India Ratings and Research (Ind-Ra), in a series of two wires, will assess the impact of COVID-19 led lockdown on the paper sector. The first wire in the series analyses the impact on domestic demand and imports based on global demand, inventory position and prices. The second wire will analyse the resultant impact on domestic paper prices and the profitability and credit profile of sector companies.

Ind-Ra expects a decline in paper demand in FY21, given the hit on demand from packaging, education, corporate and print media sectors due to the nation-wide lockdown, continued disruption in industrial production and supply chains for 20-30 days thereafter and lingering infection concerns for a few weeks. Ind-Ra expects a recovery in demand in 2QFY20 with resumption of education and corporate sectors, driving demand for writing and printing paper (WPP) and a gradual normalisation of manufacturing and logistics, pushing packaging demand. However, there could be downside risks if the lockdown is extended. Besides, domestic paper producers have already been facing volume pressure from rising imports, which grew 18% yoy in 10MFY20, significantly faster than the growth in domestic demand. While logistical disruption could provide a temporary relief, the import threat continues with subdued pulp prices and the possibility of overseas manufactures pushing their inventory amid a weak global demand, post normalisation of logistics.

Supply Disrupted:
Despite being a continuous process industry which is eligible for exemption from the lockdown, most large and many small listed paper companies (around 70% of listed revenue; list in annexure) have suspended operations post the lockdown, due to issues such as state government approval, labour and raw material availability, logistics and demand disruption. A few companies including West Coast Paper Mills Limited (‘IND AA-’/Stable) and Trident Limited (‘IND A1+’) partially recommenced operations last week. Many of the other operational companies manufacture newsprint.  

Plant Closures, Logistical Disruptions to Hit Packaging Demand in 1QFY21:
With the suspension of operations for several industries, disruptions in production of essential commodities, inland transport and export shipments, packaging demand will be hit in 1QFY21. While e-commerce demand for groceries sky-rocketed in 4QFY20 due to household stocking, Ind-Ra believes that packaging demand from e-commerce would also remain affected for the next 1-1.5 months due to manpower shortage, supply chain issues affecting procurement and logistics issues affecting deliveries. The online sale of non-essential items, which form a big chunk of the total demand, would remain completely halted until the lockdown is lifted. Despite discretionary purchases remaining affected, Ind-Ra expects growth in paper packaging demand from both industrial and e-commerce segments in 2QFY20. The packaging segment accounts for over 50% of the total paper demand, followed by WPP at 30%.

 

Lockdown and Infection Scare Hit WPP and Newsprint: Demand for WPP is hit by the closure of most educational institutions since the beginning of March and a gradual adoption of work from home (WFH) by companies. Professional courses could see a higher usage of the digital platform in the near-term. With restrictions and concerns around the COVID-19 pandemic, Ind-Ra expects WPP demand to be the worst hit in 1QFY21.

Demand for newspapers has also declined, with many readers avoiding the printed copy and housing societies banning the entry vendors as precautionary measures while some magazines have temporarily suspended their editions. With little scope of a recoup, Ind-Ra expects newsprint demand to decline in FY21. Demand for tissue papers has risen in the wake of increased hygiene concerns, leading to a 6.6% mom growth in the Wholesale Price Index of tissue paper. However, the subsequent closure of eateries in March 2020 is likely to have a negative impact in 1QFY21.

Import Threat Looms after Temporary Respite
: Paper import, which accounts for 15%-20% of the domestic demand, grew around 18% yoy in 10MFY20 with a moderation in global pulp prices. Ind-Ra however believes the imports would get constrained till normalcy is restored in India, post which Chinese manufactures are likely to push the built-up inventory, though rupee depreciation will impact prices. This coupled with a subdued demand environment and high stocks in the supply chain would weigh on paper prices for most of the grades.

 

Global Pulp Prices to Remain Subdued: Ind-Ra believes that despite production cuts in several countries and disruptions in logistics, the impact of COVID-19 pandemic on global paper demand will be higher than the impact on supply, keeping paper prices subdued in the near-term. Many Chinese producers have announced plans to cut production in April in the wake of a weak demand.
 

Figure 5
COVID-19 Impact Mapping of 20 Key Paper and Paperboard Consuming Countries

Country

Consumption (2018, million tonnes)

Share in global consumption (%)

COVID-19 cases

Legend

China

109

21

 

US

70

13

 

Japan

25

5

 

Germany

20

4

 

India

19

4

 

No. of confirmed casesa

Italy

11

2

 

 

> 2,00,000

Korea

10

2

 

 

> 1,00,000

Mexico

10

2

 

 

75,001-1,00,000

Brazil

9

2

 

 

50,001-75,000

France

9

2

 

 

25,001-50,000

UK

8

2

 

 

10,001-25,000

Indonesia

8

1

 

 

5,001-10,000

Russia

7

1

 

 

1,000-5,000

Spain

7

1

 

 

<1,000

Poland

7

1

 

Canada

5

1

 

Thailand

5

1

 

Taiwan

4

1

 

Australia

3

1

 

Netherlands

3

1

 

a As on 8 April 2020
Source: FAO, Worldometers, Ind-Ra

 

Some Chinese pulp suppliers have announced a price increase of around USD30/mt in April 2020, to cash-in on the short-term supply disruption, exacerbated by container unavailability and a rise in shipping costs. Ind-Ra however believes that the high inventory levels and weak demand in key consuming geographies including China, the US, Europe will keep pulp prices lower yoy in FY21. Also, the global pulp price declined around 5% qoq in 4Q19 while it was down over 25% yoy after a year of weak demand due to a demand decline in graphic papers in Europe and the US coupled with high inventories. A meaningful recovery is likely only in 2H20 when pulp inventories could moderate on account of limited capacity additions and planned supply cuts.


According to Fastmarkets RISI, global pulp shipments declined 5% mom to 3.8 million tonnes in February 2020, pushing the overall inventory to 42 days of supply after some correction in December 2019. Pulp inventories at Chinese ports increased due to the combined impact of weak consumption and limited outbound logistics, while inventory at European ports was down in February 2020 due to the two-week long strike of Finnish pulp and paper producers.

Old Corrugated Cardboard Price Rise to be tested by Demand Slowdown:
An increase in Chinese recovered paper (RCP) imports due to lower domestic collections, coupled with an increase in packaging demand in the US due to household stocking, led to a significant increase in prices of old corrugated cardboard since February 2020, after a marked decline in 2019. While Chinese domestic RCP collection has been gradually recovering since March 2020, collections in other regions have been disrupted due to lockdowns, resulting in continued lower RCP collections. With a likely slowdown in global demand and a decline in Chinese imports, the sustainability of the recent price rally beyond the immediate period is questionable. 

Annexure 

Figure 8
Status of Operations of Listed Paper Companies

Company

Rating/Outlook

Plant status

Exchange intimation date

Remarks

JK Paper Ltd

IND A+/Stable

Suspended

28 March 2020

Tamil Nadu Newsprint & Papers Ltd

Ballarpur Industries Ltd

IND D

Suspended

23 March 2020

Andhra Paper Ltd

Suspended

24 March 2020

West Coast Paper Mills Ltd

IND AA-/Stable

Partially Operational

8 April 2020

Notified suspension of operations on 24 March 2020 and partial recommencement on 8 April 2020

Seshasayee Paper & Board Ltd

Suspended

25 March 2020

Emami Paper Mills Ltd

Suspended

8 April 2020

Notified suspension of operations on 24 March 2020 and partial recommencement on 8 April 2020

NR Agarwal Industries Ltd

IND A-/Positive

Suspended

26 March 2020

Satia Industries Ltd

IND A-/Stable

Suspended

24 March 2020

Orient Paper & Industries Ltd

Partially Operational

7 April 2020

Notified disruption of operations on 23 March 2020 and partial recommencement on 7 April 2020

Trident Limited

IND A1+

Suspended

24 March 2020

Century Textiles & Industries Ltd

Partially Operational

3 April 2020

Notified suspension of operations on 24 March 2020 and partial recommencement on 3 April 2020

Kuantum Papers Ltd

Pudumjee Paper Products Ltd

Suspended

23 March 2020

Yash Pakka Ltd

Suspended

25 March 2020

Star Paper Mills Ltd

Suspended

25 March 2020

Shreyans Industries Ltd

Suspended

23 March 2020

South India Paper Mills Ltd

Ruchira Papers Ltd

Astron Paper & Board Mill Ltd

Partially Operational

8 April 2020

Shree Rama Newsprint Ltd

Nath Industries Ltd

Shree Ajit Pulp & Paper Ltd

Suspended

23 March 2020

Genus Paper & Boards Ltd

Suspended

23 March 2020

Magnum Ventures Lts

Rama Paper Mills Ltd

Malu Paper Mills Ltd

Suspended

31 March 2020

Shree Rajeshwaranand Paper Mills Ltd

Sangal Papers Ltd

Suspended

30 March 2020

Chadha Papers Ltd

Suspended

26 March 2020

Mohit Paper Mills Ltd

Suspended

25 March 2020

Ganga Papers India Ltd

Shree Karthik Papers Ltd

Sundaram Multi Pap Ltd

Suspended

24 March 2020

Gratex Industries Ltd

Kay Power And Paper Ltd

Superior Industrial Enterprises Ltd

Suspended

25 March 2020

Coral Newsprint Ltd

Balkrishna Paper Mills Ltd

Suspended

11 April 2020

Shree Krishna Paper Mills & Industries Ltd

Source: BSE, Ind-Ra


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Analyst Names

  • Khushbu Lakhotia

    Associate Director
    India Ratings and Research Pvt Ltd Room no - 1201, 12th Floor, OM Towers, 32 Chowringhee Road, Kolkata-700071, India
    +91 33 40302508

    Krishan Binani

    Director
    +91 22 40356162

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121