Unraveling the dynamics of wood pulp swing lines in China

In this article our expert economist Minnie Kong explore's the recent upheavals and strategic shifts in China’s pulp and paper industry. Explore the complex interplay between dissolving and paper grade wood pulp, and see how these dynamics could reshape the industry.

Recent developments in China’s pulp and paper industry, notably the divestment of the Anhui Huatai pulp mill, prompted a closer examination of the dynamics of swing pulp lines, particularly the delicate balance between dissolving wood pulp and paper grade wood pulp.

The Anhui Huatai pulp mill, which suspended production in the first half of 2023, has been suffering annual losses of RMB 220-280 million since 2019, despite the concerted efforts by its parent company, Shandong Huatai, to enhance its performance. Those losses significantly impacted the overall profitability of the group.

We have also seen several swing lines leaving the dissolving pulp market over the past five years.

Our estimates for 2017 show that there were about 1.1 million tonnes of dissolving wood pulp capacity in China. Between 2016 and 2017, almost all swing capacity was focused on dissolving pulp due to weak paper grade pulp pricing and a large price premium for dissolving pulp relative to hardwood paper grade pulp. The move toward dissolving pulp production could also be interpreted as an attempt to reduce the impact on bleached hardwood kraft (BHK) producers of the large wave of low-cost BHK capacity that was coming into the paper grade pulp market in 2017.

However, by 2023, less than half of swing mills were still in the dissolving pulp sector. Two swing pulp lines had been shifted to be fully dedicated to producing paper grade wood pulp from 2021 and 2022, respectively, and the Anhui Huatai mill was permanently closed in 2023. Another noteworthy company, Huanggang Chenming, has apparently abandoned a plan for the Huanggang mill, which was initially designed for flexible production of paper grade pulp and dissolving pulp; the mill has been focused on producing paper grade pulp for the past few years. A fourth mill was still running paper grade and dissolving pulp in campaigns, but it only produced bamboo-based dissolving pulp occasionally throughout 2023.

One of the major factors leading to this change was the collapse in dissolving wood pulp prices in 2019. The decline reduced the price difference between dissolving wood pulp and paper grade pulp to less than $200 per tonne and prompted swing capacity in China to shift to paper grade pulp production. The pandemic exacerbated the issue in 2020. The spread widened again after 2021; however, the downstream textile market was weak, with viscose fiber production staying below 2019 levels until 2022 and only creeping upward in 2023. Furthermore, there has been an increased supply from new dissolving pulp capacity added outside of the country during the past few years. The termination of the anti-dumping duties, which have been imposed on dissolving pulp imports from American producers since 2014, also had an adverse effect on domestic dissolving pulp production.

Will the shift from dissolving wood pulp to paper grade wood pulp reverse in the future? Probably not. There has been sufficient new capacity from overseas to essentially displace the domestic swing tonnage that has exited the dissolving pulp market in the past few years. At the same time, some companies that owned swing pulp lines have several new paper machines starting production, prompting them to produce mainly paper grade going forward, with a focus on vertical integration into paper production. Additionally, new viscose fiber capacity in China has so far been limited to the lyocell side of the market, and domestic dissolving pulp is not suitable for producing lyocell. Furthermore, we see limited opportunities for new cost-effective expansion of dissolving pulp in the country, as China is short of forest resources. Chinese dissolving pulp operations have relatively high wood costs compared with mills in other countries that have access to low-cost fiber, such as Brazil. And constrained imported woodchip supply and increasing demand in the paper grade pulp sector have driven wood costs up further in recent years.

With wood costs increasing and low-cost imported dissolving pulp coming in, the market does not seem favorable for building new dissolving wood pulp mills in China. Dissolving pulp is losing its appeal among Chinese pulp companies, who have become more realistic about this market, with some of them trying to tap into higher-margin areas, such as fluff pulp.

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