Where to Offload 4.6 Million Tonnes of New Capacity from Chinese Paper Industry?

SHANGHAI, Dez. 11, 2009 (RISI Blog) - One big story in 2010 and 2011 will be the wave of new printing and writing paper capacity due to come online in China. Even though the economic crisis this year has delayed some of the capacity, 4.6 million tonnes of the new capacity has been announced for China during the next two years. Of the 4.6 million tonnes, 2.6 million tonnes are coated woodfree paper and 2.0 million tonnes are uncoated woodfree paper.

Update on this article: it seems there is some mill closures as well...

On the uncoated woodfree front, government regulation has been accelerating industry consolidation in China by forcing small machines that do not meet environmental standards to close and asking the larger producers to takeover the smaller players. Some of the new capacity will essentially replace older machines. With the closing of the old capacity and the growth in Chinese demand, China's uncoated woodfree market will likely remain reasonably balanced in China even after the new machines have been installed. The biggest risk will be swing from the coated woodfree side.

In contrast, China's coated woodfree industry is already quite consolidated, with the largest four producers accounting for more than 60% of the market capacity. In addition, most of the coated woodfree machines are world-class machines and were installed in this decade. These machines do not have environmental problems and thus there is almost no room for the new machines to substitute out old capacity. A new wave of capacity expansion will have some negative impacts on the market and thus cause some downward movement in prices.

Where will Chinese producers find outlets for the production from the new capacity? A couple of factors likely hold the key in the near term.

Strong demand growth in China

China is a fast growing market with an annual growth rate of 10.4% over the past decade (2000-2009) and our medium-term forecast shows that coated woodfree demand will continue to rise strongly in 2010-2014 at an 8.1% annual growth rate. By the end of 2014, coated woodfree demand is expected to increase to 6.1 million tonnes, an increase of 2.0 million tonnes from its 2009 level. Thus in the medium term, China's market will grow enough to be able to absorb the production from the new capacity, but in the near term, they will be forced to find external markets and/or suffer low operating rates.

The type of coater installed

Producers that installed separate coaters instead of online coaters will have the advantage of being able to swing some of their production, at least in the near term, to uncoated woodfree.

Ability to expand shipments to other offshore markets, both inside and outside of the region

Chinese producers will likely be looking globally to expand their exports. Japan already saw a big increase in shipments from China in the first nine months of 2009, but whether this trend will continue remains to be seen?

Japan -- the fastest growing market for Chinese coated woodfree exports in 2009

In the first nine months of 2009, Chinese coated woodfree exports to Japan increased nearly 400% (or 145,000 tonnes). In contrast, China's coated woodfree exports to the rest of Asia had almost no increase during the same period of time. Imports gained more share of Japanese CWF demand due to rising imports from China. Significant machine downtime and closures resulted in Japan as producers grappled with the poor demand and had a tough time competing with the lower cost imports.

Now the key question is whether this trend will continue? Chinese coated woodfree exports drifted lower in October with exports to Japan showing a decline, falling 5,300 tonnes compared to the previous month, a drop of 21%. This could be caused by the rising Chinese production costs and climbing freight rates which made exports less profitable than before. Meanwhile, Japanese producers are putting up a strong fight against imported paper by offering competitive prices to their local customers. We expect it will become a big challenge for the Chinese producers to continue to move large tonnages to Japan without sacrificing their margins.

The extent to which the US anti-dumping investigation and continued fears over Dubai will dampen Chinese coated woodfree exports remains to be seen. Nevertheless, we are predicting that a lot more exports will go outside the region and find new markets, and China will reduce its coated woodfree imports. The bottom line is that we are projecting that China's net exports of coated woodfree will have to rise significantly over the next two years from 960,000 tonnes in 2009 to 1.7 million tonnes in 2011, a 740,000 tonne increase. Even with this increase, operating rates will still be low. The only way for this to be avoided would be for some of the new projects to be called off or postponed. It seems likely, that the capacity will impact coated woodfree markets greatly both domestically and globally.

In the long run, we remain positive that the Chinese domestic market will grow and eliminate the imbalance.