According to Zhitong Finance APP, China International Capital Corporation released a Research Report stating that the papermaking industry will be in a critical restructuring period in 2024, which will also test the price stability of leading enterprises. Looking ahead to 2025, papermaking demand is expected to restore moderate growth under strong policy support for consumption, while the supply side is at the tail end of the capacity cycle, making it relatively easier to restore the balance between supply and demand for containerboard and cultural paper. After the pulp stabilizes at the bottom, it may primarily fluctuate, with a preference for stocks that have a strong margin of safety and a balanced attack and defense strategy, showing a Bullish outlook for companies with high-quality forest land and pulp resources.

China International Capital Corporation's main views are as follows:

Demand: Recovery expected under policy stimulus.

On December 9, the Political Bureau meeting proposed to "vigorously boost consumption and comprehensively expand domestic demand." As a cyclical product that is highly sensitive to consumer demand, the demand for papermaking in 2025 is expected to benefit with high certainty, particularly with the demand for packaging and specialty paper likely to recover with moderate single-digit year-on-year growth, and the demand for cultural paper is expected to steadily increase supported by orders for textbooks and auxiliary materials.

Supply: The capacity cycle is at its tail end, and the pattern is changing.

In 2025, there is pressure from new capacity in the industry, although it has slowed down. It is expected that the newly added capacity for containerboard and cultural paper will account for less than 10% of the existing demand. The expansion pressure for white card and specialty paper is relatively high, but if Chenming continues to suspend production, it could temporarily alleviate the supply pressure on white card and cultural paper. Looking ahead for the year, the overall supply and demand for bulk paper is relatively balanced, with white card prices likely still in the bottoming phase; the leading specialty paper companies have relatively more capacity expansion for pulp and paper, smaller enterprises may accelerate clearance, and it is a critical restructuring period that also tests the price stability of leading enterprises.

Price and cost: The short-term pulp-paper price spread is expected to widen again, with the expectation that broadleaf pulp prices will fluctuate in the range of $550-650 per ton in 2025.

In Q4 2024 to Q1 2025, bulk paper prices are expected to remain strong under the catalyst of the shutdown during the Chenming peak season and bullish policies. If pulp prices stabilize at the bottom, it means that the inventory costs of paper mills are gradually decreasing over the next two quarters, and the overall profitability of bulk paper companies is likely to see mild recovery; however, since Q4 2024, special paper prices have slightly adjusted, with no significant improvement in profitability on a month-on-month basis. Looking ahead to 2025, while there is less supply of Commodity pulp, many self-use pulp projects in China and Southeast Asia will still contribute to new capacity, possibly reducing the procurement volume of Commodity pulp, resulting in a high probability of pulp fluctuating in the range of $550-650 per ton, and the impact of the pulp cycle on paper prices may weaken.

In the medium to long term, the scarcity of companies with high-quality forest land and pulp resources is increasing.

From 2023 to date, the global new Commodity pulp production capacity has exceeded 8 million tons (accounting for more than 10% of the Commodity pulp capacity in 2023). Looking ahead, the next large-scale Commodity pulp project may be put into production by 2027, with no certainty of large projects in the meantime; considering the continuous growth of the global economy, upstream wood chips and pulp resources may both become tight, making it bullish on companies with high-quality forest land and pulp resources.

Profit forecasts and valuations.

The firm maintains its forecasts for individual stocks’ earnings, ratings, and target prices unchanged. It is recommended to focus on Shandong Sun Paper (002078.SZ), Hangzhou Huawang New Material Technology (605377.SH), Xianhe Co.,Ltd. (603733.SH), Wuzhou Special Paper Group (605007.SH), Yueyang Forest & Paper (600963.SH), Guangdong Guanhao High-tech (600433.SH), ND PAPER (02689), Shanying International Holdings (600567.SH), Suzano (SUZ.US), and Finnish-Swedish Forest Industry Group.

Risk warning: Demand may be below expectations; new supply may exceed expectations; core raw material prices may fluctuate beyond expectations.