The displacement of China's non-wood pulp capacity
China's economy grew by 6.9% in 2015, compared with 7.3% a year earlier, marking its slowest growth in a quarter of a century. The general malaise in the economy prompted a sharp slowdown in the demand for most industrial commodities, which led to significant oversupply across many sectors and a period of depressed pricing. Chinese paper markets were not immune to the economic slowdown, with demand growth slowing to ‘just’ 6% and net exports of unconverted paper and board falling for the first time since the Great Recession. This in turn depressed operating rates, with China’s paper and board sector operating at just 79% of capacity last year.
Despite the gloom one sector remained buoyant: the market pulp industry. Chinese imports of market pulp totalled 17.5Mt in 2015, up 11% or 1.7Mt on the previous year. This represented the strongest growth rate since 2011 and ensured that market pulp was one of the best performing commodities in the world. The expansion was supported by strong production growth in Chinese virgin fibre content tissue, and by stock building at several new paper machines prior to their start-up. However, the biggest driver of import demand was the displacement of Chinese domestic pulps. We estimate that Chinese production of non-wood pulp declined by 1.1Mt last year (-24%), while the production of wood pulp fell by 0.6Mt (-6%). The collapse in non-wood pulp production was mostly driven by the government mandated closure of obsolete capacity, while wood pulp production mostly fell for commercial reasons. Drought conditions in Shandong Province also led to weaker production as water shortages caused the temporary closure of APRIL’s Rizhao mill.
The displacement of Chinese non-wood pulp production has been a strong driver of imported pulp demand during the past ten years. Non-wood pulp production peaked in 2004 at 10.5Mt but has since fallen to just 3.5Mt last year. Further displacement is likely, but the scope is greatly diminished from previous years as much of the obsolete capacity has already closed. Furthermore, much of the remaining supply has niche end-uses, which can support a pricing premium when compared to wood pulps. The Chinese tissue sector in particular still uses significant volumes of bamboo and straw pulp, which suppliers herald for their environmental credentials. However, the quality is frequently inferior and against a backdrop of record market pulp capacity growth in the coming years, some tissue manufactures may find the economic incentive to switch to wood pulp too strong to ignore. It remains to be seen for how much longer restaurants and hotels will continue to promote ‘Paper not from trees’!
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