China is the top pulp consuming country in the world, with total wood pulp consumption reaching 46 million metric tonnes in 2021. However, unlike other major markets such as the US and Europe, China has a high import dependency on wood pulp due to the scarcity and uneven distribution of domestic forest resources.
Ricky Wang, Pulp and Paper Analyst for analytics agency Sublime China Information (SCI), notes that China’s import dependence degree has been declining from 67% in 2017 to 57% in 2021 with local pulp and paper integration progress, uncertainties in 2020, unexpected overseas turnarounds and high-cost pressure from imported wood pulp.
“In addition, compared with more mature markets, the degree of integration and concentration in China’s pulp and paper industry is comparatively low,” he says, adding that the capacity concentration ratio of the top four players in the Chinese tissue industry is only about 33% in 2022.
“China’s paper players differ in terms of scale and capital strength, and their purchasing channels and strategies also vary,” Wang says.
The vast majority of integration concerns mechanical pulp produced for packaging and somewhat also fine paper production, but only a few tissue mills have onsite BHK (Bleached Hardwood Kraft) pulp integration.
Pandemic changes consumer patterns
According to Wang, there has been higher health and hygiene consciousness among consumers in China due to the ongoing COVID pandemic – meaning, in essence, that product traits such as clean, safe and food grade become more appealing to consumers.
In addition to conventional products such as toilet paper, facial tissue and paper towels, tissue players in China have launched differentiated products such as wet toilet paper, lotion tissue, disinfecting wipes, and moisturising facial tissue to serve specialised demand under more specific consumption scenarios.
“The overall demand for tissue will continue to rise with urbanisation and higher disposable income,” Wang says, while pointing out that factors such as demand differentiation and economic deceleration will cause a divergence in tissue mills’ business strategies.
Uruguay sets the tone
According to Wang the global Bleached Hardwood Kraft (BHK) pulp supply is expected to increase constantly in the future with new capacity coming online: most notably, UPM’s 2.1-million tonne eucalyptus pulp mill in Paso de los Toros, Uruguay, which is scheduled to start production by the end of the first quarter of 2023.
“China’s pulp import will most likely recover in 2023. Also, the import structure may continue to readjust with a higher BHK proportion.”
In contrast to BHK, Bleach Softwood Kraft (BSK) pulp producers usually lack cost advantages in terms of labour, energy and fibre. With constant BHK capacity expansion, a certain price spread between the two will continue, observes Wang.
“Thus, paper mills in China may continue to adjust their feedstock structure by raising the BHK content. Aside from higher BHK consumption, more non-wood fibre has been consumed as an alternative to the expensive wood pulp in 2022.”
Dealing with continuous industry concentration in China, the competition between industry giants may well escalate – and the role of importers and futures spot traders may diversify.
Rooting for China
Managing Director Tom Wright from consultancy Hawkins Wright notes that during the past 20 years China has seen extraordinary and unnaturally fast growth. The next 20 years, however, can be something very different – also from a pulp perspective.
“Still, looking at the global market, we can see that we need China to perform well, since it’s so central to the entire market.”
The rising middle class of China has been a big driver in keeping the growth going, by pursuing a western standard of hygiene products. Similarly, urbanisation is remodelling Chinese consumer behaviour in the same way.
“Now, about 65% of the Chinese live in cities, compared to only 26% 30 years ago,”
Wright notes, adding that there are currently 14 “megacities” in the country. Still, with a range of problems in the national construction and property market, this fierce urbanisation is expected to witness a hiccup or two.
“The rate of urbanisation will slow down as a period of slower growth sets in,” believes Wright.
As the market for tissue, for example, has matured, the attention of Chinese consumers has turned to such issues as high quality and sustainability.
“We see that the same drivers that are potent in the West are gaining ground in China, too.” However, the headwinds of the Chinese economy have an impact here, as well.
“Consumerism will slow down to some degree.”
Nevertheless, Wright sees some exciting opportunities out there. China is a forerunner in the fight against plastic waste, with a plan in place to phase out manufacturing and circulation of single-use plastics.
“China has shown they can adopt innovative, flexible policies.”
Strong sales presence in China
As the globally biggest single market for pulp China is very important also for UPM Pulp. UPM has strong experience and knowledge of the Chinese market – in fact, the local APAC (Asia-Pacific) sales and service team has enjoyed a great 11-year run in China. Right now, the APAC team features 18 professionals.
Senior Sales Manager Rachel Sun says that the growth of the Chinese middle class is certainly having an impact on the market.
“With UPM you have a product that is sustainable and safe, with great quality – and this is something that the customers really respond to,” she says.
According to Sun, the APAC office is committed to supply chain security and always making the delivery window. “We see the customer as our partner and believe that we can grow together, as we have done in the past. We also want to pursue transparency in our actions at all times.”
Whenever problems arise, this mindset of openness and doing things together helps to solve them. “We take challenges head on and overcome them,” she says.
With the new Paso de los Toros mill soon delivering “a wave of pulp” to China, this will certainly impact various things. “This new volume will ease pressure on demand and supply, and we can serve more Chinese customers.”
Sun believes that the competitiveness of UPM Pulp will increase with growing volumes, but also due to sustainability issues.
“Our customers want to be more sustainable throughout their value chain, and with the new capacity we’re in a great position to support them.”
Next level approach
Connie Bi, Sales Director for APAC, says that with the pulp volumes growing, UPM will take a more important role in the pulp market – and contribute to the healthy development of the local paper industry.
“Our responsibility to the customer means supporting them with great quality and service,” Bi says, adding that APAC has a strong reputation as a promise-keeper in the market.
As the Paso de los Toros mill is set to take pulp volumes to the next level, Bi talks about a positive challenge facing the APAC sales team.
“We’re excited about the opportunity to get a lot stronger as the pulp volumes grow,” she says, adding that the team has acquired three new members recently.
Playbook anchored on customer service
Bi also notes the anti-plastic stance of the Chinese government that is promoting the use of fibre-based alternatives in a big way. “With plastic being phased out, this is certainly improving the market chances of our pulp, which is a sustainable product made out of renewable sources.”
Yet, uncertainties remain in the market, as both Rachel Sun and Connie Bi point out.
The UPM APAC, however, has a very straightforward playbook for the coming years:
“We want to keep doing great business – as well as be agile in our sales operations and emphasise customer focus at all times. That’s the best certainty one can have in uncertain times,” says Bi.
Text: Sami Anteroinen