chart above shows the proportion of major origins other than Indonesia in 2021. The red box shows the countries that have undergone maintenance in the first five months, resulting in supply reduction. It can be seen that among the supply based on public circulation, over half of the countries or shares have witnessed supply anomalies, which is rarely seen in the past.

Among the major origins in the past five months this year, only six countries maintained positive growth and more than 60% of the growth was contributed by Indonesia. The import from Laos and Chile grew significantly, while that from Czech, Sweden and Japan was largely flat with minor increase. The import of three origins was less than 50% of the comparable 2021 level.

Dissolving pulp suppliers have obtained firmer attitude in pricing due to reducing supply and the price of dissolving pulp has gained ground by almost $300/mt since the New Year's Day, with an increase of about $50/mt per month, which is a continuous and sharp rise since 2010. The rise of dissolving pulp is obviously a great threat to the profit margins of VSF. Looking at the chart below, although VSF price has risen by more than 3,000yuan/mt since the beginning of this year, the profit has improved little and even has been reduced.

It is relatively optimistic that the production of Chinese dissolving pulp has increased year-on-year, but the price has also hiked from 6,800yuan/mt at the beginning of the year to 9,300yuan/mt in Jun, and still shows an upward trend.

The impact on the supply side is only one of the dilemmas that VSF is currently facing, and the challenges of the market are far more than that.