Sandy Lu, Economist, Graphic Papers, RISI
Feb. 12, 2009
The economic crisis that struck the world in the second half of 2008 has no doubt hit the Asian printing and writing paper industry, but it has also led some producers to secure new orders in an increasingly difficult global market. For the first time, Chinese coated woodfree exports exceeded South Korean coated woodfree exports in the fourth quarter of 2008 and Chinese coated woodfree production surpassed Japanese coated woodfree production allowing China to become the largest coated woodfree producer in Asia in 2008. We expect that China will be both the largest Asian producer and the largest exporter in 2009.
Chinese coated woodfree exports surpassed South Korean exports for the first time in fourth quarter 2008, but still remain 8% lower than South Korean exports for the year as a whole.
Previously I forecasted that without an aggressive stance toward supply-side management, Chinese coated woodfree suppliers would see their inventory levels shoot up and would have to move excess tonnage to the offshore market. A further increase in Chinese coated woodfree exports would undoubtedly lead to a shift in global trade flows, putting severe pressure on nations with higher production costs who are also desperate to maintain their share of the export markets.
Three months later, the results showed that Chinese coated woodfree exports, despite an ongoing global economic crisis, climbed in the fourth quarter of 2008, while exports from both Japan and South Korea fell sharply. According to customs data, the average monthly level of Chinese coated woodfree exports reached 82,000 tonnes in the fourth quarter of 2008, 12.3% higher than the average monthly level in the first nine months of the year (73,000 tonnes), while fourth quarter coated woodfree exports from Japan dropped 21% compared to year-ago levels and South Korean coated woodfree exports retreated to a monthly average of 69,000 tonnes in the final quarter of 2008, declining 12% relative to year-ago levels. Therefore, China, for the first time, surpassed South Korea in coated woodfree exports in fourth quarter 2008.
China may have already surpassed Japan in coated woodfree production, but final 2008 results need to be confirmed by the Chinese Paper Association.
According to the Japanese Paper Association, coated woodfree paper production in Japan closed at 4.639 million tonnes in 2008, falling 7% compared to 2007. This reduction was the result of significant production curtailment in the fourth quarter of the year. For example, three top paper producers, Nippon Paper Group, Oji Paper and Hokuetsu Paper Mills, cut production in October and November and aimed for more of the same in December in response to slumping demand, high production costs and faltering exports. As a result, coated woodfree production plunged 24% from the previous quarter and 27% from year-ago levels.
While we have yet to receive the final data from the Chinese Paper Association, our expectations are that Chinese production advanced at a rapid pace in 2008 as strong domestic demand in the first half of the year, robust growth in exports and falling material costs in the final quarter of 2008 gave Chinese suppliers some leeway to keep production levels up. Although high mill inventory levels reported during the September-November period forced several mills in China to take longer than usual maintenance downtime, the global economic crisis has yet to force the magnitude of supply reductions seen in other higher production cost nations.
In 2009, we expect to see China gain the distinction of being the largest coated woodfree exporter and producer in Asia. However, this change will certainly not be driven by strong global demand growth and new wave of capacity expansion. Instead, weak market pulp pricing will give Chinese producers the edge to produce paper at a cheaper cost as state-of-the-art, non-integrated mills will gain a competitive advantage over integrated mills, especially if pulp prices continue to fall. In addition, a favorable exchange rate will entice Chinese producers to aggressively pursue opportunities in offshore markets in 2009.
However, a major downside risk to China's ability to continue expanding its presence in export markets does exist. A flood of lower-priced coated woodfree from China into the USA and Europe could easily trigger a wave of trade protectionism, where the added tariffs could effectively eliminate any cost advantage for Chinese producers.