As an impact of COVID-19 on paper sector, India Ratings expects a reduction in paper demand and moderation in margins for FY21.
India Ratings & Research (Ind-Ra), the most trusted Indian credit rating agency, has analyzed the impact of COVID-19 on paper sector. As per its report, the coronavirus led lockdown is expected to reduce paper demand and to loom import threat after a temporary respite in FY21.
Impact of pandemic on paper demand
- Demand for Packaging
Packaging segment is one of the significant contributors in the paper industry, accounting for over 50% of the overall paper demand. According to Ind-Ra, the most likely scenario for packaging demand after lockdown is – a drop in the first quarter of FY21, with possibilities of growth in second.
The demand for packaging from e-commerce is expected to remain low for the next 1-1.5 months due to the complete halting of non-essential items’ online sales during the lockdown. Such products make the major chunk of the total packaging demand.
The reasons behind the reduction in packaging demand are workforce shortage, troubled supply chain and deliveries, suspended operations in various industries, disrupted productions of essential items, and interrupted export shipments and inland transport.
- Demand for Writing and Printing Paper (WWP)
The outburst of the pandemic has revolutionized the traditional ways of teaching and working. Most of the educational institutions and companies have adopted the digital platform. Ind-Ra expects them to remain confined to these platforms in the near-term, hitting the demand of WPP tremendously in 1QFY21.
- Demand for newspapers
As the precautionary measures against the virus, various magazines have suspended their editions, and several readers and housing societies have banned the entry of vendors. Considering the same, Ind-Ra expects a decline in newsprint demand in the first quarter of FY21.
- Demand for tissue papers
For now, the only method of protection from coronavirus is taking care of hygiene. As per Ind-Ra, this increased concern for cleanliness has though raised the month-on-month wholesale price index of tissue papers by 6.6%, negative impacts of the pandemic are expected in 1QFY21 as the eateries remain closed amid lockdown.
Impact of pandemic on paper import and prices
Imports attain 15%-20% of domestic paper demand in India. While the first ten months of FY19-20 saw a year-to-year hike of around 18% in paper imports, Ind-Ra expects a constraint in it until the country restores normalcy.
Once things get normal, the agency expects a push in built-up inventory by Chinese manufactures, with some possible price impacts resulting from depreciation in rupee, high stocks in the supply chain, and subdued demand environment.
- Price of Old Corrugated Cardboard Price
Unlike in 2019, the price of old corrugated cardboard rose significantly since February 2020 due to the increase in imports of Chinese Recovered Paper (RCP). This increase in imports intended to meet packaging demand for household stocking in the US and lower domestic collections.
While RCP collection is slowly recovering in China since March, the lockdown has disrupted collections in other regions. With this continuous lowering of RCP collections, reduction in Chinese imports, and likely slowdown in global demand, it’s hard to predict the sustainability of the current price trends beyond the immediate period.
- Price of Global Pulp
According to the world’s most trusted market analysis and price reporting provider, Fastmarkets RISI, global pulp shipments in February 2020 were 3.8 million tonnes, 5% lower than that of the previous month. This decline pushed the complete inventory to forty-two days of supply following some modifications in December 2019.
Ind-Ra predicts low pulp prices in FY20-21 due to high inventory levels and low pulp demands by key consumers like China, Europe, and the US. These high inventories and demand decline in Europe and the US brought down global pulp prices by around 5% quarter-to-quarter in 4Q of 2019 and by about 25% in the entire year.
The agency believes that the impact of the pandemic on global paper demand will be more than that on supply, which will subdue paper prices in the near-term. It expects the pulp industry to recover from the impacts of COVID-19 on paper sector in the second half of the year 2020.
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