As of today, the market share (by revenue) of each subsector is as follows: wrapping and packaging (53%), printing and writing paper (23%), sanitary (12%), news print (5%) and others (7%). By geography, the top five pulp & paper producers are China, the US, Japan, Germany and Canada.
The pulp & paper sector is energy and raw materials intensive, notably dependent on chemicals for transforming wood into pulp and then into other derived sub-products. Margins in the sector, especially in Europe, have been deteriorating throughout 2023 as natural gas and electricity prices remain above levels seen before the invasion of Ukraine. As it is difficult to predict when and how this conflict will end, there is much uncertainty over the length and effect of Europe's energy crisis.
Many European chemicals companies have reduced or stopped the production of certain products due to the huge amounts of natural gas needed to operate. As a result, some players in the pulp & paper sector have been forced to source from other chemicals suppliers from China, the US and Canada. Only few companies have been able to continue passing on part of these higher production costs, depending on the subsector they are in and the country. Overall, Q1 and Q2 2023 saw sharp drops in both revenues and earnings for the entire sector, and a similar performance can be expected for Q3 and Q4, with a recovery expected in the first half of 2024.
By sub-sector, we believe that companies in the packaging segment have a better outlook than those in the pulp and wood categories. On one hand, the rise in online purchases together with greater demand for paper and cardboard for food packaging and transportation are two key factors that will keep demand high in this category. On the other hand, the rise in pulp prices in Europe is making trade flows shift to other countries, such as the US and China. Regarding wood, we expect prices to remain weak due to decreasing demand, especially from the construction/housing industry, as recession fears persist.
